One of the requirements for Arizona’s anti-deficiency statutes is that the property in question must be limited to and utilized for a single one or 2-family dwelling.  (See. A.R.S. § 33-814(G)). Based on prior holdings by Arizona courts, the majority view has been that if a borrower did not actually put the residence to use as a dwelling, the borrower would not get anti-deficiency protection.  As a result, many lenders holding notes on properties that have not been completed would pursue borrowers for a deficiency after a trustee’s sale or judicial foreclosure.

Lenders will need to re-evaluate their rights on construction loans for residential properties of less than 2.5 acres after a recent holding by the Arizona Court of Appeals in M&I Marshall & Ilsley Bank v. Mueller, 2011 WL 6778743 (Ariz.App. Div. 1).  In this case, a borrower took a construction loan to build a residence that,  if completed and actually utilized as a dwelling, would have received anti-deficiency after a trustee’s sale.  However, in this case, the borrower was unable to complete construction and no one ever actually moved into the home.  The Court distinguished a prior holding of the Arizona Supreme Court where a property was not completed and used as a dwelling and held that here, where the borrower was a homeowner (as opposed to a commercial builder of residential properties), , the primary purpose of the Arizona anti-deficiency statutes is met – that is, to protect homeowners’ from deficiency judgments.   

At the heart of the Court’s holding was the fact that the borrower had intended to occupy the dwelling upon completion of construction.  This holding expands anti-deficiency protection to certain constructions loans, although the application to any given case will be dependent on the particular facts of the transaction. 

 ARIZONA LEGISLATORS INTRODUCE BILL TO BAR A DEFICIENCY FOLLOWING A SHORT SALE

 A bill recently introduced in the Arizona House of Representatives, House Bill 2584, would bar lenders from seeking a deficiency against certain borrowers following completion of a short sale.  The bill is intended to cover loans that would get anti-deficiency protection under Arizona’s trustee’s sale and judicial foreclosure anti-deficiency statutes, although it is unclear which statute would apply to a given short sale considering that a short sale will avoid a foreclosure and the anti-deficiency statutes in each statute are different.  As currently drafted for the trustee’s sale anti-deficiency statute, the short sale protection will apply if:

 “1.  The property is sold in a transaction in which the beneficiary agrees to the sale of the secured property for an amount that does not satisfy the full indebtedness of the trustor under the deed of trust.

2.  The transaction is not a trustee’s sale.

B.  This section applies to beneficiaries of first deeds of trust who have agreed to the sale and any junior lien holders who have agreed to the sale, and their successors and assigns. END_STATUTE

Sec. 3.  Applicability

Sections 33-729.01 and 33-814.01, Arizona Revised Statutes, as added by this act, apply to contracts for sale executed after the effective date of this act.”

 See the complete text of the bill and follow its status at: http://www.azleg.gov/DocumentsForBill.asp?Bill_Number=2584&Session_Id=107

 Many real estate professionals and attorneys have been calling on the legislature to codify protection for borrowers in residential short sale transactions and have pointed to recent legislation in California as an example of the type of protection borrowers should be given against their lenders.  This bill is a good start, although the legislature needs to clarify when the short sale protection in Section 33-729.01 should apply, and when the protection in 33-814.01 should apply.  Without such clarification, many short sale transactions could leave borrowers in deficiency limbo until a court is called upon to interpret the legislature’s intent.

 Marc McCain

McCain & Bursh, PLC Attorneys at Law

www.mccainbursh.com

www.marcmccain.com

mmccain@mblawaz.com

(602) 604-2138

     1.    IS THE RECORDING OF AN ASSIGNMENT OF DEED OF TRUST REQUIRED PRIOR TO THE FILING OF A NOTICE OF TRUSTEE’S SALE UNDER A.R.S. § 33-808 WHEN THE ASSIGNEE HOLDS A PROIMSSSORY NOTE PAYABLE TO BEARER?

 AND

     2.    MUST THE BENEFICIARY OF A DEED OF TRUST BEING FORECLOSED PURSUANT TO A.R.S. § 33-807 HAVE THE RIGHT TO ENFORCE THE SECURED OBLIGATION (that is being foreclosed)?

 On the 1^st issue, the Court focused on Arizona’s trustee sale process and the statutes that govern how a trustee’s sale is conducted.  Finding no authority in Arizona statutes for the idea that an assignment of a Deed of Trust must be recorded in the County Recorder’s office to provide evidence that the foreclosing beneficiary is the current holder of the beneficial interest of the Deed of Trust being foreclosed, the Court refused to impose such a requirement as a condition to a trustee’s sale.  The Court was mindful to articulate the reasons why an assignment of a Deed of Trust would be appropriate, but explained that such an assignment is discretionary and only impacts the rights of the parties to the assignment and potentially a third party that would buy an interest in the trust property without knowledge of the assignment.  However, as between the owner and the lender, the Court found that an assignment is not necessary and cannot be used by an owner to stop a trustee from carrying out the authority granted to it in the Deed of Trust.

 The Court declined to address the 2^nd issue, finding that the answer to this question would not help decide any issues in the underlying bankruptcy action since the foreclosing lender, Deutsche Bank, had been assigned the promissory note in question before the notice of trustee’s sale (related to the Vasquez foreclosure) was recorded.  As a result, this issue remains open to debate, although it will likely be clarified by decisions of Arizona courts in the near future.  Until then, some borrowers will choose to push this issue to the forefront of their disputes with their servicers/lenders. 

 Unfortunately, in not addressing the 2^nd issue presented, the Court left unanswered a very important question plaguing the non-judicial foreclosure process (i.e., trustee’s sales) and, in my opinion, a question that goes to the heart of the issues in many foreclosure disputes.  The basic argument behind the 2^nd issue is that when mortgages were sold in the securities markets, the note and collateral were separated and the collateral securing the note was never assigned to the parties that actually own the note.  Since the collateral is being sold to satisfy obligations under the note, how can a party that can’t prove it owns the note, and thus the right to enforce the note, authorize a trustee to sell the property at a foreclosure auction?  In many cases, it simply is not clear who actually owns the note that is causing the foreclosure.  If the trustee takes direction from a beneficiary (or its agent) as to when to record a notice of trustee’s sale and when to conduct a foreclosure, this begs the question – does the party that is telling trustees to foreclose on Arizona properties actually own the notes that are the subject of the foreclosure (or work for someone that does)?  If not, then one question looms large – who the heck is telling the trustees to foreclose?

 Losing a home is a pretty big deal.  Doesn’t common sense tell us that if you are going to take someone’s home, someone’s property, you better be able to establish that you own the note (or work for someone that does) that is the underlying reason for the foreclosure?  If not, can’t anyone allege they own the note or work for someone that does, never have to prove their position, pick their own trustee to do the trustee’s sale and provided the trustee follows the statutory process, sell a borrower’s house out from under them.  And what is the justification for looking the other way on this issue – simply because the borrower is delinquent?  Perhaps, but does a delinquency justify such sloppy and questionable business practices? 

Marc McCain, Esq.

McCain & Bursh, PLC

www.mccainbursh.com

www.mmccain@mblawaz.com

602 604-2138

 The answer to these questions is  “yes”.  Unfortunately, one Arizona Senator thinks it is a good idea to tinker with Arizona’s anti-deficiency statutes even though the statutes have been on the books since 1971 and are grounded on fundamental policy rationale that consumers need protections from falling home values when those assets are pledged as collateral for a loan.  Republican Senator Jack Harper of Surprise thinks that banks need more protection against consumers when making a residential mortgage loan and wants to strip Arizona’s longstanding anti-deficiency protections from consumers, enabling lenders to sue borrowers for any deficiency owed on a loan after taking a home in foreclosure.  In doing so, the thought goes, banks will suddenly be apt to lend in Arizona and this will get our economy going in the right direction.

 While the specifics of the bill are still in question, a recent article and news story by Fox News of Arizona indicated that the Senator’s bill intends to target loans written after the date the legislation takes effect.  This is a fundamental difference with the prior bill that was only short lived – it is forward looking and won’t affect the rights and protections afforded to homeowners with loans written before the new legislation would go into effect.  While Senator Harper can be commended for leaving pat the rights of borrowers and lenders in existing loans, the potential problems that  such a change  to our well established anti-deficiency laws would create are too many to address in a single blog post (more to come on these problems in future posts).  Read the story at:

http://www.myfoxphoenix.com/dpp/news/housing_market/strategic-foreclosures-penalty-bill-12-13-2011#

 Suffice it to say this – Arizona’s anti-deficiency statutes and the case law that has interpreted them must be fully understood before our legislature starts tinkering with parts of the statute.  What was clear in the last dog and pony show that took place over our anti-deficiency statutes is that our legislature did not understand the many complex rules and painstaking analysis that must take place when working through our statutory non-judicial foreclosure scheme and its sister scheme, judicial foreclosures.  Our legislature did not understand that changing only the trustee’s sale anti-deficiency statute, while leaving intact the judicial foreclosure statute, would throw most of our case decisions and analytical framework out the window and leave everyone wondering how certain cases would be decided.  It did not understand that in order to properly address the rights of lenders and borrowers in this market, a comprehensive statutory overhaul would be in order.  An overhaul that would also address borrower liability after a short sale. 

 Moreover, if getting lenders to lend more in Arizona is the goal, it is highly questionable that such a change in our anti-deficiency statute will achieve this purpose.  First, loan rates in Arizona already factor in the additional risks to lenders that our anti-deficiency laws impose.  Second, anti-deficiency statutes should, in theory, make lenders more cautious when writing loans and valuing the real estate that serves as collateral for the loan.  However, we all know this didn’t happen over the last decade.  Thus, the notion that changing our statute will change the way loans are written in Arizona is without any historical support – if our statutory non-judicial foreclosure scheme is so bad for lenders, why were lenders so willing to make the risky loans they made in the past?  Why did lenders not question the substantial spike in home values with so much to lose?

 Additionally, most loans are insured through one form of insurance or another – whether it be private mortgage insurance paid by a borrower, insurance provided by FHA, Fannie Mae, Freddie Mac or even insurance purchased by lenders on their own portfolios.  This insurance and who pays for it is another factor in the interest rate a borrower pays and a lender’s willingness to lend in Arizona.  As long as this insurance is available, and as long as lenders diligently underwrite residential mortgage loans, lenders should not be motivated to make a loan by the prospect of being able to pursue a borrower for a deficiency post-foreclosure.  Even without such insurance, prudent lenders will simply factor in the potential for increased losses into the interest rate on a loan to compensate them for additional risk of loss.

It seems more logical to suggest that if anti-deficiency protections didn’t cause lenders to be cautious when making loans on Arizona properties over the last decade, putting the risk of future falling real estate prices on the backs of Arizona property owners will only encourage lenders to look past asset values and make even more risky loans in the future.  If so, this would not be a good by-product of such legislation — our economy has suffered enough by lender’s shoddy lending practices.  What is clear in this matter is that Senator Harper, while having good intentions, needs to consider the many ramifications and consequences of changing our anti-deficiency statutes.  Trying to deal with a shattered housing market by putting more of a burden on homeowners is simply not the answer.

If you are concerned about this legislation or want to voice your opinions on the matter, contact your local representative and express your views.  You can find information on your representatives at www.azleg.gov

Marc McCain, Esq.

McCain & Bursh, PLC

mmccain@mblawaz.com

www.mccainbursh.com

(602) 604-2138

During this holiday season there are many less fortunate families that are severely struggling in obtaining basic needs such as food and clothing. Here at PHX, we are looking to raise 2,500 units of non-perishable food items to be organized into food baskets that will be donated to the Wesley Community Center. Recently, on several occasions the Wesley Community Center Food Pantry has run out of food to feed its surrounding community.

We are asking for your help in achieving this goal by donating whatever you can. For your convenience, you can either drop off your donations at McCain&Bursh, PLC located at 4300 N Miller Rd, Suite 250, Scottsdale, AZ 85251 at anytime or we will also be conducting weekend home pickups on 11/26, 12/3, and 12/10.

If you would like us to pick up your food donation, please send an email to 2011FoodDrive@PHXConsultingServices.com with the date, time of pickup, and address of the property. Please place the non-perishable food items in a plastic bag near the garage door.

For additional questions, please contact Michael at (480) 559-4365.

About the Wesley Community Center

The Wesley Community Center was established in 1950 as a 501(c)(3) non-profit, community service organization dedicated to empowering and assisting families in the south-central Phoenix community of Nuestro Barrio (our neighborhood). This predominately Hispanic community is home to approximately 7,000 individuals, in which 70% are living in sub-standard housing making less than $12,000 per year.

Some of the neighborhood challenges include:

• Extreme Poverty
• Social Problems
• High Crime Rates
• 42% School Dropout Rate.

Wesley’s Mission Statement:
“Together We Empower Positive Change,” is at the heart of all Wesley programs.

Requested Items (Please make sure nothing is set to expire within 30 days)

• Boxed Cereal: 12 oz – 18 oz
• Crackers: 16 oz
• Peanut Butter/Jam: 16 oz
• Instant Soups: 10 oz
• Pasta/Spaghetti Sauce: 26 oz
• Sugar: 5 lbs
• Pinto Beans: 1 lb – 2 lbs
• White Rice: 1 lb – 2 lbs
• Flour: 5 lbs
• Canned Vegetables: 14 oz – 16 oz
• Canned Meat: 14 oz – 16 oz
• Cooking Oil: 48 oz or less
• Tomato Sauce: 8 oz – 15 oz
• Tuna: 5 oz
• Jello: 3 oz – 5 oz
• Instant Mashed Potatoes: 12 oz
• Macaroni ‘n’ Cheese: 7.25 oz

Please help support this great cause and thank you to our sponsors:

Distressed Property Negotiators (“DPN”)
McCain&Bursh, PLC
PHX Consulting

Marc McCain

McCain & Bursh Attorneys

(602) 604-2166

www.mccainbursh.com

www.marcmccain.com

1.      is the recording of an assignment of deed of trust required prior to the filing of a notice of trustee’s sale under A.R.S. §33-808 when the assignee holds a promissory note payable to bearer?

2.      must the beneficiary of a deed of trust being foreclosed pursuant to A.R.S. §33-807 have the right to enforce the secured obligation?

A thorough analysis of these issues is not possible in this blog, but suffice it to say that these issues are of paramount importance to both borrowers and lenders and the Court’s decision will send shockwaves through the legal and lending communities.  The first issue goes to whether the holder of the promissory note must show that it has been assigned the rights as the beneficiary under the deed of trust that secures the note.  In essence, the Court is being asked whether the beneficiary can establish a proper chain of title under the deed of trust.  While hard to believe, countless foreclosures have occurred in Arizona (and elsewhere) where the alleged holder of the note was not assigned the rights of the beneficiary under the deed of trust at the time of a trustee’s sale.  Essentially, a borrower does not know who owns their note and from whom the trustee that started the trustee’s sale got its authority to conduct the sale.  If lenders are forced to establish a clear chain of title before foreclosing, this could present problems for many lenders who allegedly own a note but are far removed from the original lender – that is, given the shoddy document practices in the mortgage backed securities business, it may be impossible for certain lenders to get assignments of the deed of trust from the prior owners of a note so that the chain of title under the deed of trust clearly establishes they are the beneficiary who has the right to foreclose.

The second issue is, in reality, a version of the produce the note argument.  In other words, must the lender that is foreclosing establish that they are the rightful owner of the note that the deed of trust secures?  While one would assume this must be the case since the note is the actual obligation to pay and the deed of trust merely acts as security for that obligation, several Arizona courts have held that in a non-judicial foreclosure state such as Arizona, a beneficiary under a deed of trust need not show they own the note, but only that they followed the statutory process for conducting a valid trustee’s sale.  For these courts, it is immaterial that the beneficiary may have no right to sue the borrower on the note, only that they claim to be the beneficiary under the deed of trust and followed the trustee sale process.  Like the first issue, if lenders are forced to show their right to enforce the note in a trustee sale context, many will have a hard time doing so given their inability to show how they came to own the note (e.g. many don’t have the original instrument or any evidence of prior assignments of the note to them).    

Stay tuned Arizona . . . this could get interesting very quickly.

Marc McCain

McCain & Bursh, Attorneys at Law

www.mccainbursh.comn

www.marcmccain.comn

mmccain@mblawaz.com

(602) 604-2138

The stay against enforcement of most of the MARS rules applies to real estate professionals that

(1) are licensed and maintain good standing pursuant to any applicable state law

requirements;

(2) are in compliance with state laws governing the practices of real estate professionals; and

(3) are assisting or attempting to assist a consumer in negotiating, obtaining or arranging a short sale of a dwelling in the course of securing the sale of the consumer’s home.

Real estate professionals who meet these requirements do not have to make the disclosures required by the MARS rules and are not subject to the MARS rule ban on collecting advance fees. However, the FTC will continue to enforce those provisions of the MARS rules that prohibit unfair and deceptive practices against Real Estate Agents (such as misleading statements in a short sale context).  

The stay will bring great relief to realtors in severely depressed real estate markets such as Arizona who find short sales difficult enough without the burdens imposed by the MARS rules.  However, real estate professionals much be mindful of the myriad of state regulations governing their activities in a short sale transaction including their duty of loyalty and competence to their clients.  This means that realtors should never advise an owner to short sale a property without the client first understanding all legal and tax implications that can result from a short sale  – issues that no realtor should tackle on their own.

Marc McCain

McCain & Bursh, PLC, Attorneys at Law

www.mccainbursh.com

www.marcmccain.com

mmccain@mblawaz.com

(602) 604-2138

While my personal view is that Beauvais should be extended to cover all refinances of purchase money loans and the policy behind our ant-deficiency statutes supports such a view, and while the trend at the Arizona trial court level appears to favor this rational, borrowers must understand the legal issues involving refinanced loans and how a refinance could change their liability following a foreclosure or short sale of a property on which a refinanced loan was made to the borrower.  As a result, it is imperative that borrowers have their loans reviewed by experienced legal counsel so they do not unwittingly engage in a workout that leaves them exposed to a deficiency action or lawsuit on the promissory note following a foreclosure or short sale.

Marc McCain

McCain & Bursh, PLC Attorneys at Law

(602) 604-2138

www.mccainbursh.com

www.marcmccain.com

The Arizona Department of Real Estate updated their position on the new MARS Rule (Mortgage Assistance Relief Services) and other applicable Arizona laws in relation to short sales and how they limit the type of services and fees licensed realtors and brokers in Arizona can perform and receive in the short sale context.   The update changes the Department’s position on the ability of a broker/realtor to charge an upfront, non-refundable fee when negotiating a short sale.  The Department’s initial position was that a broker/realtor could charge an upfront fee for a short sale listing provided the fee was charged to all sellers (and not just to sellers on a short sale).  The Department reversed course on this issue, stating that such an upfront fee in a short sale transaction would be a clear violation of the MARS rules.  Set forth below is a copy of the Department’s position paper on this topic.

 UPDATE on the Short Sale Negotiator Regulations

February 15, 2011

By

Arizona Department of Real Estate (“ADRE”) Commissioner Judy Lowe

NOTE: This communication is for general informational purposes only and is not intended to constitute legal advice or a recommended course of action in any given situation. This article does not replace the need for each licensee to become familiar with the laws pertaining to short sales to ensure their business practices comply with all applicable laws.

Numerous regulations have recently been enacted governing short sale negotiations. The following are answers to frequently asked questions regarding short sale negotiators.

1. What licenses are required to negotiate a short sale?

A real estate license and/or or a loan originator license may be required for individuals who assist homeowners in negotiating with lenders to accept less than the full amount of the mortgage loan, as part of a short sale transaction.1 The particular license that is needed depends on the nature of the transaction, what licenses the person or entity holds already, the scope of services offered and whether or not a fee is charged for the service, as explained more below.

1 Arizona law defines “short sales” as “real estate transactions in which the sales price is insufficient to pay the loan encumbering the property in addition to the costs of sale and the seller is unable to pay the difference.” A.R.S. § 32-2130 (A).

2 “Loan originator” is defined as “a natural person who for compensation or gain or in the expectation of compensation or gain… (i) Takes a residential mortgage loan application; (ii) Offers or negotiates terms of a residential mortgage loan; and (iii) On behalf of a borrower, negotiates with a lender or note holder to obtain a temporary or permanent modification in an existing residential mortgage loan agreement. A.R.S. § 6–991(12). Also, a loan originator must be employed by a mortgage broker. A.R.S. § 6-991.02(13) and § 6-991-04.

3 A real estate broker/salesperson cannot collect compensation for negotiating loans unless: (1) they are licensed pursuant to Title 6, Chapter 9 (A.R.S. § 6-901, et. seq); 2) they have disclosed to the person from whom the compensation is collected that they are receiving compensation for both real estate and mortgage services; and 3) the compensation does not violate any other state or federal law. A.R.S. § 32-2155(C).

2. Is a real estate broker/salesperson acting outside the scope of their real estate license by assisting a seller in negotiations with the lender or servicer to facilitate a short sale?

No. The scope of a real estate license encompasses assisting in the “negotiation of any transaction calculated or intended to result in the sale . . . of real estate.” A.R.S. § 32-2101(48)(j).

3. May a real estate broker/salesperson receive additional compensation for negotiating a short sale in addition to receiving a commission on the sale?

Yes, if the real estate licensee is also licensed by the Arizona Department of Financial Institutions (“DFI”) under Title 6, Chapter 9 (covering loan originators2, mortgage brokers and mortgage bankers) and other requirements are met.3 The general rule is that additional compensation requires an additional license. If a real estate broker/salesperson assists the seller in negotiating with the lender or servicer to accept the short sale price as a customer service and does not charge or expect additional compensation (including an increased commission), the real estate broker/salesperson does not need a separate license from DFI.

4. Should a broker/salesperson negotiating a short sale with a lender or servicer on behalf of the seller comply with the Federal Trade Commission’s Mortgage Assistance Relief Services (“MARS”) Rule?

Yes. The MARS Rule applies to any person that provides, offers to provide, or arranges for others to provide any “mortgage assistance relief service.” Title 16, Code of Federal Regulations (CFR), Part 322. A “mortgage assistance relief service” includes any service, plan, or program, offered or provided to the consumer in exchange for consideration to assist or attempt to assist the consumer with negotiating, obtaining or arranging a short sale. 16 CFR 322.2(i).

To review the MARS Rule in its entirety, including disclosure and other requirements, go to www.ftc.gov/opa/2010/11/mars.shtm.

5. May a listing broker/salesperson charge the seller a non-refundable retainer fee in a short sale transaction?

No. Any fee, refundable or non-refundable, that a broker/salesperson requests or receives from a consumer to negotiate, obtain or arrange a short sale, in advance of an executed agreement between the consumer and his or her lender or servicer that incorporates the final terms that the lender or servicer will agree to, violates the advance fee ban described in section 322.5 of the Federal Trade Commission’s MARS Rule.

6. Must an out-of-state short sale negotiator be licensed in Arizona to negotiate a short sale for compensation on behalf of an Arizona seller?

Yes, they should generally follow the same licensing regulations as Arizona–based short sale negotiators.

7. If a real estate broker/salesperson receives a real estate commission in connection with a short sale, regardless of the how the commission is described on the HUD-1, must the commission be paid through the employing broker?

Yes. A.R.S. §32-2155(A) requires that a real estate salesperson “accept employment and compensation as a licensee only from the legally licensed broker to whom the licensee is licensed.” Compensation is defined as “any fee, commission, salary, money or other valuable consideration for services rendered or to be rendered, as well as the promise of consideration, whether contingent or not”. Thus, a real estate salesperson/broker may not receive compensation as a real estate licensee from any person or through any entity, other than the employing real estate broker to which the real estate salesperson is licensed.

8. Are there any additional licensing restrictions that apply to FHA loans regulated by the U.S. Department of Housing (HUD)?

Yes. Loan originators must be employed by a licensed mortgage broker who is responsible for the supervision of the loan originator. Under HUD rules, a mortgage broker who handles FHA loans is prohibited from employing staff who are also employed in the real estate field. For further information about HUD’s requirements, visit www.hud.gov.

9. Where can I get information about DFI’s licensing requirements?

Information on obtaining a loan originator and other licenses is available on the DFI website at www.dfi.gov.

Conclusion

There are a myriad of other issues relating to short sales. Before engaging in short sale activities make sure that you are on solid legal ground by consulting your broker, manager or independent legal counsel. The following websites may contain additional information on this subject and links to other resources:

Arizona Department of Real Estate, www.azre.gov

Arizona Department of Financial Institutions, www.azdfi.gov

Federal Trade Commission, www.ftc.gov

Arizona Association of Realtors, www.aaronline.com

Arizona State Legislature, www.azleg.gov

Judy Lowe was appointed Commissioner for the Arizona Department of Real Estate by Governor Jan Brewer in May 2009 after a long and distinguished career in the real estate industry.

This article is for informational purposes only, as a service to the public, and is not legal advice or a substitute for legal counsel. Note that laws in this area change frequently, and new laws or cases may impact the information provided here. You are encouraged to consult independent counsel before making any decisions or taking any action concerning the matters in this article. The information contained in this article is not binding in any disciplinary or other legal proceeding initiated by the Department of Real Estate or any other state or governmental agency

A recent example of such a clause occurred with a loan provided by a local credit union.  When the borrower defaulted under a HELOC loan against its residence, the lender sent out the repo man to repossess the borrowers vehicle — despite the borrower being current on the car loan and the car being upside down (loan balance compared to current value).  The car loan agreement had a clause that provided that the car was collateral for any other loan made by the lender.  Even though the car didn’t put the lender in any better position in terms of loss severity on the HELOC, the lender wanted the borrower off its books and wanted it back.

Fortunately, the borrower got lucky and talked the repo man out of taking the car and I was able to intervene quickly with lender’s counsel and work a settlement on the HELOC that included the lender’s agreement to let the borrower keep the car as long as the car payments were kept current.  However, the lesson should be loud and clear to borrowers — know what other agreements you have with your lender/servicer and understand the risk of defaulting under a home loan.  Consider a borrower who has a HELOC with a lender and also banks with the same lender.  Most deposit agreements provide that if the borrower is in default under any loan with the bank, the bank has a right of offset against all deposit accounts of the borrower.  I’ve seen a bank reach into a borrower’s account and withdraw funds when the borrower defaulted on a HELOC with the lender — even though the HELOC was a purchase money loan and covered by Arizona’sw anti-deficiency statutes.  Needless to say, the borrower was both shocked and upset to learn what had happened and wanted his money back.  However, fighting a bank over a $1,000 is not necessarily a winning proposition when you consider the legal fees involved to do so.

Similarly, some loans contain clauses that provide that a default under ANY loan agreement with ANY lender is a default under the other loan.  This could result in a situation where a lender calls a loan that is paid current.  Given these issues, I encourage borrowers to review all loan agreements and understand the potential risks of defaulting under a home loan.  While Arizona’s anti-deficiency laws are quite broad, a default under a home loan can have other consequences that should be consisdered before the decision to default is made.

Marc McCain, Esq.

McCain & Bursh, PLC, Attorneys at Law

(602) 604-2138

www.mccainbursh.com

www.marcmccain.com