Local Law Group helps see through the Deficiency mud

Recourse and Deficiency; Q & A

In response to our last email entitled "Arizona Recourse and Deficiency What Every Realtor Needs to Know", we had many great questions, so we have decided to respond to these questions and have created a blog for continuing discussions.

Q: "Additionally a lender has up to 6 years to file a deficiency lawsuit after completion of a short sale. Is that for the 1st or the 2nd?"

A: It is not a question of lien position. The issue is whether or not these loans were purchase money. We find that about 30% of the clients who's loan documents we review are mistaken as to the nature of their loans.

Q: "You are absolutely correct unless, of course, the "short sale" is regulated; overseen by the Feds, to which or to the extent this recourse is quashed or set aside as a condition of the Short Sale. Are you familiar with HAMP?"

A: There is no preemption of state or federal laws in HAMP. It is simply a guideline that, if followed by the lender will result in monetary rewards to the lender. HAMP participation is not mandatory as the majority of the homeowners that applied for loan modifications found when they were rejected. HAMP does not change anything related to deficiency risk in a short sale. It is still of paramount importance that the proper language be in the short sale agreement to prevent "harm" to a borrower.

Q: "Doug – thanks for sharing this good info. I know there was some conversation around the liability associated with the Deed of Trust vs. the Promissory Note, both of which could be instruments involved in a real estate transaction for a homeowner. Where could we obtain some greater clarification on this?

A: Under AZ law, a creditor cannot release its security in a property and sue on the note if the loan was used to purchase the property. However, a creditor is allowed to release the security and sue on the note if the loan was an extension of credit, such as a HELOC or used for non-purchase money purposes. So, that brings us to non-purchase money second mortgages, typically HELOCs, that were so popular with many homeowners between 2002 and 2006. The second lien holder could release its security and sue on the note and they have. If the homeowner is working with the lenders i.e. short sale, then the short sale creates an opportunity to negotiate with the second lender and settle so that the second lien holder does not pursue a deficiency suit. This is a much bigger issue for homeowners who have engaged in the loan modification process on the first loan, but ignored their second lender and the time period has gone on so long that the second lender stops waiting, charges off the debt, and then sells the note to a third party. This third party can then collect or sue on the note.

Q: "What is the defensibility of a short sale on an investment property?"

A: With regard to the defensibility of an investment property, the same review and analysis of the loans must be completed. Some borrowers received full residential purchase money loans while others received investment property loans and/or used HELOCs, or any combination of these loan products to acquire investment properties. The historical use of the property by the borrower is also an important issue as many borrowers have personally occupied these properties before they decided to rent them. Generally, those loans that were purchase money loans for these properties are eligible for deficiency protection while those loans that were not directly used to purchase the property are not so protected.
www.MortgageMediationGroup.com