This FAQ on Distressed Sales is taken from various legal specialist articles with in the Phoenix Valley. It is an example of scenarios that are often faced by sellers and buyers in the short sale process. Often the answer is not cut and dried and in some cases different legal specialist may take different positions on a topic, so it is very important that you use this information only as possibilities for your personal situation. You should consult your own legal representative for your specific issues. This is not legal advice. Only your legal representative can provide that.
1. Homeowner Cannot Replace Expensive Fixtures Prior to Foreclosure
When the owner built the home, the owner installed an expensive chandelier in the living room. The foreclosure sale is scheduled for next month. The owner wants to replace the expensive chandelier with a cheaper chandelier. Can the owner replace the expensive chandelier?
Answer: No. When the expensive chandelier was installed in the home, it became a fixture. The general rule is that a mortgage lender has a secured interest in not only the home, but in all of the improvements and fixtures in the home. Therefore, the mortgage lender acquired a security interest in the expensive chandelier at the time of installation. The removal of the expensive chandelier would be the criminal defrauding of the mortgage lender. A.R.S. §13-2204. In addition, the owner would have civil liability to the mortgage lender for the value of the expensive chandelier.
2. Anti-Deficiency Statutes Protect Homeowner from Deficiency after Foreclosure of Home
After more than twenty years of mortgage payments, the homeowner paid off the mortgage loan on the home. The homeowner then borrowed $250,000 under a home equity line of credit (“HELOC”). Due to financial difficulties of the homeowner, the $250,000 HELOC has scheduled a foreclosure. If there is a foreclosure, will the homeowners be liable for a deficiency?
Answer: No. If there is a foreclosure of any mortgage loan on a home, there can never be a deficiency claim against a homeowner because of the protection under the anti-deficiency statutes. This protection applies not only to owners of principal residences and to purchase money loans, but also to investors who own homes and to HELOCs and other non-purchase money loans. A “home” is defined under the anti-deficiency statutes as a single-family or duplex, on 2.5 acres or less and utilized as a dwelling. A.R.S. § 33-814 (G). Therefore, even though the $250,000 HELOC had not been used to purchase the home, there can be no deficiency claim against the homeowner after the foreclosure of the $250,000 HELOC.
Note: Inasmuch as the $250,000HELOC was not used to purchase the home, the HELOC lender could have elected to sue on the $250,000promissory note rather than foreclose on the deed of trust.
3. Buyer Not Entitled to Cancel Contract upon Learning of Suicide in the Home after Inspection Period Had Expired
The seller committed suicide in the home. The personal representative of the seller’s estate did not disclose in the SPDS the seller’s suicide in the home. After the inspection period had expired, the buyer learns from a neighbor that the seller had committed suicide in the home. Can the buyer cancel the contract?
Answer: No. Although a suicide in the home is probably a material and adverse fact, the personal representative of the seller’s estate under A.R.S. §32-2156 has no liability for failing to disclose in the SPDS that the seller had committed suicide in the home. Therefore, when the buyer learned of the seller’s suicide after the inspection period had expired, the buyer was not entitled to cancel the contract.
Note: Inasmuch as no disclosure of the suicide is required, the seller is not required to update the SPDS.
4. Protection for Homeowner Has Not Changed under the Arizona Anti-Deficiency Statutes
An investor purchased several homes three years ago. All of the homes are “upside down” and facing foreclosure. Have there been any changes in the protection for investors under the anti-deficiency statutes?
Answer: No. Although there was legislative activity in 2009 regarding the amending of the anti-deficiency statutes to attempt to eliminate the protection for homes owned by investors, no permanent amending occurred. In the 2010 legislative session, there was no activity regarding the anti-deficiency statutes. Therefore, the “bottom line” is that the Arizona anti-deficiency statutes (primarily A.R.S. § 33-814 (G)) currently afford the same protection to all homeowners, including investors, that has existed since the enactment of the Arizona anti-deficiency statutes more than 30 years ago.
5. Lender Cannot Sue Borrower on a Loan Used to Purchase the Home
The owner of the home borrowed $300,000 to purchase the home. The home is now “upside down” and only worth $200,000. If there is a foreclosure of the $300,000 mortgage loan, is the owner protected from a $100,000 deficiency claim after the foreclosure? Is the owner of the home also protected if the mortgage lender files a collection lawsuit for the $300,000 mortgage loan rather than doing a foreclosure?
Answer: If the $300,000 mortgage loan was used to purchase the home—and the home is a single one-family or two-family dwelling used as a residence on 2.5 acres or less—the $300,000 mortgage loan is a non-recourse loan. In other words, the homeowner has no personal liability for the loan, including no personal liability for any deficiency after foreclosure. The mortgage lender’s only “recourse” is to foreclose and acquire title to the home. (The homeowner after the foreclosure will be personally liable, however, for any excessive damage to the home such as vandalism or flooding, i.e.,” waste” to the home.) Therefore, after default of the $300,000 purchase money loan, the mortgage lender can only foreclose on the home with no claim for a deficiency, and the mortgage lender cannot waive foreclosure and sue to collect the $300,000 mortgage loan.
Note: If, however, the loan was not used to purchase the home, e.g., a home equity line of credit (“HELOC”) taken out after the purchase of the home, the lender can waive foreclosure and sue to collect on the amount of the loan. For example, if the homeowner after purchasing the home borrows $50,000 under a HELOC, the lender can waive foreclosure of the home and instead file a lawsuit in civil court to collect on the $50,000 promissory note.
6. Homeowner Has No Personal Liability for Second Purchase Money Loan
The homeowner purchased the home three years ago with 80/20 financing. Both the 80% first purchase money loan and the 20% second purchase money loan are now in default. Both lenders have approved a short sale. Although the second purchase money lender has agreed to the short sale, the second purchase money lender is conditioning the approval of the short sale upon the homeowner paying the short sale difference in monthly payments over five years. The homeowner will not agree to these monthly payments and has told the second purchase money lender that the homeowner will simply lose the home to a foreclosure sale by the first purchase money lender. If the homeowner loses the home at a foreclosure sale by the first purchase money lender, can the second purchase money lender file a collection lawsuit against the homeowner for the amount owed on the loan?
Answer: No. Any loan used to purchase the home, whether in first position or any other position, is a non-recourse loan. In other words, the lender has no recourse against the homeowner for the amount owed on the loan and can only foreclose on the home. The lender has no claim for a deficiency judgment after foreclosure. In addition, the lender cannot bring a separate collection lawsuit against the homeowner for the amount of the loan. Baker v. Gardner, 160 Ariz. 98, 770 P.2d 766 (1988).
7. Theft After Foreclosure
The lender foreclosed on the home and became the new owner of the home. When the previous owners of the home moved out after the foreclosure they removed all of the fixtures from the home, including vanities, sinks, toilets and light fixtures. Did the previous owners of the home commit a criminal offense by removing these fixtures after foreclosure?
Answer: Yes. The previous owners’ removal of the fixtures constitutes criminal theft pursuant to A.R.S. §13-1802. The lender should be able to file criminal charges against the previous owners.
Note: The lender may also be able to file a civil lawsuit against the previous owners for “waste” due to the wrongful removal of the fixtures.
8.No Disclosure to Lender of Sale of Personal Property to Buyer
The lender has approved the short sale. Two days before close of escrow, the listing broker learns that the seller and the buyer have entered into a “side” agreement that the buyer will pay $10,000 to the seller outside of escrow for expensive bedroom furniture and for three high-definition televisions. Does the listing broker have to disclose to the lender that the seller is receiving $10,000 cash from the buyer?
Answer: Probably not. The lender’s security interest does not extend to personal property owned by the seller. Therefore, if the seller and the buyer enter into a contract to sell any of the seller’s personal property to the buyer, e.g., car, boat, or furniture, this sale probably does not have to be disclosed to the short sale lender.
If you are having questions about the legal issues dealing with personal property, mortgages, liability or contracts during the short sale process, it is important that you contact your legal specialist. Give me a call and I can provide the names of several different legal companies that specialize in helping homeowners or buyers of distressed homes.
9. The buyer and/or seller of a short sale home cannot arrange for an additional contribution to what is provided by the first mortgage to payoff the 2nd mortgage without full disclosure on the HUD1.
The primary lender has approved the short sale and agreed to give the 2nd mortgage $3000. The 2nd mortgage has agreed to release the lien and settle for $6000. Can the seller contribute to the 2nd outside of the HUD1 and full disclosure to the first mortgage?
Answer: The primary lien holder may approve of the buyer or seller giving additional contribution to other lien holders. However, this must be fully disclosed to the primary lender on the HUD1 and approved by the primary lien holder.
10. No Liability of Seller after Short Sale if HELOC Lender Releases Lien Without New Agreement
The seller bought the home with a $100,000 purchase money mortgage. One year later, the seller borrowed $50,000 from another lender for a home equity line of credit (HELOC). Both lenders approved a short sale and recorded releases of their mortgage liens without requiring a new agreement from the seller to pay any portion of the purchase money mortgage or the HELOC. The short sale closed. Can either the $100,000 mortgage lender or the $50,000 HELOC lender sue the seller for any portion of the unpaid mortgage balances?
Answer: No. First, under Arizona law, the $100,000 purchase money mortgage was a non-recourse loan, i.e., the seller had no personal liability, and the mortgage lender is prohibited from suing the seller for any unpaid balance of the loan. A.R.S. § 33-814(G); Baker v. Gardner, 160 Ariz. 98, 770 P.2d 766 (1988). Second, the $50,000 HELOC loan was not a non-recourse loan, and the seller had personal liability to pay the $50,000. The HELOC lender could have sued the seller for the $50,000. When the HELOC lender recorded the release of the mortgage lien, however, the HELOC lender no longer had any claim against the seller. Tanque Verde Anesthesiologists v. Proffer Group, Inc., 172 Ariz. 311, 836 P.2d 1021 (App. 1992) (no claim against borrower after recording release of first and second loans unless borrower entered into new agreement to pay).