It’s no secret that thousands of people around the country and in Arizona are losing their homes to foreclosure. One of the biggest issues I deal with as an Arizona real estate lawyer handling foreclosure-related cases is the question of what happens with a second mortgage or home equity line of credit after the first mortgage forecloses.
The answer to this question requires an analysis of each individual’s specific situation, including the terms of their loan agreement, the circumstances of when they obtained the loan and what the funds were used for, and the distribution of funds upon the foreclosure sale of the property.
Although most homeowners would be wise to speak with an Arizona foreclosure lawyer about their situation, the following article provides a general framework of the Arizona laws that affect a second mortgage lender’s ability to collect a deficiency balance owed after the first mortgage lender has foreclosed.
As an initial matter, it should be understood that this discussion only applies to loans secured by properties located in Arizona. Arizona’s laws regarding a lender’s ability to collect a deficiency balance are substantially different from the laws of other States, and if you have a loan on a property in another State, you must obtain the correct information from that jurisdiction.
One of the primary distinctions of Arizona law, as it relates to a second mortgage lender’s ability to collect a deficiency balance, is found in Arizona Revised Statute Section 33-729(A), which limits the lender’s ability to seek a deficiency if the money loaned “is given to secure the payment of the balance of the purchase price” provided the property is a single one-family or two-family home and consists of two and one-half acres or less.
In other words, if the loan was “purchase money” used to buy the home, the lender’s only choice is to foreclose in the event of non-payment. If the lender cannot foreclose because the primary lender already has, it has no further recourse.
Of course, many Arizona homeowners facing foreclosure find themselves with second mortgages taken out after they bought their homes, with the funds used to make home improvements, pay off other debt, take vacations or purchase other items, or even used as down payments on other homes. In cases like these where the funds cannot be traced back to the original purchase of the property, the protections of Arizona law will likely not apply.
Tracing back to the original purchase is an important exercise for many lenders and homeowners because so many second mortgages are the product of one or more refinances and/or sales and assignments by the lenders. Fortunately, Arizona Courts have made it clear that a refinanced loan retains its original character for purposes of the anti-deficiency statute, so a refinance will not affect the protection a homeowner may have under Section 33-729(A).
Because many refinance involved both purchase money and non-purchase money elements, however, homeowners should understand that some second mortgage lenders will seek to recover at least the non-purchase money portion of the loan. There are defenses available to such claims, and homeowners facing demands from lenders should seek the advice of an experienced Arizona foreclosure lawyer to discuss how to respond to such a lender’s demands.
Unfortunately, it is impossible to address every situation in a short article, and any homeowner facing foreclosure should seek additional guidance regarding tax implications, how to handle the HOA, and how your specific loans will be treated under Arizona law after a foreclosure.