How Real Estate Lenders Enforce Their Rights Against Delinquent Owners

Arizona law allows for non-judicial foreclosures.  This remedy is available only when a lender secures a real estate loan by a document called a “deed of trust.”  This instrument is different from a traditional mortgage, but may be foreclosed as a mortgage, or through a non-judicial process established by statute.  Most secured real estate loans now use deeds of trust, and most foreclosures will be by the non-judicial method.

Technically, the foreclosure process under a deed of trust is a “trustee’s sale.”  However, it is often referred to informally as a foreclosure.  A lender can initiate this foreclosure process on the first day the borrower is in default. However, the process usually unfolds more slowly because the lender wants to give the borrower a chance to correct the default.

A slower process can help both the borrower and lender . The lender generally prefers payment from the borrower, rather than foreclosing .  However, if payment continues to be delayed, the lender will eventually follow through with the foreclosure.

The lender may begin calling the borrower to ask them to correct the default. In some cases, a new payment arrangement can be worked. If the borrower cannot cure the default, the lender will eventually initiate the foreclosure process by issuing a formal Notice of Default on the loan, and then recording a Notice of Trustee’s Sale with the County Recorder. This provides notice of the sale of the property, which cannot occur until 91 days after the notice is filed. The lender’s trustee must also mail the notice to the borrower by certified mail within five days, and the notice must appear in a local newspaper at least once a week for four weeks.

The 90 day waiting period is the last chance for the borrower to cure the default by making all required payments, including any fees, expenses, and default interest due under the loan. Although redemption to purchase the property after a sale is available for foreclosure of a traditional mortgage, Arizona does not allow for redemption of the home after a non-judicial sale under a deed of trust.

The sale will be made for cash to the highest bidder, but the lender has the right to make a credit bid, which is cancellation of some or all of the debt owed by the borrower as a form of bid or payment. If the amount of the foreclosure sale completely satisfies the borrower’s debt, then the lender has been made whole. In fact, if the sale price exceeds the debt, there may be funds available to satisfy second loans or junior lienholders.  If there are no junior lienholders, the excess funds may go to the borrower.  However, in the case of an underwater property, where the borrower owes more than the property is worth, the borrower may still owe the lender the balance.

In some cases, lender has the right to go after the borrower for the unpaid balance.  However,  Arizona’s anti-deficiency statute may apply to bar the lender from pursuing anything after the foreclosure sale. This law generally protects homeowners from deficiency judgements if their property was 2.5 acres or less, and a deed of trust was given to secure payment of a purchase money loan.  In those circumstances, a deficiency judgement generally will not be permitted. The lender will be left without a way to get back the balance owed by the borrower.  However, application of the anti-deficiency statute can be complicated in certain situations.  Borrowers and lenders should consult counsel to be certain what the impact of credit bids and a sale will be.