Arizona Deficiency and Foreclosure Rules

Like California, Arizona uses primarily the non-judicial foreclosure process. That means no court, no judge and no jury; it is a paperwork only automatic process. Arizona’s run time on foreclosure is shorter than California’s in that it does away with the separate Notice of Default, followed by the Notice of Trustee Sale. Arizona allows the immediate filing of the Notice of Trustee Sale, followed by a 90 day wait. At the conclusion of the 90 day period, the sale takes place.  Anecdotal evidence from Arizona is that the time period from stopping payments to foreclosure completion is about a year; but it varies greatly from bank to bank. In addition, the recent national mortgage settlement will likely accelerate the process. For deficiencies, the majority of the time for our clients, there is no deficiency. Arizona prohibits a deficiency on a purchase money loan on a single family residence or duplex in which the lot size is less than 2.5 acres; it appears to apply to the property type regardless of whether or not it is owner occupied. There are procedural rules which must be followed that do benefit the foreclosed party. First, if the loan, even a second trust deed, was a purchase money loan (used to buy the property or improve the property) there is no deficiency judgment. ARS 33-729A, the deficiency rule, applies to both first and second deeds.  Second, if a deficiency action is to be filed, the foreclosing lender must file within 90 days of the trustee sale.  Third, the deficiency is limited to the difference between the deed of trust value and the sales price. If the sales price seems unfairly low, ARS 33-814A and ARS 12-1566C allow the borrower to petition the court to determine the fair price, which is considered determinative. Arizona does allow for judicial foreclosures; that is a foreclosure by court action. In those circumstances, a deficiency is allowed. In the recent case of Helvetica vs. Gold an Arizona appeals court held that in a judicial foreclosure, a deficiency could be pursued by a lender after a refinance of a purchase money loan. The deficiency was limited to money taken out in the refinance which was not used for construction or purchase costs (i.e. money taken out and used for jet skis, for example). While the judicial process was used, there was nothing in the opinion which precluded its reasoning from being applied to non-judicial foreclosures, so this bears watching. As to second trust deeds, if the property is foreclosed on by the first, the second may have the right to sue. As discussed earlier, if the second was purchase money (taken out the same day as the first) there is no deficiency and no right to sue; that situation is covered by the anti-deficiency statute. If the second was used for any other purpose, or was a HELOC, the second has the right to pursue a deficiency against you.  The statute of limitations for that is six years from the date of the foreclosure sale. The 90 day rule does not apply to seconds. Short sales are also an interesting issue. Short sales are by definition not foreclosures and are not covered by the anti-deficiency rules. In the case of a short sale, the first trust deed is barred from pursing a deficiency judgment; their loan is considered satisfied from the proceeds of the sale, especially if it was purchase money or a refinanced loan. Second trust deeds are not covered, however. If you are negotiating for a short sale with a property that has a second trust deed, the second trust deed holder must agree to give up their right to pursue a deficiency. Also note that Arizona lenders have adopted the position that a refinanced first trust deed that is short sold is not subject to the anti-deficiency statute (the Arizona statute is specifically worded, and refinance is nowhere mentioned) so in a short sale situation, the right to pursue a deficiency must be bargained away. Worse, the Arizona Statute of Frauds requires that the party to be charged in the contract (the party giving something away) must sign the contract for it to be enforceable. This means that the ghost written lender agreements generated by the word processing department may not be valid unless there is a real live human signature. The Arizona legislature has before it a bill to clarify the short sale rules, HB 2584, which contains many of the short sale protections now found in California. As of this writing (May 23, 2012) this bill has not become law. There is good news in Arizona in the event your second is charged off. If a 1099 has been issued, collecting on the debt may be barred. ARS 47-3604 provides that a voluntary action such as a write off of a debt serves as a bar to collecting on it.  Better, under Amtrust Bank vs. Fossett issuing a 1099 is considered prima facie evidence of the debt write off taking place; barring collection activity.