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Short Sales and Arizona Law

By
Real Estate Broker/Owner with RE/MAX Casa Grande

Lenders don't make short sale approval easy.  After receiving government financial assistance funded by taxpayers and direct instructions to work with borrowers to avoid foreclosure, they still insist on playing hardball with homeowners who are doing everything in their power to avoid foreclosure.  In fact, they try to force home sellers into signing agreements that are contrary to Arizona law!

The Arizona market has experienced two years of declining property values which has been accelerated and multiplied by the practice of lenders foreclosing and then dumping homes back on the market in terrible "as- is" condition at low prices.  Rather than working to put these homes in reasonable condition and qualify for government financing for owner occupant buyers, they prefer to take the easy route and sell these homes to investors for lower cash prices.  These low priced "as-is" sales then become comparable sales which appraisers are forced to use to set value on home sales that are not distressed and are in good condition.  This continues to force market values down and more and more property owners find themselves "upside down" and not able to sell and pay off existing loans and closing costs without bringing cash to closing.  The current market situation was in part caused by too many investors purchasing properties on speculation, and now the same lenders who fueled that speculation with unwise lending practices are contributing to further declining values. 

If these same lenders would repair these properties so that FHA and VA buyers could purchase them, live in them, care for them and become good neighbors our neighborhoods would become stable and over time values would rise at reasonable, sustainable rates.

Having worked in the Casa Grande Valley real estate market since the early ‘80's I have observed how lending policies stifle or inhibit growth and real estate values.  In an effort to help homeowners who need to sell and don't want to walk away from their homes and allow the banks to foreclose, we searched for the best training possible to learn how to become effective at negotiating with lenders and obtain short sale approvals on behalf of our clients.  As a result of taking the extensive training we have earned the CDPE designation (Certified Distressed Property Expert) and have been able to successfully negotiate short sale approvals for distressed homeowners in much shorter periods of time.

More and more lenders are beginning to understand the benefit of approving a properly documented and valued short sale rather than foreclosing.   Yet we still find unresponsive lenders, and those seem to be the ones with the most well known names who are responsible for the largest number of foreclosures through their earlier lending practices.

Yesterday we received a tentative approval from a well known lender who was not aware of Arizona Revised Statute 33-814, subsection G, which provides that it is illegal for a lender to obtain a deficiency judgment on a home which is the owners primary residence, is a single family home and is on a lot size of 2.5 acres or less.  A deficiency judgment is the difference between the outstanding loan balance and the amount the lender receives from a sale when they acquire the property and resell it.  There are details involved in the statute that I will not attempt to cover completely here.  The bottom line is that the loan was a "purchase money mortgage" and the current market value is less than the first mortgage which was used to purchase the property.  After dragging their feet and not wanting to accept the market values in the extensive documentation we provided, the lender finally accepted the second appraisal, which shows that the market value has continued to decline while they have been delaying an approval.  The agreement they provided yesterday stated that they would release the mortgage lien from the property in order to close the short sale but they would hold the seller responsible for the difference.  This is not consistent with AZ law.  This lender is doing everything possible to prevent an approval and sale of this property, despite the fact that the seller is insolvent, has no assets to cover the deficiency, did not participate in fraud when purchasing this property and is a victim of declining neighborhood property values. 

 If we hadn't taken the CDPE training, we probably wouldn't have known to question this lender and challenge the legality of their proposal.  There is also a home equity line for a small amount with a well known lender.   Despite being given a portion of the outstanding balance they are refusing to release the second lien without the seller agreeing to be liable for the difference.  After consultation with an attorney we know that this home equity line, which was obtained after the purchase of the home is a full recourse note, which means the lender can go after the homeowner for the difference.  

Both these lenders refuse to accept that unless they approve this short sale they will receive this property back in foreclosure.  The longer they drag their feet the more the value declines and the less money they will receive.   The lender with the second mortgage will receive nothing if the first mortgage holder forecloses.  If they choose to foreclose the property value will probably decline further as a result of more bank owned as-is sales, plus they'll have months of additional costs, attorney's fees, title fees, lost interest, property taxes, HOA fees and the property will sit abandoned with probable deferred maintenance and possibly vandalism and theft.  The property will ultimately sell "as is" to an investor who will do minimal repairs and rent it to a family who just lost their home in foreclosure. 

We as taxpayers will ultimately pay the cost for the additional delay, unreimbursed costs and we'll have added another distressed sale at lower values to the neighborhood.  Instead, these lenders could verify the financial data provided on the homeowner, verify the property value information and expedite this sale to a qualified, working family who will purchase this property using an FHA or VA loan and live in it, adding to the neighborhood stability.

If you ponder this situation even further, all those loans created just a few years ago as 80/20 loans and 90/10 loans to purchase properties cannot have deficiency judgments, according to Arizona law.  When are these lenders going to wise up and contribute to solving the problems of the declining values, rather than contributing to them?  And why will my taxes and those of future generations continue to be directed to these major lenders who continue to operate with these incomprehensible policies?

Please don't misunderstand me.  We are going to continue to fight for these property owners by negotiating short sales and try to stop the flood of foreclosures, which impact homeowners and neighbors.  A recent review of almost 90 expired listings showed the majority are in foreclosure and will wind back up on the market as bank owned listings.  As time consuming as these short sale packages and negotiating are, we feel it is the right thing to do, and we have been successful in nearly 90% of them, with approvals in less than 30 days or as long as 60 days.  It's hard to listen to news and know that our taxes for the next several generations will go toward solving problems that are still being created by these lenders.  Check out ARS 33-814, subsection G and seek legal advice if what the lenders are telling you sounds fishy!

 Visit us at www.StopAZForeclosureToday.com or www.YostHomes.com

Comments (26)

Anonymous
Scott

Hello,

My wife and I are in a similar situation.  Our bank has sent us a letter saying foreclosure on April 7, 2010 unless we are current.  Instead of dealing with a foreclosure, we are trying to do a short sale.  I don't even know how to do that, but did call my bank and they want me to fax in all sorts of paperwork and have to find some "listing" person to hire, etc.  Is this not something I can do on my own?  It sounds like I might not want to since I have no knowledge/understanding with laws, etc.  What do you suggest?  Are you available to help us or maybe send us in the direction of someone who can :)  Also, does this mean that people have to come and tour our house while we are living there?  That sound uncomfortable.

Thanks,

Scott

Mar 22, 2010 06:10 AM
#7
Anonymous
Debbie Yost

You need a Realtor who understands and is highly experienced in short sales RIGHT NOW!  If your foreclosure date/trustee's sale date is April 7th, you have about 9 days to get it sold and a complete package submitted by about April 1st or 2nd in order to stop the foreclosure.  This assumption is based on me understanding your situation as you wrote about it.  DO NOT DELAY at all!  Depending on where your property is located, I can put you in touch with an experienced short sale broker.  Please email me directly at Debbie@Yosthomes.com asap and give me your contact info and property location.

You probably cannot do this yourself, as you don't have access to the market data that needs to be submitted to the lender along with a purchase contract and all your financial information.  Let your lender know you are going to list your property with a Realtor as a short sale and request that they send you any specific paperwork.  Your Realtor will also provide you with a list of paperwork and documents that they will need to submit to your lender along with a purchase contract from a buyer.  Your lender will not stop the foreclosure without a complete package.

I cannot stress enough that you are running out of time, if the foreclosure is scheduled for April 7th.  Please don't delay in taking action today!

Mar 22, 2010 07:09 AM
#8
Anonymous
Debbie Yost

oh yes Scott.....the buyer will want to look at your property before they make an offer to purchase your home.  Would you buy a home without seeing it?  

Mar 22, 2010 07:14 AM
#9
Anonymous
John

Hi Debbie,

 

I have an FHA 30-year fixed with BofA in Mesa, and I'm trying to sell my house so that I can move.  The mortgage is upside down by quite a lot (probably $50K-$100K) However, I do not have any financial hardship - I'm not having any difficulty affording the payments.  Would I still be able to qualify for a short sale?

I guess I'm thinking that if I call up BofA and tell them that either they allow the short sale or I'll just move and mail them the keys, what are their choices?  It sounds like they can't come after me for the deficiency anyway in Arizona, so they have no choice but to accept the short sale or lose even more money by foreclosing...  Will this work or am I being too optimistic?

-John

Apr 02, 2010 01:46 PM
#10
Anonymous
Debbie Yost

If you have an FHA loan you will need to apply to HUD for approval first before attempting a short sale.  Your lender will provide the forms needed to apply.  A short sale is generally not available for situations where there is only a loss of equity.  Loss of equity by itself is not considered a hardship.

Having said that, many lenders are making the decision in areas hit hard by value declines to accept the short sale without a hardship situation.  Only by filling out the paperwork and applying for an FHA approved short sale through your lender will you know whether you have the option for a short sale.

Please don't just mail back your keys....for several reasons:  mailing your keys back to the lender creates another abandoned property in your neighborhood, which only causes your neighbor's property values to decline further.  Also, your credit will be hurt more by you taking this action than attempting to negotiate responsibly with the lender.  If your job requires a security clearance a foreclosure can impact your ability to maintain this clearance.  Your credit rating governs your ability to function freely in our economy.  Everything - from insurance premiums on your car to credit card interest rates, and even future employment is impacted by your credit rating.

For more information on your options feel free to visit our site: www.CasaGrandeShortSales.com.  I also know some excellent brokers who serve your area and they are very successful in negotiations with lenders on short sales.  If you would like me to suggest someone in your area please feel free to eamil me directly at Debbie@Yosthomes.com.  Good Luck!

Of course I am not an attorney, nor an accountant and cannot provide legal or financial advice.

Apr 02, 2010 02:14 PM
#11
Anonymous
bruce

Once the short sale prossess starts with your mortgage holder/lender, do you still have to make the house payment and do you have to vacate the property?Also can you try to sell the property yourself. And last,is there a time limit on tring to sell it and can the lender foreclose while  the short sale is in prossess.

Apr 04, 2010 04:52 AM
#12
Anonymous
gloria lederer

in a short sale, can a family member purchase the home?

What do you know of Chase allowing short sales to go thru and in case of foreclosure is the move-out date  the same as the auction date?

 Last question, how do these lawyers have the nerve to ask these large fees of people who have not enough money to keep up their mortgage payments?  This is how these big banks are getting away with stealing so many homes.

May 07, 2010 10:15 PM
#13
Anonymous
Debbie Yost

The lenders will require all parties in a short sale to sign an affidavit attesting that the transaction is "arm's length" which essentially means that the parties cannot be related, nor can the homeowner's employer buy the property.  Furthermore this will ask all parties to attest that there are not any lease back or agreements to resell the property to the defaulting homeowner in the future.  There are some financial guru's recommending that your family member or employer purchase your property in a short sale.  It's just not possible with the arm's length transaction affidavit.

We have been successful in negotiating short sales with Chase several times.  The lender's decision is going to be impacted by the type of financial hardship, severity of the hardship, the seller's willingness to work with the lender, the documentation available, and the viability of the purchase price vs market value.

In the case of a foreclosure typically the lender will take action to have the former homeowner give up possession of the property.  In many cases they will offer relocation assistance which is commonly called "cash for keys."  Their goal is to gain possession of the property quickly in order to resell the property.  If a tenant is occupying the property with a valid lease the tenant has the right to continue to lease the property for up to 90 days.  I've seen the lender offer the same "cash for keys" to a tenant as relocation assistance.  Many lenders are now offering a rental program.  The best situation is to stay in touch with your lender.

I'm not an attorney so I can't address their fees.  Our focus is to try to prevent foreclosures in neighborhoods and to help people stay in their homes.  If they are unable to obtain refinancing or a loan modification we will do our best to help people avoid a foreclosure by doing a short sale.  It's usually a better solution in that the impact to their credit rating is usually less severe than a foreclosure or deed in lieu of foreclosure, and it is definately a better situation for neighbors than a foreclosure with brings down all property values in the area.

I hope that helps you Gloria!

Debbie

May 11, 2010 04:39 PM
#14
Anonymous
rob day

Debbie,

Can the bank require repayment if we took out a HELOC and spent it on other things other than the home? It was about 50% house improvements and 50% other (pay off credit cards and buy new appliances). I know you are not a lawer but have you seen this? From reading the law ARS 33-814, subsection G it doesn't state that they can. Also, I am so underwater on the home (250,000) and can't get a loan to do repairs, I just had the AC repair person out to repair both units but they are old and he said that they need to be replaced, (16,000). This is just a tip of the iceburg, roof leaks, sprinklers not working etc. At this point we are not behind in payments, but I have to do something as summer is here and we can't survive in the heat. So it's fix the AC or make a payment.

Rob

May 27, 2010 08:54 AM
#15
Anonymous
Debbie Yost

Rob,

I am NOT an attorney, so I would recommend that you both speak to your lender and seek legal and accounting advise.  A HELOC doesn't hold the same anti-deficiency protection as the purchase money mortgage, which is the mortgage you obtained to buy the property. 

It sounds like you may want to decide if you want to stay in the home, and if so, what are the necessary repairs that are needed to make it habitable - roof leaks, A/C etc,   I'd get some bids in writing and then speak to your mortgage company.  They really don't want the house back....no bank wants to foreclose despite what you may have heard.  Perhaps a loan modification, or a temporary suspension of payments while you repair the A/C and roof?  Talk to your lender about these issues and give them proof of the need for repair and the costs.  Loan modifications are difficult to obtain, but are easier these days than in the recent past. 

If that doesn't work, then seek some legal and accounting advise.  I'm happy to refer you to a Realtor who specializes in short sales in your area if that is something you are interested in pursuing.  They can give you specific advise on your home's value and the probability of it in this current market.  Please don't abandon your home...that is probably the worst thing to do.  You need somewhere to live and you are liable for the HECLA so continue to try to work it out with the lender via a loan modification or a short sale.

Good Luck and let me know if you need a Realtor referral.  If so, I would need to know the location of your property (city and zip code)

Debbie

May 28, 2010 03:24 AM
#16
Anonymous
Rob

Debbie,

Looks like I miss understood the type of loan I had. I thought I had a HELOC loan. We refinanced the house in 2006 and was given a check for monies to use as we see fit. From what I now understand a HELOC is a type of loan that uses a type of "revolving credit line" like a credit card. Is this correct? If so I do not have that type of loan. The amount was given to us at time of closing in a form of a check that I had to deposit. As far as I can tell it is just an ARM loan that I was given equity monies to spend. ???

Rob

May 30, 2010 10:03 AM
#17
Anonymous
Debbie Yost

Hi Rob,

If I am understandiung you correctly you refinanced your purchase money mortgage with a "cash out" refinance and you spent some of the money on items other than improving the home?  If so, you aren't alone.  Millions of folks refinanced their homes during the boom years. Yes, a HELOC is a credit line that rises and falls as you draw funds and pay them back.  So you have only one loan. the refinanced loan?  

The place that this information will come into play is if you have any "debt forgiveness" which is the difference between what you owe and what the lender receives through a short sale, deed in leui of foreclosure or foreclosure.  This is the "debt forgiveness" that used to be taxable as income by the IRS and this tax has been eliminated on debt forgiveness on your primary residence thru 2010 by Debt Forgiveness Act enacted by Congress.  Depending on your personal situation an accountant is the one to specify whether your debt forgiveness is totally exempt from taxes or partially exempt.  There are so many levels to these transactions which is why I constantly recommend that you seek the advice of your accountant and attorney.

The first question you need to decide is what you really want to do.  Do you want to stay in your home if you could manage the payments?  If so, have you spoken with your lender about a loan modification?  The information concerning the necessary repairs is important information for them to know.  If you do not want to stay in the home, or the loan modification is impossible, then the next decision for you is to try to sell it and if you email me directly at Debbie@Yosthomes.com with your home's location (city and zip) I'll see if I can connect you with a Realtor who has the necessary experience to assist you.

Check out our website at www.CasaGrandeShortSales.com for more specific info on the government's loan modification and simplified short sale programs.  There is alot of info under "resources".  You might also want to read the AAR Short Sale Advisory, which was created by the Arizona Association of Realtors and gives many sites to research for information about your options.

Best of luck to you and let me know if I can assist you further.

Debbie

 

 

May 31, 2010 05:38 AM
#18
Anonymous
Ann Spruell

Hey there, I am thinking about short selling my home, and I am wondering if the following is true;

I was told The Mortgage Forgiveness Debt Relief Act of 2007 states that I must live in the home 2 out of the last five years to not be left with the deficiency.  I have not ived there for 3 years, so does this mean I will be required to pay the deficiancy if it takes another year to finish a short sale?

Ann Spruell

Sep 13, 2010 09:36 AM
#19
Anonymous
Debbie
Yes, the mortgage debt forgiveness act applies to your primary residence. There are tests for qualifying as a primary residence, best discussed with whomever is doing your accounting and taxes to see how your home has been categorized in the past.
Sep 13, 2010 09:50 AM
#20
Anonymous
Becka

Thank you so much for your post and replies, they have been very helpful. We are in a similar situation, we're approx $250K under water in our home. We can make our mortgage payments right now, but since we bought the home we have lost significant income, had two additional children, and my husband's job is now 20 miles further from our home. I'm pretty sure we could write a letter showing hardship.

So---assuming we would qualify for a short-sale, once we begin the process it is best to stay current on mortgage payments? Do I need to be late or delinquent on at least one payment to "verify" hardship? My husband is expecting a substantial bonus next month---it would be helpful to use the money to pay off a car, credit card debt, medical care debt and get us back on track. However, if I do that will the banks be less likely to approve my short sale because I paid off other debt but not theirs? So many unknowns---your advice would be greatly appreciated

 

Sep 17, 2010 05:20 PM
#21
Anonymous
Debbie Yost

Thanks for your message.  I wish I could predict your lender's response, but short sale practices are changing daily and no two banks handle things the same way.  There are 3 main requirements for a short sale:  being upside down on value, a financial hardship, and not enough assets to pay the difference at close of escrow.  Some banks are running pilot programs in Arizona because they understand the severity of the problem.  So i'ts hard to say without really looking at the specifics of your situation.

Re your question on staying current on your mortgage, I would never advise you to stop paying your mortgage.  Some lenders will tell us specifically that unless you have missed a payment they can't approve the sale.  Some do not require you to be in default in order to approve the short sale.  After submitting your short sale package and discussing it with the lender, your Realtor will have a better idea about whether your loan needs to be in default in order for them to approve it.

One of your goals might be that you want to come out of this short sale with your credit rating as high as possible.  One of the things that will really create "dings" and cause your score to drop is the missed payments.  The short sale itself will be reported as "settled" or other language that may show something other than paid in full.  This will cause a drop of anywhere from 50 to 200 points, I am told.  However, the missed payments before the sale will cause a credit score drop as well, and if you combine that with the short sale reporting it causes a bigger credit score drop.

The bank will require a financial package when the contract along with all the terms of the sale is submitted for short sale approval.  Part of this package includes the most recent two months of bank statements, two months of paystubs, etc.  People think they can hide assets, bank accounts, large deposits or spending habits.  That isn't wise because the lender reviews your spending habits by looking at your statements for the past two months.  They are looking at your habits.  We've had some folks we've worked with that were regularly spending significant amounts of money at the casino.  That person's short sale was approved, but with a small contribution from the seller required.  We've had several folks with significant retirement accounts but other definate hardships and were able to get those short sales approved, sometimes with the seller contributing a few thousand dollars at closing, and sometimes without a contribution.

If your plans include using your husbands upcoming bonus to make yourself and your family's financial picture more stable by paying off credit card and medical debt, and even your car....that seems to be a very prudent plan.  Banks are looking for responsible financial decision making.  Without knowing the specifics of your financial situation I can only give you general info.  If you decide to move in the direction of a short sale, consulting an attorney or accountant and your Realtor who specializes in short sales should give you more info. 

My specific answer - no, you don't necessarily "need" to be in default for your lender to approve your short sales........and, making prudent financial decisions for your family's future would be the best use of your husband's upcoming bonus.  Good luck!

Sep 18, 2010 04:00 AM
#22
Anonymous
Terry

Debbie

 

I have learned a lot while reading on your site, but I still have a question?

I meet all of the hardship requirements that you have spoken about, but I have an inheritance that is in a trust that I can not touch, because of the way it is set-up, can the bank come after that money?

Thanks

Terry

Mar 31, 2011 07:08 AM
#23
Anonymous
Debbie

Your question about assets, specifically your trust requires an answer by an attorney because it is so specific.  

Apr 09, 2011 10:23 AM
#24
Anonymous
benz

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Jul 02, 2013 11:27 PM
#25
Fred Griffin Florida Real Estate
Fred Griffin Real Estate - Tallahassee, FL
Licensed Florida Real Estate Broker

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Feb 02, 2017 09:27 PM