Rea Estate Questions? Call an Arizona real estate lawyer: 602-424-4152
|
The Phoenix area condo market has tanked. Condos are very difficult to sell, especially those priced above $417,000, the maximum amount of conventional home loans. Jumbo loans over $417,000 for residential properties are very difficult to obtain in today’s lending environment. 44 Monroe, located at 44 West Monroe in downtown Phoenix is a 34 story high-rise tower that is the tallest residential building in Arizona. that was completed in 2008. Only 14 of the 196 units have been sold. The holder of the debt on the unsold units has started a foreclosure by filing a notice of trustees sale. The trustees sale is set for April 14, 2010. The Arizona Republic claims that the debt is $86.8 million. The project was developed by Grace Communities of Scottsdale, Arizona. It sounded like a great project on paper. See a description of the project.
In the summer of 2009, the owner of another downtown condo project called The Summit at Copper Square filed a bankruptcy petition to stop a foreclosure on the 165-unit condo project.
Whether a homeowner’s decision to allow his or her lender to foreclose is based on a presently existing financial hardship, anticipated financial strain over time, or to strategically divest themselves of a bad investment, the debate rages as to whether such a decision on the part of the borrower is morally wrong or financially sound.
It is important to examine this issue from an objective standpoint, weighing well-informed arguments from both sides of the debate. An excellent commentary on ‘strategic walkaways’ by Mike Bell and the ensuing robust debate on this topic can be found here: The Ethical Dilemma of Strategic Walk-Aways.
For another view, see Arizona Republic reporter Russ Wiles’ story in the February 14, 2010, called “Walking away’ comes with drawbacks.” The story says,
But the prospect of mass “strategic defaults,” where homeowners who can afford their payments nevertheless walk away, has sparked sharp words from both sides. That’s partly because these actions don’t just affect borrowers and their lenders, but other parties, too.
Update: See an MSN Money article called “Are you foolish to pay your mortgage?” and “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis” by Professor Brent T. White, University of Arizona College of Law. The abstract for this article states:
Despite reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations – and to ignore market and legal norms under which strategic default might be both viable and the wisest financial decision. Norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility. This norm asymmetry leads to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse.
Related Articles by Arizona real estate attorney Jeana Morrissey
For more information about Arizona’s anti-deficiency laws, see my article called “Arizona Foreclosure Law aka Arizona Anti-Deficiency Law.” For information about short sales, see “Arizona Department of Real Estate Publishes Short Sale Seller Advisory.” For information about the federal income tax consequences of a short sale or discharge from indebtedness income see “Mortgage Forgiveness Debt Relief Act of 2007” and “Federal Income Tax Consequences of Home Foreclosures & Cancellation of Indebtedness.”
Schedule an Arizona Foreclosure Law or Short Sale Consultation with Arizona Real Estate Attorney Jeana Morrissey
If you have questions about Arizona foreclosure law and the legal consequences of defaulting on a loan secured by a lien on an Arizona home or questions about short sales or short sale contracts, hire me, an Arizona real estate attorney to review your situation and answer your questions. I offer a one hour in office or over the phone consultation for $299. Call me, Jeana Morrissey, at 602-906-4953, ext. 4 or email me at jrm@keytlaw.com. To hire me for a consultation about Arizona foreclosure law or short sales, complete my online consultation agreement. To schedule a consultation, call me or my legal assistant Milena at 602-424-4159.
Arizona Republic: “Maricopa County homeowners will begin to receive their latest property valuations in the mail today. Most will see a third straight annual drop in home values. Residential property values fell an average of 15.2 percent in 2009, according to the latest report from the Maricopa County Assessor’s Office.”
Phoenix Business Journal: “Arizona ranked second in foreclosures for January behind only Nevada, which has held the top spot for 37 months running, according to a RealtyTrac report released Thursday. One in every 129 Arizona housing units was hit by foreclosure proceedings during the month, a 4 percent increase over January 2009. That rate translates to 21,048 homes.”
An Arizona State University report says that one half of the recent sales or homes in the Phoenix area involved forecloses and two thirds of the sales in January were either foreclosures or re-sales of foreclosures.
Arizona Republic: “January’s significant drop in pre-foreclosures is the indicator many metropolitan Phoenix housing-market watchers have been anxiously looking for during the past several months. For the first time since November 2008, the monthly tally of Valley homeowners to fall behind on their mortgages and face foreclosure is below 7,000. Actual foreclosures dropped as well, although their decline wasn’t as dramatic.”
Short sales of real property are not for the faint of heart or the uniformed. A short sale is the term given to the situation where a homeowner has a prospective buyer who wants to purchase the home for less than the amount owed to the lender(s) who have liens on the home to secure one or more loans. For example, A owns Blackacre, which he purchased for $300,000 at the height of the real estate boom with a $280,000 loan from Unfriendly Bank. The home is now worth $150,000 and B wants to buy the home at that price, but cannot unless Unfriendly Bank releases its lien on the home for $280,000. A negotiates with Unfriendly Bank until A is blue in the face and has pulled out all of his hair and finally after what seems like an eternity, Unfriendly Bank agrees to accept $150,000 at the closing in exchange for releasing the $28,000 lien. The fact pattern describes a typical scenario that is called a “short sale.”
There are a lot pieces to the short sales puzzle. If you are considering a short sale, you should first do your homework and understand the process from a to z. Here are some issues to understand, consider and resolve before you do a short sale:
- What special provisions should a seller or buyer put into a real estate purchase agreement when the transaction involves a short sale?
- If the short sale is completed, can the lender sue the home owner for a deficiency? In the example above, the lender was owed $280,000, but was only paid $150,000 at the short sale closing. The short fall amount of $130,000 is called the deficiency amount. Borrower promised to pay $280,000 when borrower signed the promissory note and borrower only paid the lender $150,000. Can and will the lender take legal action against the borrower/owner to collect the deficiency amount? For more on this topic, see KEYTLaw real estate attorney Jeana Morrissey’s post on this topic called “Confusion about Short Sales and Arizona’s Anti-Deficiency Law.”
- What are the federal income tax consequences of a short sale? Will the owner/borrower have to report taxable income to the IRS for the amount of debt the owner/borrower is released from paying? The general rule of federal income tax law is when a borrower is discharged from paying all or a portion of a debt, the borrower has taxable income in the amount of the debt that was forgiven. When real estate is involved, the answer to the question can become more difficult to determine. See “Federal Income Tax Consequences of Home Foreclosures & Cancellation of Indebtedness” and the “Mortgage Forgiveness Debt Relief Act of 2007,” which ameliorates the normal foregiveness of indebtedness rules discussed in the former article.
- How will a short sale affect the seller’s credit score?
- Will a short sale create a waiting period before a seller can buy another home?
The good news for people contemplating a short sale of Arizona real property is that the Arizona Department of Real Estate and the Arizona Association of Realtors have worked together to publish an excellent Arizona short sale help booklet called the “Short Sale Seller Advisory.” The introduction to the booklet states
A short sale involves numerous issues as well as legal and financial risks. This Advisory is designed to address some of these issues and risks . . . .
Here are the topics covered in the “Short Sale Seller Advisory:
- Understand a Lender’s Options upon Loan Default
- Be Aware of Predatory “Rescue” Scams & Short Sale Fraud
- Contact a free HUD-approved housing counselor or contact your lender directly
- Utilize free services available to Arizona residents
- Obtain Legal Advice
- Obtain Tax Advice
- Be aware of the Consequences of Committing “Waste”
- Consider All Options such as: loan workout, loan modification, refinance, deed in lieu of foreclosure, work out sale, bankruptcy and foreclosure
- Contact a qualified real estate professional
- Investigate documentation and eligibility
- Determine the amount owed on the property
- Determine the estimated fair market value of the property
- Consult legal counsel
- Understand that a short sale may not discharge the debt
- Obtain tax advice
- Be aware of the impact on your credit score
- Understand that there may be a waiting period before you can buy another home
- Review the Arizona Association of REALTORS® (AAR) short sale forms
I note that the booklet recommends consulting an experienced attorney twice, which I obviously agree with. KEYTLaw attorney Jeana Morrissey has considerable experience advising Arizona home owners with respect to Arizona’s foreclosure laws, anti-deficiency laws and legal issues arising from short sales. See Jeana’s articles on these topics:
For information about the federal income tax consequences of a short sale or discharge from indebtedness income see “Mortgage Forgiveness Debt Relief Act of 2007” and “Federal Income Tax Consequences of Home Foreclosures & Cancellation of Indebtedness.”
Schedule an Arizona Foreclosure Law or Short Sale Consultation with Arizona Real Estate Attorney Jeana Morrissey
If you have questions about Arizona foreclosure law and the legal consequences of defaulting on a loan secured by a lien on an Arizona home or questions about short sales or short sale contracts, hire Arizona real estate attorney Jeana Morrissey to review your situation and answer your questions. Jeana offers a one hour in office or over the phone consultation for $349. Contact Jeana at 602-906-4953 ext. 4 or email her at jrm@keytlaw.com. To hire Jeana, complete our online consultation agreement. To schedule a consultation, call Jeana or Jeana’s legal assistant Milena at 602-424-4159.
Arizona Republic: “The Arizona Supreme Court’s recent ruling in the CityNorth case has reignited debate in Scottsdale over whether public subsidies and tax incentives truly benefit the community. Some say the more than $220 million the city has committed in subsidies has only wasted taxpayer money by lining the pockets of developers. Others argue that the incentives have proven to be money-making investments, contributing to downtown revitalization and economic growth. Since 1987, Scottsdale has granted roughly $150 million in tax incentives to spur new retail, promote redevelopment, attract new jobs and encourage historic preservation. In return, the city has received new roads, water lines, parking structures and more than $165 million in new revenue to date with millions more expected in the future.”
Question: I have several investment properties in Arizona that may go into foreclosure. I am looking for an attorney who understands and believes in the “Produce the Note” defense. Can you represent me?
Answer: No. The “produce the note” defense is where the borrower attempts to stop a foreclosure on real estate secured by a lien on the basis that the party foreclosing (the lender) cannot produce the original promissory note signed by the borrower(s). Some states have apparently allowed this as a defense to a foreclosure on real estate.
I would not take the case for two reasons:
- The cost to litigate the defense could be very, very expensive. I would not want you to waste your money on legal fees.
- No Arizona appellate court has ruled on the issue, but there is at least one Arizona case that could decide the outcome against the borrower in favor of the lender.
Issue 1: Legal Fees to Defend
To defend against the foreclosure under a deed of trust on Arizona real property, the borrower must file a lawsuit in Superior Court asking the Court to stop the foreclosure and find that the lender does not have the right to foreclose because the lender cannot produce the original note. Do you have the money to pay to litigate? To take a case to trial could cost $10,000 – $50,000. Are you willing to pay that kind of money to pursue a lawsuit? If you win at the trial court level and the defendant appeals, the cost to pursue the appeal will further increase your legal fees and costs. I can’t imagine you could find a lawyer to take the case on a contingency so you would have to pay as you go. Most lawyers would require a substantial retainer ($10,000 or more) before accepting your case with assurance from you that you can pay more as the lawsuit proceeds and fees increase.
I don’t know any lawyers who have experience defending a borrower who owes the money, but wants to defend on a technicality. One potential problem is the lender could drop the foreclosure and sue on the note in court, which would eliminate the protection from a deficiency judgment provided by ARS Section 33-814(G). The lawsuit to defend on the lack of a note could be the equivalent of jumping out of the frying pan into the fire if the result is the lender waives its right to foreclose on the lien and sues for a judgment on the note and gets a judgment for the full amount against the borrower.
If the borrower’s goal is to pay money to buy time to stay in the home, then one option that may succeed is for the borrower to file a lawsuit demanding that the lender produce the original promissory note. However, if the borrower hires a lawyer to file the lawsuit, the legal fees could be very high.
Issue 2: Adverse Case Law
The Arizona Court of Appeals case Florence Melni vs. Joseph Custer, Trustee, et al., 162 Ariz. 153 (1989), sheds light on how Arizona courts may handle a claim by a borrower that the lender cannot foreclose on a lien because the lender cannot produce the original promissory note. Florence Melni went to an open house on s Sunday in the 1984 in Scottsdale, Arizona, and said she wanted the buy the home. The guy showing the home said “ok, its $500,000 meet me at Metro Home Loans tomorrow and bring a check for $75,000.” That’s what Mrs. Melni did. Florence did not have a purchase contract, open an escrow or get title insurance. The next day she gave the man the check for $75,000 and he gave her the keys to the home. Mrs. Melni moved into the home and about a year later called a realtor to list the home for sale. The realtor checked the records of the Maricopa County Recorder and found out the woman never got a deed to the home. That’s when I got involved.
About that time the President of Metro Homes Loans was murdered and the State Department of Banking put MHL into receivership. There were two deeds of trust (a first for $300,000 and a second for $115,000) on Florence’s home, both signed by a “Doctor DM Conrad,” the same person who signed the held legal title to the home that was never conveyed to Florence Melni. It turns out that DM Conrad was a fictitious person created by MHL to scam people into investing in the two loans that were the first and second liens on the home.
Mrs. Melni could not or did not want to pay the debt secured by the second deed of trust on the home. The lender threatened to foreclose. The parties then litigated the issue of whether the lender had a valid lien on the home. Florence Melni’s position was that neither the promissory note that evidenced the debt nor the second deed of trust that secured the debt were valid because neither document was signed by an actual person. DM Conrad did not exist. The documents were signed by somebody at Metro Home Loans, which had created this fictitious person including bogus financial statements of “Dr. Conrad.” A notary falsified the acknowledgment of DM Conrad’s signature on the deed of trust. Dr. Conrad looked great on paper, but he did not exist.
You’d think that a promissory note and a deed of trust that lacked a signature would not be valid and prevent the second lender from foreclosing on the property. The Arizona Court of Appeals concluded otherwise. It said the lender had an “equitable lien” on the property that gave the lender an enforceable lien to secure payment of a debt evidenced only by a promissory note and secured by a deed of trust, neither of which were ever signed by a real person or the purported owner of the property.
This Arizona appellate case could affect the out come of a lawsuit filed in Arizona by a borrower against a lender that is trying to foreclose a lien on Arizona real property if the borrower’s defense to the foreclosure is that the lender cannot produce the original note.
State law will control. For example, according to Foreclosure University, the foreclosure law of Virginia says:
If the original note has been lost a copy with a lost note affidavit will suffice, but the lender, prior to the institution of the foreclosure, must give the obligor(s), including the property owner, written notice that the original note is unavailable and that a request for sale by the Trustee will be made upon expiration of 14 days from the date of the notice.
For some actual situations involving this issue, see “Foreclosure sales in limbo over title issue” and “Who owns your home? Lost paper trail allows borrower to keep her house.” For a ton of articles on this topic, just Google foreclosure original note.
For more information about Arizona’s anti-deficiency laws, see KEYTLaw real estate attorney Jeana Morrissey’s article called “Arizona Foreclosure Law aka Arizona Anti-Deficiency Law.” For information about short sales, see “Arizona Department of Real Estate Publishes Short Sale Seller Advisory.” For information about the federal income tax consequences of a short sale or discharge from indebtedness income see “Mortgage Forgiveness Debt Relief Act of 2007” and “Federal Income Tax Consequences of Home Foreclosures & Cancellation of Indebtedness.”
Schedule an Arizona Foreclosure Law or Short Sale Consultation with Arizona Real Estate Attorney Jeana Morrissey
If you have questions about Arizona foreclosure law and the legal consequences of defaulting on a loan secured by a lien on an Arizona home or questions about short sales or short sale contracts, hire Jeana Morrissey, an Arizona real estate attorney to review your situation and answer your questions. Jeana offers a one hour in office or over the phone consultation for $349. Call Jeana Morrissey at 602-906-4953, ext. 4 or email her at jrm@keytlaw.com. To hire Jeana for a consultation about Arizona foreclosure law or short sales, complete our online consultation agreement. To schedule a consultation, call Jeana or her legal assistant Milena at 602-424-4159.
The Real Estate Guy: “So you get the call from your agent that the title company has received the loan documents and needs to set up an appointment. Lucky you! If you are a first time home buyer, everyone tells you to ‘get ready to sign your life away’ or ‘man is your wrist going to tired from all that signing’ or ‘be prepared for a hour of misery’ and so on and so on. My goal with this post is to ‘dissect the loan package’, and take away as much anxiety as I can. I have over 6000 loan signings under my belt, and the average person may do 10 in a lifetime. A skilled signer should be able to get you through the package in about 30 minutes. Every lender is a bit different, but the package I will dissect below is representative of most lender document packages.”
|
|
Follow Us!