It’s no secret that thousands of people across the country and in Arizona have lost their homes to foreclosure. One of the biggest issues I deal with as an Arizona real estate attorney working on foreclosure-related cases is the question of what happens to a second mortgage or home equity line of credit after the first mortgage is foreclosed. The answer to this question requires an analysis of each individual’s specific situation, including the terms of their loan agreement, the circumstances in which they obtained the loan and what the funds were used for, and the distribution of the funds on the sale of foreclosure properties. . While most homeowners would be wise to talk to an Arizona foreclosure attorney about their situation, the following article provides a general outline of Arizona laws that affect a second mortgage lender’s ability to collect any outstanding balances after the first mortgage lender has foreclosed.
For starters, it should be understood that this discussion only applies to loans secured by property located in Arizona. Arizona laws regarding a lender’s ability to collect shortfall balances differ substantially from the laws of other States, and if you have a loan on property in another State, you must obtain correct information from that jurisdiction.
One of the main differences in Arizona law relating to the ability of a second mortgage lender to collect a shortage balance is found in Arizona Revised Statute Section 33-729(A), which limits a lender’s ability to seek a shortfall if money is lent to guarantee payment of the remainder of the purchase price. ” provided that the property is a one- or two-family home and consists of two and a half acres or less. In other words, if the loan is “purchase money” used to buy a home, the lender’s only option is to foreclose in case of non-payment. If the lender can’t take over because the main lender already owns it, he has no recourse.
Of course, many Arizona homeowners facing foreclosure find themselves with a second mortgage taken out after they bought their home, with funds used to make home improvements, pay off other debts, take vacations or buy other items, or even be used as a down payment. in another house. In cases like these where funds cannot be traced back to the original purchase of the property, Arizona’s legal protections may 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 refinancing and/or sales and assignments by the lender. Fortunately, the Arizona Court has made clear that a refinanced loan retains its original character for anti-deprivation statutory purposes, so refinancing will not affect any protection a homeowner may have under Section 33-729(A).
Because many refinancing involve elements of purchase money and non-purchase money, however, homeowners should understand that some second mortgage lenders will attempt to recover at least part of the non-purchase money of the loan. There are defenses available for such claims, and homeowners facing lawsuits from lenders should seek the advice of an experienced Arizona foreclosure attorney to discuss how to respond to the lender’s lawsuit.
Unfortunately, it’s impossible to address every situation in this short article, and any homeowner facing foreclosure should seek additional guidance on the tax implications, how to deal with HOA, and how your specific loan will be treated under Arizona law after foreclosure.