When a real estate owner falls behind on their mortgage payments, the lender has the right to foreclose on the property. While a lender can initiate the foreclosure process the first day that a payment is considered late, many lenders will wait a while before declaring a default and recording a Notice of Trustee Sale. Even if they have to wait a little while, most lenders prefer to get the money they were promised over taking possession of the property that secures the loan.
Lenders may give the homeowner several months to correct the default, or attempt to give them a way to make up for the missed payment. Refinancing, loan modifications, or other repayment plans are often preferable to foreclosure for both parties, if the borrower’s financial problems are temporary and they keep making payments in the future. However, there does come a point when the lender needs to enforce their right to foreclose in order to protect their interests.
The Foreclosure Process in Arizona
In Arizona, most lenders use something called a “Deed of Trust” instead of a traditional mortgage. This document, and Arizona law, allow for non-judicial foreclosure based on the power of sale clause in the deed. That power gives the lender’s representative (the trustee) the right to sell the property in the event of a buyer default. But they have to follow a process imposed by statute. The foreclosure process starts when the lender declares the loan in default. After that, the trustee records a Notice of Trustee Sale with the county recorder where the property is located.
A.R.S. § 33-808 provides several requirements that must be satisfied when filing a Notice of Trustee Sale. The notice must be filed at the county recorder’s office, and it must also be advertised for four consecutive weeks in a local newspaper. It also must be posted at a conspicuous place on the property, the courthouse, or the trustee’s place of business.
Within five days of filing the notice, a copy must be sent via certified mail to the property’s mailing address. The sale cannot be completed until at least 91 days after the Notice of Sale is filed.
The borrower still owns the home until the trustee sale takes place, and the 90 day period gives them a chance to become current on all payments, including late fees, and keep the property. If the borrower does not cure their default before the trustee sale, they have no further redemption rights in Arizona.
Judicial foreclosure is less common in Arizona, but can also be used under A.R.S. § 33-721.
The trustee sale must be for cash to the highest bidder, except that the lender has the right to “credit bid”, by bidding to effectively cancel some or all of the amount owed on the mortgage lien by the borrower. The proceeds of the sale will go to towards the obligations secured by the “mortgage” (technically a deed of trust), then to any junior lien holders in order of priority.
Sometimes the sale of the property does not fully compensate the lender for the amount owed on the mortgage. In those cases, the lender may be able to obtain a deficiency judgment A.R.S. § 33-814 for the remaining loan balance. However, there are limitations on this remedy, known as anti-deficiency laws.
Generally, if the property is 2.5 acres or less, is a single family residence, is sold pursuant to the Trustee’s power of sale, and the loan was for purchase money, no deficiency judgement will be permitted.
For refinanced loans, the anti-deficiency laws may still apply in some cases. In Bank One of Arizona, N.A. v. Beauvais, the Arizona Court of Appeals found that a typical refinance loan is protected because it retains its character as a purchase money security note. However, if a loan is a home equity loan or a home improvement loan, it is not taken out with the purpose of purchasing real estate, and would not receive anti-deficiency protection. A cash out refinance that exceeds the original purchase money loan may expose the borrower to some deficiency claim as well.
The threat of foreclosure may be enough in some cases to convince a real estate owner to cure their default. In some cases, there are legitimate defenses to the default claim, but in almost all cases, they must be asserted and a lawsuit filed before the foreclosure is completed.
Chernoff law handles Arizona real estate disputes by finding creative solutions to your complex problems. If you need to consult with a real estate attorney to discuss your lending dispute, contact us here.