AZ Foreclosure last year: now collection agency??

[robabeatle]

I foreclosed last year. Sale was in early April. I had an 80/20 loan all purchase money, bought in Aug. 2007, less than 2.5 acres, residential.

I thought i had it all worked out that I could not be sued for the deficiency, as AZ is anti-deficiency. I just got a letter today from Professional Recovery Services for their client: Chase Banks, stating that I owe them the amount of the second mortgage.

WTH! Please tell me this is not valid.

HELP!

[justbroke]

The non-recourse status does not "usually" work for second mortgages. Generally, second mortgages that are 80/20, are actually HELOCs! (home equity line of credit loans). Look no further than your paperwork, and I'm pretty sure that what you have is a 80% conventional loan and a 20% HELOC!

Sorry, I can't tell you this is not valid. However, our resident expert on Arizona, Despritfreya, should be by soon.

[robabeatle]

For what its worth: I did have mortgage insurance on the property.

[despritfreya]

A.R.S. § 33-729(A):

. . . if a mortgage is given to secure the payment of the balance of the purchase price, or to secure a loan to pay all or part of the purchase price, of a parcel of real property of two and one-half acres or less which is limited to and utilized for either a single one-family or single two-family dwelling, the lien of judgment in an action to foreclose such mortgage shall not extend to any other property of the judgment debtor, nor may general execution be issued against the judgment debtor to enforce such judgment, and if the proceeds of the mortgaged real property sold under special execution are insufficient to satisfy the judgment, the judgment may not otherwise be satisfied out of other property of the judgment debtor, notwithstanding any agreement to the contrary.

__________________


Purchase money is purchase money and the fact that the lender split the loan into two separate loans does not change this. The statute clearly applies “notwithstanding any agreement to the contrary”. The legal effect of the statute is that a lender, the collection agency it hires, or anyone who purchased the worthless paper, is barred from pursuing any action against a borrower if the mortgage secured by a deed of trust was obtained to purchase the home. All you need to do is send a stern letter stating that the paper the collection agency is dealing with covers a PMSI second and cite the above Statute and the below Case Law. Tell the collector that there is no debt owed and if there is any further attempt to collect a non-existent debt you will sue the crap out of the lender and the collector.

This issue is so well settled in Arizona that one would be hard pressed to find a case dating after 1997.

Main cases are:

Baker v. Gardner, 160 Ariz. 98, 770 P.2d 766 (Ariz., 1988) - lender cannot waive the collateral and sue under the note. The only recourse a PM lender has as it relates to qualified property, is to foreclose.

Cely v. DeConcini, McDonald, Brammer, Yetwin & Lacy, P.C., 803 P.2d 911, 166 Ariz. 500 (Ariz. App., 1990) - Taking out a 2nd and using those funds to purchase a 2nd home does not make the second PM. PM relates to a loan used to purchase the property to which the lien attaches.

and

Bank One, Arizona, N.A. v. Beauvais, 934 P.2d 809, 188 Ariz. 245 (Ariz. App., 1997) - a refinance that refinances the PM loan is still PM.

Des.

[robabeatle]

despritfreya: Thank you for the reassurance. I had thought that I did all my homework before the foreclosure and then I received this letter in the mail.

So if I write a cease and desist letter and they still contact me, I can threaten to sue?

I was just accepted to a M.S. program and now I think that I should put it off because of this, just in case I have to take legal action. Uggh!

[justbroke]

Thanks Des for following up. The first one I understood, where refinancing doesn't destroy the purchase money state in Arizona. However, I didn't know that even HELOCs used to purchase the home (the so called 80/20 loans) are also covered by the statute and renders them the same purchase-money status as the first (80%) loan.

That's great stuff for Arizona. I wish it were consistent across all the States. Florida is still a recourse state.

[robabeatle]

Des: thank you so much. Can I ask your credentials or at least how much confidence you have in this? It just might help me sleep better tonight, though I already wrote up a letter and plan to send it via certified mail this week. thanks again.

[despritfreya]

However, I didn't know that even HELOCs used to purchase the home (the so called 80/20 loans) are also covered by the statute and renders them the same purchase-money status as the first (80%) loan.

Purchase Money 2nds are handled the same way in California as well. Think about it. . . If a lender could get around a State's anti deficiency statute simply by splitting the loan, all lenders would take that step. Such would have had nothing to do with what was going on to get borrower's "qualified" for loans and homes they simply could not afford. Allowing a lender to get around the statue in this fashion would be tantamount to sticking it to the legislature and committing fraud against the unsuspecting consumer.

Des.

[despritfreya]

Des. . . Can I ask your credentials or at least how much confidence you have in this?

Certainly. . .

22 years in the bk world and never once seeing a suit brought by a lender on a PM 2nd that survived a Motion to Dismiss. Remember, anyone can sue anyone. If you do not defend you lose.

If you want the info from the "horse's mouth" you might want to give the Firm of Folks & O’Connor a call. Below is the link. Speak to either Larry Folks or Lisa Kass. While this Firm represents mortgage lenders, the attorneys are really nice and probably will accept your call and answer your question without hesitation.

http://folksoconnor.com

Des.

[last2cents]

Des - on a similar note......

If the original Purchase Money mortgage was refinanced (with cashout), and then subsequently a HELOC was added to the mix......in a F/C situation the borrower WOULD be on the hook for the entire deficiency here in Arizona, correct?

Or would the deficiency amount be offset by the original amount of the purchase money loan that was refinanced?

[justbroke]

I want to hear this from Des as well. There are some thoughts that refinancing doesn't destroy the purchase money characteristics -- as far as the statute on non-recourse is concerned. However, if you did a cash-out refinance, the cash would not be purchase money, even if used to purchase another property.

Interesting scenarios indeed.

[last2cents]

Justbroke - I'm asking this question on behalf of my sister (and to a lesser extent, my future husband)......In my sisters case, she's current (and has the $$$ to stay that way), but her next door neighbor just listed their place on a short sale for $95K, and they're walking away.....Sis now thinks this might be a fine idea as well, notwithstanding the fact that she's got enough income to pay the mortage (and I'm SURE that Wells Fargo is NOT going to even consider a short sale), and she does not seem to grasp the fact that the reason she's $208K underwater is because she doesn't know how to live within her means.

My fiancee's situation is a little different......Des has been quite wonderful in giving me the poop that after we're married, I don't have to worry about any deficiency judgements attaching to my assets ....BUT, his former home (we rented it out for about two years) just F/C on Friday....and while my future DH is collection proof, he's not judgement proof in this situation. We really don't want to file a BK for him....it doesn't make sense, and there's some property that is titled in his name that would be in jeopardy if we went that route...........

[despritfreya]

In response to Last2Cents 1st post of today:

First, it must be understood that in Arizona 99% of mortgage lenders foreclose using non-judicial means. Arizona law is very clear on this subject. If a lender forecloses its Deed of Trust through the power of sale, so long as the property is “qualified” there is no claim for a deficiency. It does not matter if it is purchase money, refinance of purchase money, refinance of purchase money with money out or a true HELOC. If the lender conducts a trustee sale it gets the property and nothing more.

ARS 33-814 G. “If trust property of two and one-half acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling is sold pursuant to the trustee's power of sale, no action may be maintained to recover any difference between the amount obtained by sale and the amount of the indebtedness and any interest, costs and expenses.”

It gets a little more complicated if the refiance lender elects to do a judicial foreclosure. I am not aware of any reported case directly on point, however the language in Bank One v Beauvais, 934 P.2d 809, 188 Ariz. 245 (Ariz. App. Div. 1, 1997) leads the authorities on this subject to conclude that the refinancing of a PM loan (even with cash out) does not change the character of the loan.

“In this appeal, we must decide whether the extension, renewal or refinancing of a purchase-money loan transformed the renewed or new loan into a non-purchase-money obligation. We hold that under the facts of this case, the trial court correctly held that the renewed or new loan retained its character as a purchase-money note. . . (W)e believe the legislature did not intend that a loan would lose its character as a purchase-money obligation when, as here, it is extended, renewed, or the remaining portion of the original loan is refinanced and the deed of trust on the property that was bought with the original loan continues or is renewed. Given the realities of the marketplace, to believe otherwise would put many homeowners, unable to make mortgage payments, at the peril of facing personal liability as well as the loss of their homes--a result the legislature intended to avoid through the Anti-Deficiency Statutes.”

The problem with this approach is that the facts in Bank One were very unique. The debtor consolidated a pre-existing loan with the loan used to purchase the home. The lender attempted to elect to sue under the consolidated note instead of foreclosing. The leading case of Baker v. Gardner held that a lender who is secured by a purchase money loan on a qualified property cannot elect to sue under the note. It can only foreclose on the property. The question in Bank One was whether or not the loan was purchase money since a component of it was from a prior loan. Both the lower court and the Court of Appeals held that since the lender could not distinguish between the components of the loan, the entire loan was purchase money. The strong language relating to legislative intent is what the gurus look to when they assert that even a refinance with cash out is purchase money. I am not so sure and have to wonder if, to the extent the cash out can be “traced” a refinancing lender can elect to sue for that portion and that portion only.

As it relates to a purely non PM loan such as a true HELOC, if the 1st forecloses the 2nd still have the ability to sue under the note. In fact, the 2nd does not have to wait for the foreclosure. It can waive its collateral and sue unde the note upon default by the borrower.

Des.

[despritfreya]

his former home (we rented it out for about two years) just F/C on Friday....

Assuming the property is "qualifying" - no larger than 2.5 acres - he has no liability to the foreclosing creditor. If there was a 2nd that was a true 2nd (not part of the original purchase), then he can be sued by the 2nd.

Des.

[last2cents]

Des - thanks for the clarifications! Greatly appreciated