LAW OFFICE OF BARRY W. ROREX, PLC
AFFORDABLE LEGAL REPRESENTATION (520) 495-7596
FORECLOSURE IN ARIZONA
Since 1971, real property loans in Arizona have been secured primarily by Deeds of Trust rather than by mortgages. The main difference between the mortgage and the Deed of Trust is that foreclosure of a mortgage requires a judicial proceeding whereas foreclosure of a Deed of Trust can be accomplished without ever resorting to a lawsuit.
DEEDS OF TRUST
The Deed of Trust is a three-party instrument involving a borrower, referred to as the Trustor, the lender, referred to as the Beneficiary, and the Trustee. In granting the Deed of Trust, the Trustor transfers legal title to the Trustee to secure the obligation owed to the Beneficiary. In the event of the borrowers default, the Trustee uses his power of sale to foreclose the borrower's interest in the property for the benefit of the Beneficiary. The borrower retains equitable title to the property, which includes the right to possession.
Most foreclosures in Arizona are accomplished through Trustee sales. Unlike foreclosure of a mortgage, foreclosure of a Deed of Trust does not usually require any judicial involvement. Deeds of Trust grant to the Trustee the right to sell the encumbered property in the event of default. Because a Trustee's sale does not afford the protections of a judicial foreclosure, the procedures for the sale are established by statute (A.R.S. § 33-801, et seq.) and must be strictly followed.
The most important statutory requirement is notice (A.R.S. § 33-808). At least 90 days prior to the sale, the Trustee must record the Notice of Sale with the County Recorder. Within 5 days after recording the Notice of Sale, the Trustee is required to send a copy to the borrower by Certified Mail. The Trustee must then publish a copy of the Notice in a newspaper of general circulation in the county where the property is located. The publication must run for 4 consecutive weeks with the last publication at least 10 days prior to the scheduled sale. Additionally, the Trustee must post a notice of the sale at the property and at the county courthouse at least 20 days before the sale.
Often, rather than resort to foreclosure and the expense of reselling a property, lenders are willing to modify the borrower's obligation in some way so as to, hopefully, keep the borrower in the property. Loans may be modified in several ways. The interest rate can be lowered. The term of the loan can be extended. The loan amount can be reduced. Or, any combination of these modifications can be made in order to reduce the monthly payments.
In practice, few lenders are willing to modify the loans in all but the most dire circumstances. Major real estate lenders, such as banks, routinely require borrowers to be significantly behind in their payments before they will even discuss modification.
Currently, many lenders participate in government sponsored modification programs. Although many homeowners report major frustration and limited success in attempting to take advantage of these programs, for many, they are the last best hope to save a home from foreclosure. The requirements for these programs are not always understood but help is available from government and non-profit organizations. Unfortunately, there are also many scams that seek to take advantage of desperate homeowners willing to do anything to save their homes. Find out more about these modification programs.
At its simplest, a short sale is just an agreement by the lender to allow the borrower to sell a property at a price that is less than what is owed. Often when a property has decreased in value, and the borrower is either unable or unwilling to keep making the payments, it is highly unlikely that the property can be resold for an amount that will pay off the borrower's current obligation. In many instances, the lender would rather accept a lower amount in order to sell the property quickly.
In practice, short sales can be difficult and frustrating. Many lenders are reluctant to even discuss the possibility of a short sale until the current borrower is substantially behind in the payments. Even if a potential new buyer can be found, often the lender will take a very long time to approve the transaction, sometimes ending the potential sale. There can also be adverse tax consequences for the home owner (See below). It is always a good idea to review the specifics of a short sale with an attorney to protect your interests.
[More on Short Sales]
Arizona has an anti-deficiency statute, A.R.S. § 33-729(A), which prohibits lenders, in some circumstances, from going after borrowers for the difference between what is owed and what was received by the lender at a Trustee's Sale. Although this statute offers significant protections to many foreclosed borrowers, there are exceptions that make the application of the statute very tricky in some circumstances. Generally, borrowers with purchase money mortgages, on property of 2 1/2 acres or less, used as a single family or two family residence, are protected.
POTENTIAL TAX TRAP
One aspect of foreclosure that is often misunderstood, and a potential trap for property owners, is the taxation of debt cancellation or forgiveness. Debt cancellation often occurs in connection with foreclosures, short sales, repossessions and deed surrenders. The general rule is that the lender will issue a 1099 to the debtor and report the amount of the forgiven debt to the IRS. The IRS treats the forgiven debt as ordinary income taxable to the debtor. This can result in a large tax obligation with no actual income to pay it with. A debtor in this situation should obtain a copy of IRS Publication 4681 - Canceled Debts, Foreclosures, Repossessions and Abandonments. In Chapter 1, there is a section on exclusions, including bankruptcy.
Fortunately, there is currently a window for many homeowners to avoid this taxation. The Mortgage Debt Relief Act of 2007 allows many homeowners to exclude from taxable income the discharge of debt on their principle residence. As currently written, the exclusions are scheduled to expire in 2012. There are limitations on the amount and types of property subject to the exclusion so this is a topic that should be discussed in detail with an attorney or tax professional.