QUESTION: What happens if I go into foreclosure on my mortgage or trust deed?

ANSWER: You can lose your property in a forced sale and in some cases still owe the creditor money.


QUESTION: Explain the different remedies for a loan default, please?

ANSWER: In general law and just as in the other states, above, the loan secured by real estate may be enforced by the lender or holder of the instrument either by suing the debtor directly on the promissory note the debtor signed, or by conducting either a judicial foreclosure (in a court) or a non-judicial trustee sale (the latter on trust deed loans, only). Under the law (UNLESS THE DEBT INSTRUMENT WAS A NON-DEFICIENCY INSTRUMENT--SEE BELOW) the creditor sells the property either for enough to get the entire loan paid off (and the creditor keeps the payoff up to the amount of the remaining loan and expenses to foreclose it) or it sells short of that debt amount (very common, recently, due to adverse market conditions) and if there is a shortfall, the creditor can (unless, as noted, it is a non-deficiency instrument explained below) collect the shortfall from the debtor even after the property has been sold on the foreclosure sale.

BUT THE CREDITOR CANNOT do this if the instrument is one that falls under the "ANTI-DEFICIENCY" STATUTES, BELOW. MOST HOME MORTGAGES DO FALL UNDER THE PROTECTION OF THE ANTI-DEFICIENCY STATUTES AND THAT MEANS NO "DEFICIENCY" AGAINST THE DEBTOR IN A FORECLOSURE. See below for what qualifies. But even when there is no deficiency, there can be IRS and credit ramifications, of course, as explained below.


QUESTION: What is a “deficiency judgment”?

ANSWER: It is a legal judgment against the borrower for any shortfall in a judicial sale of the property to meet the total remaining debt plus taxable interest, fees and costs.

To the extent the judicial or trustee’s foreclosure auction yields less than the judgment, a deficiency judgment could be available, provided the loan is not a qualifying “purchase money loan” on a residential property (a “non-deficiency” loan), as explained more, below. If it is not such a loan, in judicial sales of the property, whether under a mortgage or deed of trust, the Court lodges judgment for any loan balance, costs, fees and other expenses set forth by statute not meet by the proceeds from the auction. In a non-judicial foreclosure of a loan not qualifying for “non-deficiency” treatment, the creditor has 90 days to file for any shortfall after the date of sale. As noted, in the case of purchase money mortgages and trust deeds on qualifying residential properties and trust deeds, there is NO DEFICIENCY. See “qualifications” for that non-deficiency treatment, below.


QUESTION: What loans qualify for non-deficiency treatment?

ANSWER: Arizona law has two "anti-deficiency" statutes that will often apply to loans secured by single residential real estate and whether or not the home is occupied by the borrower.

Where these statutes apply, a lender's remedy will be ONLY a foreclosure, with NO RIGHT TO SUE FOR MONEY beyond the amount received from the foreclosure sale. These two "safe harbors" are as follows:

One statute applies to mortgages, which must be foreclosed judicially, or deeds of trust if foreclosed judicially (that means by the creditor suing the debtor in a court). A.R.S. ' 33-729(A). It limits the claim to the proceeds of a sale of the property.

The other "anti-deficiency" statute applies only to deeds of trust when foreclosed via a trustee sale (through a suit in the court). It is A.R.S. ' 33-814(G). Same rule: The creditor only gets the amount from the sale of the property and no more.


For either of the anti-deficiency statutes to apply, the mortgage or deed of trust must be secured by real property that: (1) Consists of 2 1/2 acres or less; (2) and is restricted to and utilized for a single-family or dual-family dwelling ; (3) the proceeds of the loan had to be used to pay all or part of the purchase price of the property (better that all of it was). If all three of the foregoing apply, a deficiency on a normal foreclosure is unlikely.


QUESTION: What about refinances of a loan that was originally a non-deficiency loan? Do they get the same non-deficiency treatment, though, technically, they were not the actual loan used to “purchase the property?”

ANSWER: In most cases, yes.

If the loan is not the original one that purchased the house, but a refinance of one that purchased the house? A "refi" will also often be covered by the same non-deficiency rule. In Bank One v. Beauvais, 188 Ariz. 245, 937 P.2d 809 (App. 1997), in which the court held that an extension, renewal, and/or refinancing of a purchase-money loan retained the character as a purchase-money loan, and therefore was subject to the same general qualification as a purchase money loan. This also applies to second trust deeds or mortgages if they were "purchase money" and were for residential property as noted above. See Mid-Kansas Federal Savings and Loan Ass'n v. Dynamic Development Corp., 167 Ariz. 122, 804 P.2d 1310 (1991).


This rule will not apply if the debtor has allowed the property to be wasted by such things as his own bad maintenance, by vandalism of him or others or uninsured losses before the foreclosure sale (voluntary waste). See A.R.S. ' 33-729(A). Also: If money was taken out of the loan for other purposes than purchase of the property (lines of credit, home equity loans and even purchase money loans where there was cash-back that was itemized as such), these anti-deficiency rules do not apply and the lender could see that cash directly from the borrower as a result of or in addition to the foreclosure. Id. Beauvais. The anti-deficiency rules also do not apply to a loan guarantee executed separately. As to the Guarantor, they are liable.


QUESTION: So unless the loan meets the above qualifications, a deficiency is possible?


Bare land, office buildings, tri-plexes and larger, commercial offices and the like ARE NOT NON-DEFICIENCY instruments. On those, the lender can sue for money, go to a sale and collect for a deficiency. The defenses in these situations are narrower. There are defenses in foreclosure law, itself, such as that the property was not sold at a reasonable value or that a claim for deficiency was not instituted in a timely fashion and other defenses. In some cases there can also be the defense of a wrongful appraisal and underwriting failures that could arise to a regulatory violation in addition to being actionable by the borrower or guarantors as misleading lending practices.


QUESTION: What if I have signed a “Guaranty” for someone on the debt or they have signed one for my debt?

ANSWER: You or they could be liable for the debt or judgment to the extent it falls short of paying off the lender, even on a non-deficiency debt, depending upon how the Guaranty is worded.

Guarantys are enforceable even if for a debt which was purchase money, as the actual is on the separate written Guaranty and not the debt and even where there is no deficiency for the primary borrower. Pure lines of credit (for any use such as a credit card or for cash or for home improvement but not used as part of the purchase price of the property) all pull out money and so they are not purchase money debt and can be claimed upon independently and are not limited by the anti-deficiency statutes. A so-called pure "HELOC" is a line of credit-type loan when not used to purchase the home, though some HELOCs have been used for part or the entire purchase price. It is likely under the Beauvais theory (above) that if the HELOC was actually used to buy the home it is probably “purchase money” in fact and no deficiency on it can be had or, at the very least, as to the amount used to buy the home, it is purchase money if it was spent that way the moment it was generated, but the balance taken out and not used to purchase the home may be collectible in an action on the debt. There is no clear authority on the effect of a “blended” (purchase and non-purchase in the same note) HELOC instrument, but there are some very logical questions that would cloud enforcement, such as “what part of each payment on a ‘blend’ goes to the “sub-non-deficiency” part of the debt and which to the “sub-deficiency”; what part of the foreclosure sale proceeds to which “sub-balance”? What part of the remaining debt is which “sub-balance?” A great deal of confusion is possible here and there is no legal authority to resolve that on a single note which, itself, does not even mention, let alone divide the “sub-balances”.

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