What You Need to Know About Arizona Foreclosures

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What You Need ToKnow About

Arizona Foreclosures

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As residents of a state with one of the country’s highest foreclosure rates, nearly every Arizonan is somehow impacted by what has been labeled “the foreclosure crisis”. And while the term “crisis” might be quite fitting to those who have lost their home to foreclosure, foreclosure buyers might agree that this period presents a very unique financial opportunity. Of course, many others lie in between these two extremes, ranging from borrowers searching for an alternative to foreclosure, to lenders attempting to mitigate losses on loan portfolios, to neighbors concerned about the diminution in value that foreclosures might bring to their property. Indeed, all around the state people are feeling the effects of foreclosure.

Although not every foreclosure impacts the state at large, there are at least three parties to a foreclosure for whom foreclosure’s effects are very real. First, borrowers facing foreclosure have obvious concerns about losing their home. Second, foreclosing lenders have concerns about recovering the loan’s unpaid balance. And, third, foreclosure buyers have concerns about making sound investments. While each situation has a unique set of concerns, those with even a basic understanding of how foreclosure works are better equipped to handle issues that arise along the way. This guide is designed to help provide that basic understanding.

Because this guide is informational only and does not purport to give specific legal advice, any questions beyond its scope should be directed to a JacksonWhite foreclosure attorney. The foreclosure process is tightly controlled, and even minimal delays can sometimes cause borrowers to lose their home, prospective buyers to miss a great investment opportunity or lenders to incur additional expenses needlessly. Those who seek legal counsel can possibly avoid these harsh consequences. Referencing this guide for instruction, and relying on a qualified foreclosure attorney for specific guidance, will help in making decisions for a suitable, if not beneficial, approach to addressing foreclosure.

1What You Need To Know About Arizona Foreclosures

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I The Foreclosure ProcessMortgage vs. Deed of Trust, Event and Notice of Default, Trustee's Sale Guarantee, Notice of Substitution of Trustee, Statement of Breach, Notice of Trustee's Sale, The 90-day Reinstatement or Cure Period, Postponing a Sale, Foreclosure Sale, Post-Sale Possession, Foreclosure Timeline

II Impacts & Effects of ForeclosureCredit Impact, Credit Recovery, Co-Signers, Equity & Excess Proceeds, Uncertainty, Home Recourse Debt, Home Equity Line of Credit, Deficiency, Federal Tax Consequences, Waste, Home Owners' Association Liens, Financial Waste - Hazard Insurance, Eviction, Real Estate Owned, Home Affordable Modification Program (HAMP), Home Affordable Foreclosure Alternatives Program (HAFA), The Protecting Tenants at Foreclosure Act of 2009, Vandalism, Depreciating Home Value, Home Owners’ Association Assessments

III Foreclosure AlternativesRent the Home, Stay in the Home, Modify, Refinance, Short Sale, Deed in Lieu of Foreclosure

IV Bankruptcy & ForeclosureAutomatic Stay, Chapter 13, Chapter 7

V Purchasing A Foreclosure PropertyRequirements, Title, Competing Lien Interests, Purchasing

VI Definition of Commonly Used Terms

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© 2011 Jackson White P.C., All rights reserved. This publication is provided for informational purposes only and should not be construed as individual legal advice. Please consult a knowledgeable attorney regarding your specific legal needs.

JacksonWhite Attorneys at Law

40 North Center Street, Suite 200

Mesa, Arizona 85201

1.800.243.1160 | 480.464.1111

www.jacksonwhitelaw.com

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What You Need To Know About Arizona Foreclosures2

court in the event of a borrower’s default.

While the variances between mortgages and deeds of trust may seem like legal technicalities, there is a big difference in the foreclosure process among the two. Mortgages can only be foreclosed through the judicial process, meaning that lenders must file a lawsuit and obtain a court judgment to establish the validity and priority of the mortgage lien. Deeds of trust, on the other hand, can be foreclosed either judicially or non-judicially, that is, by going to court or not going to court. Non-judicial sales tend to be quicker and more cost effective than judicial sales because they allow lenders to avoid the time and cost implicated by court involvement. Additionally, non-judicial foreclosure terminates the borrower’s right to redeem a property. For these reasons, deeds of trust are the most common security instruments used by lenders in Arizona. Mortgages are seldom used. Because of the omnipresence of deeds of trust, this guide deals mainly with the foreclosure process under deeds of trust, with only incidental comments on mortgages where helpful or

The Foreclosure Process

Mortgage vs. Deed of TrustCommonly, people use the term “mortgage” to describe the financing instrument that secures the purchase of their home. While this is not necessarily incorrect, most Arizona home loans are actually secured by a “deed of trust”. Both instruments serve as security for a loan and create only an interest in the property in favor of the lender, but neither serves to transfer full title to a property to the lender. A mortgage involves only two parties, whereas a deed of trust involves three. Under a mortgage, legal and equitable title remain in the name of the borrower. The lender places a lien on the property that the lender can enforce in the event of a borrower’s default. Under a deed of trust, legal title resides in a third-party Trustee, although the borrower retains equitable title, which carries with it the right of possession and use of the property. A deed of trust, allows the Trustee authority to sell the property without going to

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applicable. Unless otherwise indicated, use of the word “mortgage” throughout this guide actually refers to an interest or obligation on a property under a deed of trust. This guide does not address all issues that may arise in foreclosure. Complex issues involving title defects, contracts for sale and lease-purchase contracts should be addressed by a competent real estate attorney. Event and Notice of DefaultThe first step in a foreclosure is a borrower’s default under the loan. Although default necessarily precedes foreclosure, borrowers who miss only a single payment are not always foreclosed on. Conversely, missing a payment is not the only event of default that may trigger foreclosure. In the event of default, depending on the provisions of the deed of trust, lenders usually must give borrowers notice of the default, granting them 30 days to cure the default before the lender can exercise the power of sale of the deed of trust. Although a notice provision in the deed of trust satisfies this requirement, lenders who actually mail a demand

letter might encourage defaulting borrowers to reinstate the loan. Of course, this 30-day cure period does not prevent lenders from reporting late payments to the credit bureaus. Thus, while a single late payment might not trigger foreclosure, it can nevertheless damage a borrower’s credit rating.

Trustee’s Sale GuaranteeTrustees should obtain a Trustee’s Sale Guarantee (TSG) to direct them through the foreclosure’s statutory noticing requirements. Most title companies offer TSGs as a necessary tool to help Trustees ensure the validity of the Trustee’s Sale. The TSG contains the results of a thorough title search, including the disclosure of any liens or encumbrances on a property, unpaid property taxes, and parties of record to whom the Trustee should give notice of foreclosure. The title company will also alert the Trustee as to any errors in the Trustee’s Sale documents. Since a Notice of Trustee’s Sale may not be re-recorded for any reason, catching errors at this early stage can help Trustees avoid costly mistakes at the outset. Trustees who give notice to each party identified in the TSG can later obtain an insurable Trustee’s Deed.

Notice of Substitution of TrusteeGenerally, three documents are recorded in the county where the trust property is


located in order to initiate the formal foreclosure process. These documents include a Notice of Substitution of Trustee, a Statement of Breach, and a Notice of Trustee’s Sale.

Lenders oftentimes wish for somebody other than the original named Trustee, in the deed of trust, to conduct the Trustee’s Sale. For instance, where a deed of trust originally names an escrow company as Trustee, the lender may later decide that it would be wiser to have an attorney handle the sale. So long as the Trustee appointed as successor is statutorily qualified to serve, the lender may prepare a Notice of Substitution of Trustee to have the original Trustee replaced. Arizona statute allows banking associations, credit unions, insurance companies, escrow agents, consumer lenders, attorneys, licensed real estate brokers, licensed insurance producers and federally licensed, chartered or regulated entities to serve as Trustee.

Statement of Breach To initiate a Trustee’s Sale, lenders must prepare and deliver to the Trustee a Statement of Breach that fully identifies the default. Trustees have an absolute right to presume that a Statement of Breach is accurate, and to fully rely upon it to move forward with the foreclosure process. Although the Statement of Breach

is not required to be recorded, the Trustee must provide a copy to the parties to the deed of trust where he mails the Notice of Trustee’s Sale, thus the Statement of Breach is often recorded with the Notice of Trustee’s Sale.

Notice of Trustee’s SaleTrustees cannot exercise the power of sale until the 91st day after recording a Notice of Trustee’s Sale (Notice) in the county where the trust property is located. Generally, the Trustee’s Sale will be held at the Trustee’s place of business if it is in the same county as the trust property or on the County Courthouse steps for the county in which the trust property is located. Arizona law requires the Notice to include:

The date, time and place of the sale.A legal description of the trust property. A street address of the trust property, if available.The tax parcel number of the trust property.The original principal balance of the obligation.Names and addresses of the lender, borrower and Trustee.The statutory basis for the Trustee’s qualification.The Trustee’s telephone number.

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Arizona law also provides publishing, posting and recording requirements for the Notice. Trustees must publish the Notice at least once a week for four consecutive weeks in a newspaper that circulates in the county where the trust property is located. Importantly, the last date of publication can be no less than ten days prior to the date of sale. Trustees must also post the Notice in a conspicuous place on the trust property, and also at the County Courthouse at least 20 days before the sale.

Trustees are also responsible for sending copies of the Notice to every party with an interest of record. The Trustee has five business days from recording the Notice to mail the Notice, along with a Statement of Breach, to each party to the deed of trust as well as to the parties’ known successors. The Trustee then has 30 calendar days to mail the Notice to anybody who has an interest of record in the trust property or who has recorded a request for Notice.

The 90-Day Reinstatement or Cure PeriodIn addition to the Trustee’s duties during the 90-day wait period, borrowers have certain rights with respect to their loan and the trust property. Until the Trustee’s Sale occurs, the borrower still owns the property and has rights to occupy

it and responsibility for damage caused to it. Borrowers also have the absolute right to reinstate their loan up until the close of business on the day preceding the non-judicial sale. A borrower should obtain a reinstatement figure from the Trustee to determine the correct amount to pay in order to reinstate the loan. The reinstatement figure will likely contain penalties and fees incurred or charged as a result of the default; however, it does not include a full acceleration of the loan balance. Full payment of the reinstatement amount will cure the default and stop the foreclosure.

Trustees cannot hold a Trustee’s Sale any sooner than 91 days after recording the Notice. Before holding the sale, Trustees should do everything in their power to ensure the sale will be valid. By fully complying with the relevant statutes and properly notifying each party named in the TSG, Trustees can be reasonably certain that the sale will be valid. However, since liens and encumbrances may be recorded after the Trustee obtains the TSG, it is necessary for Trustees to keep abreast of issues that might develop as the sale approaches. As a tool to help Trustees keep informed in this regard, title companies offer endorsements, which update the TSG.

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The Trustee’s Sale extinguishes almost all liens recorded after the recording of the Notice. The Trustee who obtains the TSG before recording the Notice should obtain an endorsement to determine any new encumbrances of record. The Trustee should also obtain an endorsement as the sale date approaches to check for new I.R.S. Federal Tax Liens. In the event that the I.R.S. records a Federal Tax Lien more than 30 days before the sale date, the Trustee must provide the I.R.S. special notice of the sale 25 days before the sale occurs in order to extinguish the lien as to the trust property.

In addition to obtaining TSG endorsements, the Trustee should also make sure the borrower has not filed a bankruptcy petition between the recording of the Notice and the actual sale date. When a borrower files a bankruptcy petition, the court issues an “automatic stay,” which ultimately prevents the borrower’s creditors from taking any action to collect on debts against the borrower without first obtaining relief from the stay. The automatic stay takes effect immediately upon the bankruptcy filing, and remains in effect until the borrower is discharged in bankruptcy or a lift off the automatic stay is granted, during which time the Trustee cannot hold a valid Trustee’s Sale. By petitioning the court, however,

the Trustee may obtain a lift of the automatic stay, and proceed with the Trustee’s Sale even before a borrower’s debts are discharged in bankruptcy. The Trustee should also ensure that any third party with an interest in the trust property (no matter how small) has not filed a bankruptcy petition and is not currently under the protection of the automatic stay before the Trustee proceeds to sale.

If a Trustee proceeds to sale without knowledge of a bankruptcy, the sale is “undone” and the sale is automatically postponed for 28 days from the date of the sale, giving the Trustee time to petition the bankruptcy court for relief from the stay. However, a reversal can become complicated if the Trustee discovers the bankruptcy more than 28 days after the sale, if the property has been re-sold post-sale or if the property sold to a third party bidder at the sale.

Finally, a Trustee should check service-member records to ensure that a borrower is not currently serving on active duty in any of the armed forces at the time of sale. Federal law prohibits foreclosure of a service-member’s home while that service-member is on active duty.

Postponing a SaleThe Trustee can postpone a Trustee’s Sale for virtually any reason that is in

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the lender’s or the borrower’s interest. They must give notice that the sale has been postponed, of course, but the notice requirements are relatively easy to satisfy. To postpone the sale, the Trustee need only show up at the original sale’s designated location at the time set forth in the Notice and verbally declare the date, time and place of the new sale. The new sale must be within 90 calendar days from when the Trustee publicly declares the postponement. No other notice needs to be given to either the borrower or the public. When a sale is postponed, anyone desiring information on the new sale date must contact the Trustee personally to determine the new sale date and time. Sales can be postponed indefinitely in increments of 90 days or less.

Foreclosure SaleAs previously discussed, borrowers have until 5:00 p.m. on the day before the sale to reinstate the deed of trust. This requires them to pay all late payments, in addition to all costs and fees the lender spent on the foreclosure action. Once the Trustee’s Sale closes, borrowers have little recourse, as

Arizona does not have a post-sale right of redemption. In other words, the window for borrowers to keep their property closes on the day of the Trustee’s Sale.

Trustees must adhere to a very specific process when conducting a foreclosure sale. Everything from opening the sale to the bidding and payment processes is controlled by statute. Throughout all of this, Trustees have an obligation to be familiar with the relevant rules, and do everything in their power to obtain the highest price for the property. However, the process is routine and there are seldom problems with the procedure.

A non-judicial sale is public and open to anyone desiring to make a bid on the trust property, including the current occupant or borrower. Any party interested in making a bid at the sale must arrive prior to the designated sale time and will usually be required to sign in with the Trustee. Each bidder is required to bring a bid deposit of $10,000 in cash or cash equivalent, at the Trustee’s discretion. Most Trustees and lenders will accept cashier’s checks drawn in favor of the bidder that can be endorsed over to the Trustee or lender if the bidder is successful at the sale. These funds are usually verified prior to the opening of bids. Every bid made is an irrevocable offer, meaning once a bid is placed it cannot be rescinded. The sale is a live auction

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with competitive bidding. The opening credit bid is set by the Trustee on the advice of the beneficiary. Interested bidders may only bid above the last price bid. Bidding continues until one party reaches a figure that no other bidders are willing to surpass. If no bidders are present or no bidders place bids in excess of the opening credit bid, the beneficiary becomes the winning bidder, with its opening credit bid becoming the bid price. The successful bidder, other than the beneficiary, must surrender the $10,000 to the Trustee. The successful bidder has until 5:00 p.m. of the day following the sale to pay the balance of his bid price. If he fails to make payment timely, he forfeits his deposit. The purchasing process is discussed in greater detail later in this guide.

Post Sale PossessionAfter a Trustee’s Sale, the successful purchaser acquires both title to the property as well as the right of immediate possession. This right arises as soon as the purchaser has completed the sale by paying the full amount of the bid price. In order to secure possession, the purchaser will first need to gain access to the property. Because the property has been foreclosed, generally the lender will not have possession of keys to the property. In any event, it is the purchaser’s responsibility, not the lender’s, to gain access to the interior of the property.

If the property is vacant, this may necessitate the use of a locksmith. A purchaser can gain access with the help of a locksmith by displaying the Trustee’s Deed to the locksmith. The purchaser should then change all the locks on the property.

In the event a property is not vacant as of the date of the sale, the purchaser has the right to evict the occupants. Eviction is governed by the provisions of the Arizona Residential Landlord Tenant Act (“AzRLTA”). The AzRLTA contains specific provisions for notice and eviction procedures, which procedures must be followed precisely. The eviction process, fortunately, is not difficult and can be completed in a relatively short period of time.

If eviction is necessary due to an occupant in the property, it is important for the purchaser to first ascertain the identity of the occupant. If the occupant is the former owner or an unauthorized individual not paying rent (i.e., a “squatter”), the eviction process may begin immediately, with a written demand for possession. If the occupant is a bona-fide leaseholder, the occupant will likely qualify for certain statutory protections, including those available under the Protecting Tenants at Foreclosure Act of 2009. Purchasers facing the need to evict an occupant should consult an attorney in order to determine their rights.


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Foreclosure Timeline Review 1. The borrower defaults on the loan.2. The 30-day notice of default period runs.3. The Trustee obtains the TSG from a title company, which shows the condition of the title and directs the Trustee as to whom it must give notice of the Trustee’s Sale.4. If the lender decides to replace the Trustee with one it deems more qualified, it must prepare and record a Notice of Substitution of Trustee.5. The lender gives the Trustee a Statement of Breach that fully describes the default.6. The Trustee records the Notice of Trustee’s Sale, beginning the 90-day notice period.7. The Trustee publishes the Notice of Trustee’s Sale in a newspaper that circulates in the county where the trust property is located.8. The Trustee posts the Notice of Trustee’s Sale at the County

Courthouse, and on the trust property itself, at least 20 days before the sale.9. Within five business days of recording the Notice of Trustee’s Sale, the Trustee mails Notice, accompanied with a Statement of Breach, to each party to the deed of trust, and their successors.10. Within 30 calendar days of recording the Notice of Trustee’s Sale, the Trustee mails the Notice, accompanied with a Statement of Breach, to anybody who has an interest of record in the property or who has recorded a request for notice. 11. The Trustee obtains endorsements, checks for bankruptcy, and reviews service-member records.12. The Trustee holds the Trustee’s Sale at least 91 days after recording the Notice of Trustee’s Sale.13. The borrower has no right of redemption.14. The successful bidder is given a Trustee’s Deed upon payment of the bid price.


Approx.30-60 Days or More

Approx.30 Days 1

DayAt Least 91 Days

~ ~

Notice ofDefault

Notice ofTrustee's Sale

Recorded

Sale Date

PaymentDue

Trustee’sDeed Issued

FederalTax Lien

Redemption

120 Days

Approximately 180 Days or More

7 Days

<15 Days

Foreclosure TimelineNon-Judicial

1st MissedPayment

Trustee’sDeed Recorded

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Impacts & Effects of ForeclosureForeclosure is generally one of those “once in a lifetime” events for many. For others, it’s their day-to-day job. Either way, the impacts of foreclosure and any personal involvement in foreclosure should be fully understood.

What Borrowers May FaceCredit ImpactCredit scores range from 300 to 850 points. A higher credit score will qualify a borrower for a lower interest rate loan. If a borrower’s credit score is too low, they may not be able to qualify for any loan. Half of all Americans have a credit score between 620 and 755, with twenty-five percent having scores less than 620 and the other twenty-five percent having scores greater than 755. A good credit score is generally considered to be above 720.

Foreclosure has a serious impact on borrowers’ credit scores. In fact, lenders can report even the first late or missed payment

to the credit bureaus. Thus, borrowers who eventually prevent foreclosure can suffer credit damage. Fortunately, one missed payment will not cause as much damage to credit as foreclosure. Foreclosure notations remain on a credit score for up to seven years. Although the actual impact will depend on the amount of time a foreclosure takes and credit health prior to default, borrowers should be able to estimate the likely impact. According to an article reported in 2010 by CNN Money, based on information provided by Fair Isaac, the company that developed FICO Scores, you can expect the following impact to your credit score during a foreclosure:

These estimates assume that a borrower is in default of their loan prior to short selling their home or giving the bank a deed-in-lieu of foreclosure. While it may be possible to complete a short sale or a deed-in-lieu of foreclosure without going into default, it is likely that an


30 days late: 40-110 point drop

90 days late: 70-135 point drop

Foreclosure, Short Sale or Deed-in-lieu: 85-160 point drop

Bankruptcy: 130-240 point drop

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individual considering such options is doing so because of the financial pinch they are experiencing. Fair Isaac also provides the following chart, which depicts two fictitious individuals’ credit scores and the direct, cumulative credit impact they may experience during each stage of default.

Credit RecoveryIn the aftermath of a foreclosure or other traumatic financial experience, individuals often continue to depend on their credit in order to qualify for purchases. Borrowers need to consider how long it might take for their credit to recover. If recovery is measured by the amount of time it takes an individual’s credit score to return to the level it was prior to foreclosure, it will take an individual with a higher initial credit score a longer period of time to recover than one with a lower initial credit score. This outcome is due to the

fact that the higher initial credit score required a clean credit history. In order to rebuild to a pristine credit history after foreclosure or bankruptcy, the time requirements will be greater than recovering to a marred credit history.

While it may take an individual with a 680 credit score only a few years to rebuild their credit to that level, it may take an individual with a 780 credit score seven or more years to rebuild to that level. Notwithstanding this, most individuals should not worry about trying to attain a 780 credit score, as such score is generally not necessary to obtain a favorable loan. The reality is that within a couple of years, if an individual can keep his other credit sources clean and make payments on time, the individual will recover enough to qualify for favorable loans at decent interest rates.

In order to obtain a loan on a new home, an individual that has experienced a major financial crisis, such as foreclosure or bankruptcy, may expect a mandatory wait period before being able to apply and qualify for a loan. Bear in mind, although an individual may be able to qualify for a loan, the interest rate that will be attached to the loan is dependent on the individual’s credit score, which may take longer to recover. Mandatory loan qualification wait times are summarized in the chart on page 12.


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How delinquencies hurt credit scores

Initial credit score 680 780

After 30-day 620-640 670-690delinquency

After 90-day 595-610 645-665delinquency

Foreclosure, short 575-595 620-640sale or deed-in-lieu

Bankruptcy 530-550 540-560

Borrower#1

Borrower#2

Note: Borrower #1 had six credit accounts versus 10 for Borrower #2, two past delinquencies versus zero, a shorter credit history and had used a higher % of credit available.

Source: Fair Isaac Corp.

Co-SignersCo-signers can be equally threatened by foreclosure. A co-signer’s obligation on a loan is as strong, and in some cases, stronger than the borrower’s. For instance, parents that co-sign on an adult child’s loan may not fully understand that they might be placing their own financial health in jeopardy. If the child later becomes unable to make the payments, parents in this situation might have to choose between taking over the payments or suffering serious harm to their personal credit score. Just as if they were the trust property’s primary owner, co-signers in foreclosure can suffer damage to their credit score that can take up to seven years to restore. Additionally, like the primary borrower, co-signers may be subject to liability for any deficiency resulting from foreclosure if the trust property does not qualify

for anti-deficiency protections, as discussed further in this guide.

Equity & Excess ProceedsParticularly given that the housing market has crashed so dramatically over the past several years, most borrowers in foreclosure have little or no real equity in their home. Equity is a measure of the market value of a property less the amount outstanding on the loan that the property secures, which, in this market, is often a negative figure. As such, the issue of excess proceeds rarely comes up with foreclosures these days. However, in the rare case a property does sell for more than the amount of the outstanding loan that the property secures, the resulting excess proceeds must be distributed.

Arizona law provides a specific formula for dealing with excess


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Financial Event: Type of Loan: Wait Time:Chapter 7 Bankruptcy *Conventional (FNMA)

FHAVA

4 years from discharge2 years from discharge2 years from discharge

Chapter 13 Bankruptcy *Conventional (FNMA)FHAVA

2 or 4 years from discharge or dismissal

1 year from plan approval1 year from plan approval

Foreclosure *Conventional (FNMA)FHAVA

7 years from sale3 years from sale2 years from sale

Short Sale/Deed-in-lieu *Conventional (FNMA)FHAVA

2-7 years from sale3 years from sale2 years from sale

Approximate Loan Qualification Wait Times

* Require a minimum 660 credit score

proceeds in a foreclosure sale. The bad news for borrowers, however, is that they are last in line to receive any excess that may exist. Before a borrower has any rightful claim to excess proceeds from a foreclosure sale, the Trustee must first pay:

1. The costs and legal fees of the sale.2. Court costs and legal fees in filing the excess proceeds petition.3. Any obligations secured by the deed of trust, actually paid before the sale.4. All other obligations provided in the deed of trust.5. Unpaid association dues and fees secured by a lien.6. Junior lien holders in the order of priority.

If there are proceeds left over after the Trustee has paid all of these expenses, the borrower is entitled to a share of the sale proceeds.

UncertaintyUncertainty is always an issue for borrowers facing foreclosure, not the least of which stems from the prospect of losing their home and not having elsewhere to go. Beyond this fundamental concern, however, most borrowers also have many questions about their rights as they pertain to the foreclosure process. Is there any way to postpone or prevent foreclosure? How much time do I have to find a

new place of residence? How long is the process going to take? Will my lender work with me to keep me in my home? Of course, answers to these types of questions always hinge on the specific circumstances, so borrowers should consider turning to professional counsel for assistance.

Home Recourse DebtLoan proceeds borrowed for the purpose of purchasing real property are referred to as purchase money loans. In Arizona, many purchase money loans qualify as non-recourse loans, meaning that a lender may not be able to hold borrowers personally responsible for the debt. Instead, lenders may be limited to recovery of the property in the event of default. Even where lenders fail to collect the full outstanding amount of the debt from a Trustee’s Sale, the general rule with non-recourse debt is that lenders cannot hold borrowers personally responsible for the balance. Although borrowers may be protected from personal liability for purchase money loans on their residence, many


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borrowers have used their home to secure additional debts for which they could be held personally liable even after foreclosure.

Home Equity Line of CreditHome Equity Lines of Credit (HELOC) have been quite popular among borrowers in the past. HELOCs carry a certain degree of risk. First of all, because HELOCs are secured by trust property, failure to repay a HELOC can eventually result in foreclosure. A HELOC is generally not a purchase money loan. If borrowers with a HELOC default on their purchase money loan, they likely will retain personal responsibility to repay the HELOC even after foreclosure. Nearly all HELOCs are recourse loans, meaning that lenders who do not recoup the full debt through foreclosure can sue borrowers for the outstanding balance. DeficiencyA deficiency is the opposite of an excess and exists when the proceeds from a Trustee’s Sale are insufficient to cover the amount of the outstanding debt. Of course, lenders have an interest in recovering this deficiency from borrowers, but Arizona law may prevent recovery. Lenders cannot pursue a deficiency judgment on a loan secured by a residential property that is limited to and utilized as a single one-family or single two-family

dwelling, and is less than 2.5 acres in size. This is commonly referred to as the Arizona anti-deficiency statute, and is found in the Arizona Revised Statutes at A.R.S. § 33-729(A) for mortgages and A.R.S. § 33-814(G) for deeds of trust. If a property does not satisfy these requirements, the borrower does not qualify for the anti-deficiency statute’s protections, and may be held personally responsible for an amount up to the amount still owed after the Trustee’s Sale. The statutes provide that any action to claim a deficiency must be brought within 90 days of the date of the Trustee’s Sale or sheriff’s sale.

A deficiency is determined by subtracting the greater of the fair market value of the trust property on the date of the sale or the bid price at the Trustee's Sale from the total amount owed on the loan as of the date of the sale. As an example: in 2005 a borrower took out a $300,000 loan for a trust property that has dropped in value, and the trust property did not qualify for the anti-deficiency statute’s protection. The


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Deficiency Matrix

If the property went into:

» Judicial foreclosure» Trustee's Sale

» Short sale

Then NO deficiency is owed.


» Judicial foreclosure: Then YES a deficiency

may be owed.

» Trustee's Sale: Then NO deficiency is owed.

» Short sale: Then PERHAPS a deficiency is owed.



» Short sale

Then YES a deficiency may be owed.



» Short sale

Then YES a deficiency may be owed.

If you checked YES for both

If you checked NO for both

If you checked YES for #1 and

NO for #2

If you checked NO for #1 and

YES for #2

Judicial Foreclosure: Legal proceedings, overseen by the court, by which a lender obtains court approval allowing the sheriff to sell property securing a loan upon which a borrower has defaulted.

Trustee's Sale: A public auction conducted by a Trustee’s private power of sale, without court oversight, at which the Trustee sells property securing a loan upon which a borrower has defaulted.

Short sale: An arrangement between a borrower, lender, and third party, under which the borrower sells property that is security for a loan from the lender to the third party for a price that is less than the outstanding loan balance, and the lender accepts this discounted amount in partial or full satisfaction of the loan obligation and releases its security interest in the property. Short sales made under the government’s HAFA program are not subject to deficiencies.

1. Were proceeds of a loan used to purchase or refinance the property that secured the loan?

2. Is the property limited to and utilized as a single or dual-family residence located on less than 2.5 acres of land?

YES NO

Ask yourself the following questions to determine if a deficiency may be owed:


borrower has paid the loan down by $25,000, leaving a balance on the loan of $275,000. If the trust property is purchased at sale for $100,000, but a court decided the market value at the date of the sale was $150,000, the deficiency amount would be $125,000, not $175,000, because the deficiency is the difference between the amount outstanding on the loan ($275,000) and the greater of the fair market value ($150,000) or the purchase price ($100,000). The chart on the previous page may help you determine if a deficiency is available on a particular loan. Borrowers facing and lenders contemplating a deficiency claim should seek guidance from a professional who can protect their interests throughout this process. Federal Tax ConsequencesMany borrowers overlook the serious tax obligations that foreclosure can create until it is too late for them to make effective tax preparations. As a result of this, they might be unpleasantly surprised when it comes time to file their tax return. The general rule is that when recourse debt is discharged, the amount of the forgiven debt is counted as income for tax purposes, and when non-recourse debt is discharged, the amount of the forgiven debt is counted as a “deemed” sale or exchange of the property. The principle behind this rule is that forgiven debt amounts to

a transfer of wealth because a person is relived of the obligation to repay money previously received. This transfer of wealth is almost always susceptible to taxation.

After foreclosure of property, a lender will typically issue an IRS tax form 1099 to document the cancellation of the balance of a debt. If the lender issues a form 1099-A, it is an indication to the IRS that the lender believes it has taken an interest in a property in partial satisfaction of a non-recourse debt. When a 1099-A is issued, a taxpayer will use the reported amount as the amount realized in what amounts to a sale of the property. From the amount realized, the taxpayer will deduct his or her basis (which includes all value, including debt, given to purchase the property) to determine taxable gain or loss with respect to the transfer of the property. In contrast, if a lender issues a form 1099-C, it is an indication to the IRS that the lender believes that it has settled a recourse debt of a taxpayer. A 1099-C is issued when the lender

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chooses not to pursue collection from a debtor of all or a portion of a deficient balance on a loan. If the portion that the lender does not pursue is forgiven, the debtor typically will be treated as having cancellation of indebtedness income, which is taxable as ordinary income unless statutory exemptions apply. Cancellation of indebtedness income may not be reported as taxable income if the debt forgiven is secured by a debtor’s primary residence (where you have resided for 2 of the past 5 years), if the borrower can show that he or she is insolvent or if the borrower has filed bankruptcy prior to the date that the 1099-C issued and the borrower completes the IRS Form 982.

Tax issues associated with real estate transactions and transactions involving the voluntary or involuntary return of real property to a lender, are complex and require careful analysis by a trained professional. Issues to be considered include the proper tax treatment of the transaction, whether the reporting by a lender is appropriate or inappropriate, and the actual tax liability associated with a transaction. Anyone involved in a short sale, foreclosure or other surrender of property to a lender should consult a competent tax advisor prior to implementing any transaction.

WasteArizona law provides lenders an action for recovery for waste against borrowers in certain circumstances. Borrowers who commit waste against a property may be subject to liability. Waste can include activities such as intentionally damaging a property, or permissively allowing a property to fall into disrepair. Both instances can subject the property owner to liability to the lender for the damage regardless of the anti-deficiency statute.

“Stripping” a property, whether done by the property owner or by third party vandals after a property owner has vacated the property, is a common form of waste. The analysis of which items may be removed from a trust property upon moving is best addressed with a legal professional, however the general rule is that if all you have to do is unplug it, you can take it, but if you have to unscrew it, leave it - it is a fixture and therefore part of the property.

“Stripping” a property is not the only form of waste. As another example, imagine a borrower facing foreclosure moves out of the property and allows his basement to flood with water by neglecting a broken pipe. If, as a result of this damage, the Trustee cannot recover the full debt at the Trustee’s Sale, the lender could bring an action for waste against the borrower to

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recover either the loss in the property’s value or the cost of repairs. Arizona’s anti-deficiency statute does not bar a lender’s subsequent action for waste. Lenders must take into account the diminution in value of a trust property due to waste or damage caused by the borrower in calculating the amount of the lender’s credit bid. Failure to account for the reduced value may result in a credit bid that cancels any obligation under a loan or impairment of value or loss due to waste.

Other ObligationsHome Owners’ AssociationsHome Owners’ Associations (HOAs) are granted an automatic lien for the amount of annual assessments due under the HOA’s restrictive covenants against a property that is subject to the restrictive covenants of that HOA. If a homeowner fails to pay timely assessments to their HOA, the HOA may opt to record the lien. HOAs can foreclose on a lien when a homeowner is more than one year delinquent on assessments, or assessments in excess of $1,200 are outstanding on a property. Because the lien attaches to the property itself, the HOA can initiate foreclosure against the property. However, the HOA’s right to recover payments for delinquent assessments is not limited to foreclosure of a property. The HOA has contractual rights by virtue of the restrictive covenants, which Arizona

law holds to be a binding contract between the homeowner and the HOA. HOA liens are junior to first position deeds of trust, and the HOA’s lien will be wiped out at a Trustee’s Sale. However, the underlying contractual obligation of the foreclosed homeowner to pay delinquent assessments is not extinguished by the sale. An HOA can opt to sue a homeowner under the contract for unpaid assessments.

Financial Waste – Hazard InsuranceThe doctrine of waste is not limited to instances where borrowers actively or permissively damage the property. Rather, this doctrine also includes financial waste, i.e. where borrowers fail to maintain insurance coverage on the property. Because borrowers put lenders in a precarious position by neglecting to insure trust property, special safeguards are in place to help lenders make sure that coverage is maintained.

Usually hazard insurance premiums are bundled with mortgage payments, so lenders are effectively notified when borrowers neglect their monthly premiums. Because lenders may not want a trust property that could eventually return to their possession to go without adequate insurance, they may choose to maintain the coverage themselves if necessary. One way they


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might do this is by paying the defaulting borrowers’ insurance premiums, and then adding the cost to the total indebtedness. Lenders then pursue recovery of these payments from the Trustee’s Sale proceeds or as part of an available deficiency.

What Lenders May FaceIn addition to the issues that both borrowers and lenders face jointly, certain issues are specific just to lenders.

EvictionWhat happens when a borrower or unauthorized tenant refuses to leave the property? Arizona law provides both the methods and limitation of removing holdover borrowers from a property. Lenders must follow the same guidelines governing eviction of a tenant when removing a holdover borrower. The mechanism for removal is the judicial process of Forcible Detainer. Additionally, lenders may choose to offer cash to a holdover borrower in exchange for voluntarily vacating the trust property. In the “cash-for-keys” scenario, a borrower will agree to be out of the property by a certain date for payment of some amount. This scenario ensures minimal damage to the property and a quick and definite date of removal. However, where the holdover borrower refuses to vacate the trust property amicably,

lenders should seek legal representation to conduct a Forcible Detainer (eviction) action of the holdover borrower.

Real Estate OwnedBeyond the substantial loss that lenders and investors take from defaulting borrowers, the foreclosure process has quite a few costs of its own. If a property fails to sell at the Trustee’s Sale, it becomes real estate owned (REO) of the lender, and the lender assumes much of the previous borrower’s responsibility. Precisely who bears the costs of REO property depends on who is contracted to service the loan, but for simplicity’s sake let’s assume that the lenders themselves bear these costs. Very generally speaking, along with the loss of income on the loan, lenders incur transaction and preparation costs associated with selling the REO property. More specifically, lenders can incur the following costs while managing REO property:

Property taxes and hazard insurance.HOA fees and assessments.Legal fees for representation during


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and after foreclosure.Administrative costs, such as court fees, publication fees, and title fees.Realtor commissions and other costs associated with remarketing the property.Property maintenance costs.Restoration and repair costs.

Even where one might be able to pursue recovery of these costs under the waste doctrine, they must pay these costs up front.

Government ProgramsIn 2009, Congress enacted several mortgage programs intended to battle the mortgage crisis. The relevant programs to this guide include the Home Affordable Modification Program (HAMP) and Home Affordable Foreclosure Alternatives Program (HAFA).

Home Affordable Modification Program (HAMP)Prior to foreclosure, lenders may be obligated to explore loan modification as an alternative. In 2009 Congress enacted the Home Affordable Modification Program (HAMP), the aim of which is to standardize loan modification guidelines for eligible loans. Although HAMP affects a relatively small target segment of homeowners, lenders must be mindful of which loans in their portfolio qualify for the protections of HAMP.

Any lender owed or guaranteed by Freddie Mac and Fannie Mae is required to participate in HAMP. Other lenders may participate voluntarily and are given incentives to do so. In order to be eligible for HAMP, a loan must meet the following requirements:

1. Loan was originated before 1/1/2009.2. Loan is in first position on an 1-4 unit, owner-occupied property.3. Loan is less than:

1 unit – $729,7502 unit – $934,2003 unit – $1,129,2504 unit – $1,403,400

4. Loan payment (principal, interest, taxes and homeowners insurance) exceeds 31% of monthly income.5. Borrower must affirm financial hardship.

Currently, HAMP will expire on December 31, 2012, unless legislation extends the program. If a loan qualifies for HAMP, lenders must be aware of the requirements and proactively offer HAMP modifications to borrowers that are more than 31 days delinquent on their loan payments. Even if a lender is not required to participate in HAMP, the lender may opt to offer its own modification program to convert a non-performing loan into a performing asset.


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Home Affordable Foreclosure Alternatives Program (HAFA)The Treasury Department introduced the Home Affordable Foreclosure Alternatives Program (HAFA) to provide options for borrowers who are unable to keep their homes under the HAMP guidelines. Although HAFA cannot keep a borrower from losing their home, it can help alleviate the effects of foreclosure. HAFA allows borrowers with government backed loans to work short sales and deeds-in-lieu of foreclosure. Lenders required to participate in HAMP are also required to participate in HAFA. One large benefit of HAFA is that no deficiency balance results from the short sale, as the short sale agreement under HAFA requires a full release of any deficiency. The eligibility requirements for HAFA mirror those of HAMP. Like HAMP, HAFA will expire on December 31, 2012 unless extended.

What Tenants May FaceUnfortunately, landlords are just as susceptible to foreclosure as anybody else. Until recently, when a landlord’s property was foreclosed it was oftentimes the tenants who suffered most. Prior to the early part of 2009, tenants could be forced to vacate their foreclosed residence immediately following the Trustee’s Sale. This meant that even good tenants with a perfect record of timely payments were

being forced out of properties much sooner than they agreed to in the lease. Although tenants might have recourse against their landlord for his breach of their lease agreement, they had little, if any, ability to stay in the property past foreclosure. Recent changes to the law, however, now provide tenants with certain protections.

The Protecting Tenants at Foreclosure Act of 2009The Protecting Tenants at Foreclosure Act of 2009 (the “Act”) provides tenants whose residences are foreclosed with specific protections against unfair treatment. Among other things, the Act ensures that renters have time to make new living arrangements if their residence is foreclosed. More specifically, the Act provides tenants with the following protections:

If the lender takes possession of the property following the Trustee’s Sale, the tenant can continue making monthly rent payments and maintain residence in the property through the lease’s end. If the property is sold to a third party who will use the property as a primary residence, the new owner can give the tenant a 90-day notice to vacate.If the lease is month-to-month, the lender or new owner must provide the tenant with a 90-day notice to vacate.


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These protections only apply to bona-fide tenants who pay fair market rent. Also, these protections only apply to fixed term leases which the tenant entered into before the date that title to the property transferred under a foreclosure. Additionally, the tenant is still obligated to make rental payments during the period of occupancy. After foreclosure, rental payments should be made to the new owner of the property. Tenants who meet these requirements, qualify for the Act’s protections and cannot be forced out of their residence if they stay current on their rent obligations.

What Communities May FaceThe reality of Arizona’s real estate market is that there are too many homes in foreclosure to make a general statement about how foreclosure impacts a community. In some instances, new owners move in before the neighbors even realize a property was foreclosed, and other times foreclosed properties remain vacant for months, or even years, before they are purchased. So while foreclosure doesn’t necessarily signal a community’s demise, there is always the possibility that it will cause certain problems.

VandalismForeclosed homes are more susceptible to vandalism than other homes for

two reasons. First, some borrowers intentionally damage the property upon learning of the impending foreclosure. In extreme cases, they might attempt to exact retribution of some sort by breaking windows or spray-painting walls before vacating the premises. In other cases, they might leave their mark on the property by “stripping” it of fixtures, wiring or even piping before moving out. As such, home values throughout communities have suffered as Trustee’s Sales values have declined due to the uncertain condition of the interior of a property. Even a property left in pristine condition might be sold for a discounted price due to the uncertainty. The result is a reduction of property values throughout the community.

Second, during the foreclosure period, properties have a higher incidence rate of vandalism because they are unprotected. These properties have often been abandoned by the borrower and are not yet property of the lender. Thus, they can be prime locations for anything from adolescent parties to squatting grounds for vagrants.


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Furthermore, as these properties begin to show visible signs of vacancy, the likelihood of this type of vandalism increases even more. While foreclosing lenders may have claims against the borrower for the waste caused by vandalism, communities have little recourse.

Depreciating Home ValueForeclosure incidence is often tied to depreciating property values, particularly where the foreclosed properties are neglected or vandalized. For one thing, because unoccupied homes tend to lack curb appeal, potential buyers might think twice before moving into a community filled with pre-foreclosure and bank-owned properties. Additionally, communities with high foreclosure rates sometimes get characterized as unsavory places to live. On the positive side, as new owners move in, communities have a tremendous opportunity for rebirth and appreciation.

Homeowners' Association AssessmentsMany homeowners who go into foreclosure also neglect

to pay their HOA assessments. Although the HOA retains the ability to pursue the homeowner under his contractual obligations of the restrictive covenants, it might be difficult to locate a recently departed homeowner or to actually obtain any money from him. In extreme cases, HOAs might charge the remaining homeowners a prorated special assessment to make up for lost revenue. Although the HOAs have foreclosing authority, they can only exercise this authority if a homeowner is more than one year delinquent or owes more than $1,200 in unpaid assessments.

Foreclosure Alternatives Rent the Home Excluding communities with rental restrictions, borrowers can always attempt to rent out their home. Exercising this option generally requires at least a modest cash reserve. Borrowers who collect enough rent to cover their mortgage should also be financially prepared if their tenants stop making payments or if


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home repairs become necessary. Furthermore, acting as a landlord is no small responsibility. Borrowers who decide to rent must either pay a property management company a percentage of their rental income, or be prepared to deal with issues at virtually any hour of the day or night.

Renting definitely has its benefits as well. Many people generate significant income with rental properties. First, assuming the real estate market begins to improve, borrowers who rent their home for a period of time can give their property more time to appreciate before eventually selling it. Renting also has certain tax advantages, so tax planning can help borrowers offset any rental income the property generates. And lastly, rental income can be enough to cover a mortgage payment and possibly leave a little left over for borrowers to put towards the cost of living elsewhere.

While renting is definitely one option, borrowers should carefully consider all of its associated costs to make sure their efforts do more than merely postpone the inevitable. Renting out a property while facing foreclosure on the underlying mortgage may cause serious legal problems for a landlord. Individuals considering renting out a property

in foreclosure should consult an attorney to discuss the possibility of liability in working with tenants during foreclosure.

Stay in the HomeModify Many borrowers have avoided foreclosure by obtaining a loan modification from their lender. A loan modification can mean many things, and lenders may or may not be willing to negotiate, but it is always something for struggling borrowers to consider. Lenders might be willing to defer payment, modify the interest rate, or in rare situations even lower the principal balance to the present market value. Lenders are never required to modify a loan, even though certain lenders may be required to explore modifications under HAMP. Borrowers can never be sure if this option is available until they ask.

Borrowers should always make a few preparations before contacting their lender about a modification. They should prepare a detailed monthly budget and be ready to explain the hardship they are facing. Additionally, borrowers should be prepared to articulate what type of modification they need to get them back on their feet. Put simply, borrowers who adequately demonstrate their need for a modification, along with their


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willingness to abide by its terms, have a better chance at receiving help from their lender. RefinanceA general tightening in lending practices has made it more difficult for borrowers to refinance their homes with private lending institutions. Congress implemented the Home Affordable Refinance Program (HARP) to help certain borrowers who might not be able to obtain affordable refinancing elsewhere. While it is certainly not a perfect system, HARP has helped hundreds of thousands of borrowers around the country stay in their homes, and out of foreclosure. The program is set to expire on June 30, 2012. To qualify for the program, borrowers must:

Own a 1-4 unit home with a loan backed by Fannie Mae or Freddie Mac.Have made no mortgage payments more than 30 days late in the past year.Have a first mortgage that is no greater than 125% of the home’s current market value.

Short SaleWith lender approval, borrowers might avoid foreclosure by “short selling” their home. A short sale is an arrangement between a borrower,

a lender, and a third party, under which the third party purchases the home for somewhat less than the loan’s outstanding balance. Borrowers facing foreclosure might prefer short selling because it may not harm their credit score as much as foreclosure and lenders might prefer it because it is easier and less costly for them than foreclosing on the property. In many instances, a short sale is mutually beneficial to the borrower and the lender, but lenders always have the final say as to accepting the terms of a short sale offer.

Borrowers may request to initiate a short sale before or after they have defaulted on their loan, and it can be a lengthy and uncertain process. Nevertheless, in today’s real estate market, most lenders will at least entertain the idea of a short sale. Of course, finding a buyer is not always as easy as borrowers anticipate. Many potential short sale buyers are simply unable to meet lenders’ expectations. And because the authority to accept or reject short sale


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offers ultimately lies with lenders, and not borrowers, it sometimes takes several attempts to actually complete a sale. Borrowers need to be aware that they may have an income tax liability for the difference between the loan amount due and the sale price at the short sale. It is always a good idea to obtain competent legal advice in these situations.

Deed-in-Lieu of ForeclosureA transaction known as a deed-in-lieu of foreclosure allows many borrowers to avoid foreclosure by deeding their property back to the lender. Depending on the particular arrangement, borrowers can satisfy all or a portion of the outstanding loan with such a transaction. The rationale behind a deed-in-lieu of foreclosure is much like that behind a short sale, in that lenders avoid the costs and trouble of foreclosing, and borrowers may avoid some of the negative marks on their credit score. Also like a short sale, borrowers can only pursue this option if their lender agrees, so a deed-in-lieu of foreclosure is not available to everybody. Nevertheless, it is certainly something for borrowers facing foreclosure to look into.

A deed-in-lieu of foreclosure conveys all of the borrower’s equity value, along with any lien or encumbrance

that may be attached to the property, back to the lender. As such, borrowers with little or no home equity tend to favor this approach, although lenders generally won’t even consider it if the property is encumbered by junior liens. While a deed-in-lieu of foreclosure can be very equitable under the right circumstances, the lender always gets to decide whether to accept this type of arrangement. In the last few years, in Arizona, acceptance by lenders of deeds-in-lieu of foreclosure has become more popular.

As with short sales, borrowers need to be aware that they may have an income tax liability or deficiency liability for the difference between the loan amount due and the sale price at the short sale. It is always a good idea to obtain competent legal advice in these situations.


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Bankruptcy & ForeclosureAlthough many borrowers hesitate to consider bankruptcy as a solution to foreclosure, it can provide relief under the right circumstances. Filing bankruptcy might not be the preferred method for most borrowers, it is almost always preferable to losing a home in foreclosure and may be necessary when facing a large deficiency. As such, borrowers should keep bankruptcy in mind as they weigh their options, as it might provide financial relief even beyond the effect it can have on foreclosure.

Automatic StayImmediately upon the filing of a bankruptcy petition, an automatic stay becomes effective by operation of law, which requires all creditors to cease collection efforts against the person who filed for bankruptcy. As such, when a borrower facing foreclosure files bankruptcy, the automatic stay can prevent the lender from conducting the Trustee’s Sale until after the bankruptcy case closes or until a lender

applies for and is granted a lift of the automatic stay. Because bankruptcy proceedings tend to last several months, an automatic stay might buy borrowers a significant amount of time to make financial and living arrangements. Depending on the particular circumstances, these arrangements might involve working out a plan to remain in the home, or saving money for a new place to live.

Automatic stays are powerful but temporary. If the court lifts an automatic stay, lenders can conduct the Trustee’s Sale before the bankruptcy matter is resolved. The Trustee’s Sale is postponed during the time that it takes lenders to file the motion and the court grants the motion. How much extra time a bankruptcy filing will provide a borrower ultimately depends largely upon which chapter of the U.S. Bankruptcy Code the borrower files.

Chapter 13Those who file Chapter 13 bankruptcy agree to repay at least a substantial portion of their debt through a repayment plan. Under this plan, individuals’ debt is


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consolidated and restructured with better terms, such as lower interest. Borrowers facing foreclosure might use such a plan to restructure back mortgage payments, and remain in their home. Because these plans provide up to five years for people to repay their outstanding balances, Chapter 13 can sometimes prevent foreclosure altogether. The catch here is that borrowers must have enough regular income to cover not only payments due under the plan, but future mortgage payments as well. As such, Chapter 13 is not always suitable for those without a steady flow of income.

Chapter 13 can be a particularly powerful tool for borrowers who have other debt secured by the home, such as second or third mortgages. Given that property values have fallen so dramatically in recent years, the fair market value of many homes is no longer great enough to secure all of the debt that is tied to a home. For example, let’s say a borrower took out a $300,000 home loan five years ago, followed by a second mortgage of $50,000 one year later. If the home is now worth $200,000, there is no longer enough value in the home to secure the second mortgage. As such, if this borrower filed for Chapter 13 bankruptcy, the second mortgage could be reclassified as unsecured

debt, which takes last priority under a Chapter 13 repayment plan, and can sometimes go unpaid. This is commonly known as lien stripping. Chapter 7Those who file for Chapter 7 bankruptcy liquidate all of their non-exempt assets and distribute the proceeds to their creditors through a bankruptcy trustee. Because it does not involve a repayment plan, Chapter 7 typically does not provide a way to prevent a pending foreclosure. Filing Chapter 7 does, however, provide borrowers with the protections of the automatic stay. As such, lenders cannot hold a Trustee’s Sale until the bankruptcy case is closed, or until they obtain judicial relief from the stay. In addition to forestalling the Trustee’s Sale, Chapter 7 also cancels every debt that the home secures, so the proceeding effectively discharges payment obligations on mortgages and HELOCs.


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Purchasing A Foreclosure PropertyAt SaleRequirementsPurchasing a foreclosure property is a unique experience, and buyers who are serious about a particular property need to pay careful attention to the statutory requirements and intricacies of a particular sale to stand a chance at acquiring it. First of all, foreclosure properties are sold at auction, held at the courthouse of the county in which the property is situated or in the office of the Trustee which is located in the same county as the property. In Maricopa County, for instance, Trustee’s Sales are held every weekday at the Maricopa County Courthouse, and information about the sale of a specific property is provided in the Notice of Trustee’s Sale. Because the Trustee’s Sale is an auction, prospective buyers who arrive even a few minutes late can miss their opportunity. Punctuality is very important.

In addition to arriving at the courthouse on time, buyers also

need to arrive with $10,000 in cash or cash equivalent, as they must deposit this amount with the Trustee in order to participate in the auction. A cashier’s check probably works best here, but Trustees can accept or reject any form of payment they choose, with the exception of cash. The Trustee must promptly return deposits to unsuccessful bidders at the auction’s close, and in the rare event that the property closes for less than $10,000 the Trustee must refund the difference to the successful bidder upon delivering the Trustee’s Deed.

TitleThere are certain risks involved with purchasing a foreclosure property of which buyers should be aware. First, Trustees never make representations as to a foreclosure property’s value or condition of title. This means that bidders might have to place bids with only limited information. Second, foreclosure properties neither come with express nor implied warranties, which means that sellers are not responsible for any repairs after the close of the sale. While these


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conditions do present a certain degree of risk, prospective buyers can usually get a pretty good idea about a home’s condition and value even without the seller’s cooperation. A good real estate agent or attorney can help buyers obtain the information needed to mitigate any risks that may be involved.

Competing Lien InterestsGenerally, real property will have several encumbrances on the property. It is very rare that someone owns a property “free and clear” of all encumbrances. Even if an individual has satisfied their mortgage, they will still have other obligations that are tied directly to their home. Some of these encumbrances may extend past the property and create individual obligations independent of the land. It is important for lenders, borrowers and investors to have at the very least a basic understanding of competing property interests, which interests remain personal to a landowner, and the priority among competing interests. Lenders and investors

should know which interests survive a foreclosure as they will be required to pay off superior interests in order to clear title. Failure to clear a superior interest may result in the eventual loss of the property to a party holding that superior interest. Competing property interests may include:

Federal Tax LienProperty TaxesMunicipal and County Improvement LiensFirst Position MortgageMechanics LiensHOA LiensJunior Position MortgagesChild Support LiensPersonal Judgments

These competing property interests have been listed in their general order of priority. The interests listed above the First Position Mortgage will generally survive a Trustee’s Sale and will become the responsibility of the purchaser at the sale. The Federal Tax Lien can be extinguished prior to sale if the Trustee or lender follows the proscribed statutory notice requirements; however, the Federal Tax Lien carries with it a redemptive period which cannot be ignored. Additionally, interests in real property are generally given priority based on the time that an interest is created. Therefore, the actual priority of interests like mechanics liens, personal


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lined up for this payment, as they typically only have one day to produce the full amount. Trustees designate the location at which buyers shall deliver or deposit payment, and payment extensions are only allowed by the Trustee’s consent. Trustees have seven days from receiving payment in full to deliver the Trustee’s Deed to a purchaser.

The Trustee’s Deed is the instrument that actually conveys the property from the seller to the purchaser. It also clears any junior liens or encumbrances that may have attached to the property while the previous owner owned it. So, in essence, the Trustee’s Deed certifies that title to the property is as free and clear from junior encumbrances as it was when the previous owner purchased it. Importantly, to prevent the deed’s priority from being broken, purchasers should record it with the county recorder’s office within 15 days of the Trustee’s Sale.

judgments and child support liens may differ from the list above. Questions as to the actual priority of interests in a specific property should be addressed to a qualified attorney who can make the determination after consideration of a title report.

Purchasing Although most Trustee’s Sales tend to follow a similar format, Trustees have statutory authority to control the means and manner of each auction. As such, buyers should contact the Trustee before the date of the auction to determine how it will proceed. Generally the Trustee opens the bidding after accepting deposits from each bidder wishing to participate in the Sale. Once the bidding begins, every bid is considered irrevocable and cannot be retracted, so prospective buyers should not bid unless they are serious about purchasing a property. A successful bidder who reneges on a bid automatically loses the deposit, and can even be liable for any losses and expenses arising from the revocation.

The auction closes upon the final bid, which is declared as such after the Trustee calls the highest bid three times without any response from bidders. The Trustee announces the final bid price, along with the winning bidder, who then has until 5:00 p.m. on the following business day to pay the full bid price. Bidders must have money


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ConclusionEach party to a foreclosure has a very important interest in understanding the process from beginning to end. The stakes are high for everybody involved, be it a borrower trying to avoid default, a buyer trying to acquire an affordable place to live, or a lender looking for efficiencies. And just as it is important to understand how foreclosure works, it is also important to know where to turn for help with the process.

With every foreclosure, there are contingencies and unexpected events that can arise. Even informed borrowers, buyers, sellers and lenders many times feel unqualified to make the important decisions necessary to successfully navigate the process. A foreclosure attorney who understands foreclosure from every angle can provide sound advice and effective representation throughout the process, from before default, to after the Trustee’s Sale.

For borrowers, sometimes recruiting a foreclosure attorney makes the difference between walking away empty

handed and remaining in their home. Likewise, for buyers, a foreclosure attorney might make the difference between acquiring a great home at a great price, and losing the home to a higher bidder. And lastly, for lenders, appointing a foreclosure attorney as Trustee can provide confidence that the Trustee’s Sale will move forward effectively and efficiently.

With this guide, borrowers, buyers, and lenders alike should be well equipped to make the best of their foreclosure situation. However, although this guide is quite comprehensive, it might leave some questions unanswered. A foreclosure attorney can help resolve these questions. Those with additional questions or concerns can call JacksonWhite for individualized and thorough counsel. Nobody should navigate the foreclosure process alone.


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Definition of Commonly Used Terms

Anti-Deficiency Statute: Arizona statute designed to protect borrowers on certain residential loans by preventing lenders from bringing court action to collect the difference between an outstanding loan balance and the proceeds from a Trustee’s Sale or the fair market value of a property.

Automatic Stay: Powerful automatic court order upon the filing of a bankruptcy petition that stops creditors from collecting any debts or pursuing any actions against individuals who have filed bankruptcy.

Beneficiary: The lender, where a deed of trust is concerned.

Deed-in-Lieu of Foreclosure: An agreement between a borrower and a lender, under which the borrower deeds a secured property back to the lender to avoid foreclosure.

Deed of Trust: Financing instrument used to purchase most Arizona property, under which a third-party Trustee holds title to the home, and can sell the home non-judicially in the event that the borrower defaults.

Default: Where a borrower fails to make timely payments, or has otherwise breached the agreement with the lender.

Deficiency: When the proceeds from a Trustee’s Sale are insufficient to cover the amount of the loan’s unpaid balance.

Endorsements: Updates to the Trustee’s Sale Guarantee provided by a title company, demonstrating any new noticing requirements that may emerge as the Trustee’s Sale approaches.

Foreclosure: Legal proceedings, either judicial or non-judicial, by which a lender sells the collateral property securing a loan upon which the borrower has defaulted.

HELOC: Home Equity Line of Credit. A type of recourse debt, collateralized by home equity, that is typically not cancelled by foreclosure.

Mortgage: Financing instrument used to purchase a home, under which the lender places a lien on the purchase property that it can enforce judicially in the event that the borrower fails to repay the loan.

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Non-Recourse Debt: Debt acquired from a collateralized loan that can be foreclosed upon in the event of default, but for which the borrower cannot be held personally liable beyond the collateral itself.

Notice of Default: Generally, a 30-day notice period that must pass before the lender can exercise a power of sale, and during which time a borrower may cure default. The notice can be included in the deed of trust itself.

Notice of Substitution of Trustee: Document prepared by a lender that substitutes an appointed Trustee under the deed of trust for another qualified Trustee.

Notice of Trustee’s Sale: Recorded notice that sets a date for a Trustee’s Sale for no sooner than 90 days after the notice’s recordation.

Recourse Debt: Debt that subjects a borrower’s personal assets to attack in the event of default.

REO: Real Estate Owned. Term describing lender-owned property that failed to sell to a third party at the Trustee’s Sale, thus reverting to the lender.

Right of Redemption: The right of a borrower whose home has been foreclosed to purchase the property back from the new owner. Arizona does not recognize a right of redemption for non-judicial foreclosure of a deed of trust. Federal law provides for a right of redemption in favor of the I.R.S.

Short Sale: An arrangement between a borrower, lender and third party, under which the borrower sells property that is security for a loan from the lender to the third party for a price that is less than the outstanding loan balance, and the lender accepts this discounted amount in partial or full satisfaction of the loan obligation and releases its security interest in the property.

Statement of Breach: Document prepared by a lender and delivered to a Trustee that fully identifies and describes a borrower’s default.

Trustee: Third party to a deed of trust who holds legal title to the property until the loan is repaid, and also handles the foreclosure in the event of default.

Trustee’s Sale Guarantee: Necessary tool offered by title companies that informs a Trustee of the condition of the title of a property and instructs a Trustee as to whom the Trustee must notify of the impending foreclosure.

Trustee’s Sale: A public auction conducted by a Trustee’s private power of sale, without court oversight, at which the Trustee sells property securing a loan upon which a borrower has defaulted.

Trustor: The borrower, where a deed of trust is concerned.

Waste: Intentional or permissive actions by borrowers that results in the devaluation of a property, and for which a borrower can be held personally liable to a lender.


Index

1099-A 16

1099-C 16-17

30-Day Cure Period 3

90-Day Reinstatement Period 5, 9

AAdministrative Costs 20

Anti-deficiency Statute 14-15, 17-18, 34

Auction (See Foreclosure Sale)

Automatic Stay 6, 27-28, 34

BBankruptcy 6, 10-12, 17, 27-28

Chapter 13 12, 27-28

Chapter 7 12, 28

Basis 4, 16

Bid Deposit 7

Bid Price 8-9, 14, 31

Bona-Fide Tenant 22

See Protecting Tenants at Foreclosure Act of 2009

CCash-For-Keys 19

Cashier's Check 7, 29

Child Support Lien 30-31

Co-Signer 12

Anti-Deficiency Protections 12

Contract for Sale 3

Credit 10-12

Impact 10-11

Recovery 11

Credit Bid 7-8

Creditors 6, 27-28

DDebt-Forgiveness 16-17

Deed-in-Lieu of Foreclosure 10, 26, 34

Deed of Trust 2-5, 7, 9, 13, 34-35

Deficiency 12-19, 21, 26-27, 34

EEncumbrance 3, 5-6, 26, 30-31

Endorsements, Title 6, 9, 34-35

Equity 12-14, 34

Event of Default 3, 13, 35

Eviction 8, 19

of Borrower 8

of Tenant 19

Excess Proceeds 12-13

FFannie Mae 20, 25

Federal Tax Lien 6, 30

Fixture 17, 22

Forcible Detainer (See Eviction)

Foreclosure Sale 7, 13

Freddie Mac 20, 25

GGovernment Programs 20

See HAFA See HAMPSee HARP

HHardship 20, 24

Hazard Insurance 18-19

Home Affordable Foreclosure Alternatives Program (HAFA) 20-21 Home Affordable Modification Program (HAMP) 20-21, 24

Home Affordable Refinance Program (HARP) 25

Home Equity Line of Credit (HELOC) 14, 28, 34

Home Owners’ Associations 18, 23, 30

Assessments 18-19, 23

Automatic Lien 18

I Impairment 18

Insurance 4, 18, 20

IRS Form 982 17

JJudicial Foreclosure 2, 15, 35

LLandlord 8, 21, 24

See Eviction

Lease 21-22

Lease Purchase 3

Legal Fees 13, 19

Liens 3, 5-6, 18, 26, 30-31

Lien Stripping 28

Lift 6, 27

Lift of the Automatic Stay 6, 27

Loan Modification 20, 24

See HAMP

MMarket Value 12, 14, 16, 24-25, 28

Modification (See Loan Modification)

Mortgage 2-3, 14, 18, 20, 23-25, 28, 30 34

Mortgage Payments 18, 24-25, 28

NNon-Judicial Foreclosure 2, 5, 7, 9, 27, 34-25

See Foreclosure Sale

Non-Recourse Debt 13, 16, 35

Notice of Default 3, 9, 35

Notice of Substitution of Trustee 3, 4, 9, 35

Notice of Trustee Sale 3, 4, 9, 29, 35

Notice to Vacate 21

See Eviction

See Landlord

Noticing Requirements 3, 34

PPossession, Post Sale 8

Postponing a Sale 6

See Automatic stay

See Service-Members Civil Relief Act

Primary Residence 17, 21

Priority 2, 13, 30-31

Property Taxes 30

Protecting Tenants at Foreclosure Act of 2009 8, 21

Purchase Money 13-14

RReal Estate Owned 19, 35

Recourse Debt 13, 16, 34-35

Refinance 25

Reinstate 3, 5, 7

Repayment Plan 27-28 Right of Redemption 7, 9, 35

See Federal Tax Lien

SSale Price (See Bid Price)

Sale Proceeds (See Excess Proceeds)

Service-MembersCivil Relief Act 6, 9

Short Sale 10, 12, 17, 21, 25-26, 35

Squatting 22

Statement of Breach 4-5, 9 ,35

Stripping (See Waste)

T Tax 3-4, 6, 9, 16-17, 20, 24, 26, 30

Taxable Gains 16-17

Tenant 8, 19, 21-22, 23, 24

See Landlord

See Eviction

See Protecting Tenants at Foreclosure Act

Title 2-3, 5, 8-9, 12, 20, 22, 29-31

Title Defects 13

Trustee 3-5, 33

Trustee's Deed 29, 31

Trustee's Sale (See Foreclosure Sale)

Trustee's Sale Guarantee 3, 35

See Endorsements

VVandalism 22-23

WWaste 17-18, 20, 22-23, 35

Contact Us:

JacksonWhite Attorneys At Law

1-800-243-1160 | (480) 464-1111

www.JacksonWhiteLaw.com

The Foreclosure Process

Impacts & Effects of Foreclosure

Foreclosure Alternatives

Bankruptcy & Foreclosure

Purchasing A Foreclosure Property

Definition of Commonly Used Terms

What You Need to Know About Arizona Foreclosures

Documents

foreclosure sale

foreclosure buyers

foreclosure crisis

foreclosure processmortgage

foreclosure act

foreclosure works

qualified foreclosure

depreciating home value