New Arizona Case Says Homeowners Cannot Prospectively Waive Anti-Deficiency Protections

In yet another case favorable to homeowners, the Arizona Court of Appeals (Division One) determined that borrowers cannot contractually waive the anti-deficiency protections afforded by Arizona statutory law. The Arizona anti-deficiency statute protects most homeowners (exceptions do apply – see an attorney for help with this) from paying for the difference owed on their homes if they are foreclosed upon and their homes are sold for less than what is owing.

In Parkway Bank and Trust Co. v. Zivkovic, a borrower contractually agreed to waive all rights or defenses he might have under anti-deficiency law. The borrower eventually defaulted and the lender foreclosed. The house sold at foreclosure for less than what was owed, and the lender proceeded to sue the borrower for the difference. The borrower argued he could not be sued for the difference because of Arizona’s anti-deficiency statute but lost. He then appealed.

The Appellate Court concluded that the Legislature in creating the anti-deficiency statute (see A.R.S. 33-814) intended to protect consumers from the risks associated with borrowing to purchase homes by eliminating the hardships consumers would suffer for failing to fully appreciate the extent to which they were subjecting their personal assets to legal process. Instead, the legislature allocated to the lenders the “risk of inadequate security” in hopes that this would deter unbridled lending and overvaluation of collateral, and would also protect consumers against general downturns in the real estate market.

ARIZONA PROPERTY TAX LIENS AND MERS

A recent case illustrates at least one of the pitfalls for those who invest in property tax liens. In Delo v. GMAC Mortgage, an investor (Delo) purchased a property tax lien on a property that had been acquired by Pinal County. Mr. Delo paid the outstanding property taxes and received an assignment from the County.

Following the three year waiting period for the owners to redeem the property tax lien by paying the past due taxes (plus interest), Mr. Delo proceeded to foreclose. Neither the owners nor the lenders defended and Mr. Delo obtained a default judgment.

However, while Mr. Delo’s lawsuit was proceeding, the lender on the property initiated a separate non-judicial foreclosure proceeding on the property. The original lender was EquiFirst with MERS (Mortgage Electronic Registration System) “as a nominee for Lender and Lender’s successors and assigns” and as “the beneficiary under the Security Instrument” and as legal title holder.

PURCHASE PRICE AT A TRUSTEE’S SALE IS NOT EVIDENCE OF FAIR MARKET VALUE

In Arizona, many homeowners who lose their home to foreclosure are not required to pay their lender for any deficiency between what they owed on the home and the price that the home is sold for at a trustee’s sale. This protection from liability is found in Arizona’s “anti-deficiency” laws.

However, Arizona’s anti-deficiency statutes do not protect all property owners from liability for a deficiency in the event of a foreclosure. In these instances, in order to determine the correct amount of the deficiency, the fair market value of the property must first be established. In MidFirst Bank v. Chase, 1 CA-CV 11-0013, the Arizona Court of Appeals found that a bank’s bid price for a property sold in a Trustee Sale is not evidence of the property’s fair market value for purposes of calculating a deficiency judgment.

In MidFirst Bank v. Chase, the lender, MidFirst Bank (“MidFirst”) loaned $1,620,000 to a borrower. The loan was secured by a deed of trust recorded against real property, and was guaranteed by two individuals, Mike and Linda Chase (the “Chases”). The Chases defaulted and MidFirst purchased the property at the trustee’s sale for a credit bid of $486,000.

MidFirst then moved for summary judgment against the Chases seeking a deficiency judgment of $1,325,044.09. The Chases argued that there was no deficiency because the “value of the Property far exceeds anything that could be owed on the Loan.” The trial court granted MidFirst’s motion for summary judgment. The trial court reasoned that, “No reasonable juror could find for [the Chases] on the issue of fair market value based upon the record presented.” The Chases appealed and the Court of Appeals reversed the trial court’s decision.

FANNIE MAE AND FREDDIE MAC ANNOUNCE NEW RULES FOR DEEDS-IN-LIEU OF FORECLOSURE

Fannie Mae and Freddie Mac recently announced new rules for deeds-in-lieu of foreclosure. The new rules will become effective on March 1, 2013. A deed-in-lieu of foreclosure allows a borrower to convey all interest in a real property to the lender to satisfy a loan that is in default and avoid foreclosure proceedings.

The principal advantage to the borrower is that it immediately releases him or her from most or all of the personal indebtedness associated with the home. Another benefit to the borrower is that it hurts his or her credit less than a foreclosure does.

Due to the decline in the housing market, many homeowners have been stuck in homes that are worth much less than they owe. The new rules for deed-in-lieu transactions will assist many homeowners who no longer wish to remain in their homes.

The new rules apply to people who are current or less than 90 days late on their mortgage payments. To be eligible for the deed-in-lieu programs, borrowers are required to have a 55 percent debt-to-income ratio, which means that 55 percent of their monthly gross income goes to paying the debt and must also document a hardship, such as illness or a spouse’s death. The home must be clean and not damaged.

ANOTHER FAVORABLE ANTI-DEFICIENCY RULING FOR ARIZONA REAL ESTATE OWNERS

The Arizona Court of Appeals recently ruled in Independent Mortgage Co. v. Alaburda, that Arizona’s anti-deficiency law (A.R.S. § 33-814(G)) protects a borrower who has a fractional interest in a vacation home.

The Alaburdas purchased a 1/10 fractional interest in a single-family residential condominium in Sedona. Independent Mortgage financed the purchase with a loan in the amount of $321,750, which was secured by a deed of trust on the 1/10 interest in the property. The Alaburdas could vacation at the property for up to twenty-eight days each year.

The Alaburdas defaulted on the promissory note, and Independent Mortgage foreclosed on the property via a trustee’s sale. The property sold for $285,000, which was less than the amount owed on the promissory note. Independent Mortgage filed a lawsuit against the Alaburdas as a result of the deficiency balance.