Foreclosure

questions & answers

Question: Short Sale question - What do I do if there was not full disclosure at the short sale by the lender that a heloc would still have a balance & they would come after me 4 years later?

Answer:

This question requires a two part answer. The first part concerns Arizona’s anti-deficiency statutes and whether they would apply to a home equity loan on credit (HELOC). A HELOC is different from conventional loans in that a HELOC provides a line of credit rather than a lump sum payment up front. While a conventional mortgage loan would provide the borrower with, for example, a lump sum of $100,000, a HELOC would provide the borrower with the ability to request the lending bank to provide up to $100,000 at the borrower’s request over a certain period of time. This enables a borrower to borrow part of the loan amount initially and borrow more at a later point in time.

The difference between HELOCs and conventional loans is significant because of the language of Arizona’s anti-deficiency statutes. The anti-deficiency statutes protect some borrowers from liability for any debt owed on a home mortgage after a foreclosure. There are two types of loans that are given this protection. The first is for purchase money mortgage; a mortgage is considered a purchase money mortgage when the lender provides all or part of the money that is actually used to buy the property that is being mortgaged. A.R.S. 33-729. Arizona law states that there can be no deficiency judgment against a borrower on a purchase money mortgage if the property that was purchased is two and a half acres or smaller and used for either a “single one-family or single two-family dwelling.”

The second anti-deficiency statute applies only to property that is two and a half acres or smaller and used for either a single one-family or single two-family dwelling that is sold “pursuant to a trustee’s power of sale.” A.R.S. 33-814(G)   This provision only applies to borrowers who have executed a deed of trust in exchange for the mortgage loan. A deed of trust is a deed executed and conveyed to the trustee/lender to ensure repayment of the loan. A.R.S. 33-801    Thus, the statute only applies to a borrower who has executed a deed of trust for property that is two and a half acres or smaller, used for a family home, and then sold by the trustee to repay the debt.

Both of these statutory protections are very narrow and only cover a small number of borrowers. Because of the narrowness of the statutes, the facts of each case are very important. A borrower who has a HELOC is unlikely to qualify for anti-deficiency protection. HELOCs are not typically used for the purpose of purchasing the property that is used as collateral for the mortgage. Therefore, a HELOC is not likely to qualify as a purchase money mortgage. Similarly, a HELOC may not be structured as a deed of trust mortgage. It would depend on the terms of the contract signed when the HELOC was first taken out. If the HELOC did not involve a deed of trust, then the anti-deficiency statute does not protect the borrower.

The second part of the answer concerns liability after a short sale. If the borrower is not covered by an anti-deficiency statute, as discussed above, then there is no law that automatically protects the borrower from liability to the lender. Many people believe that a short sale will allow them to walk away from upside down mortgages and owe nothing after the sale. This is not necessarily true.

When property is sold in a short sale, any debt remaining after the sale is still owed by the borrower to the lender. The only way to avoid this liability, other than protection under the anti-deficiency statutes, is if the borrower and lender agree in the contract to allow a short sale that the borrower will not be liable for any deficiency. Lenders are not obligated by law to make this kind of agreement and they will not automatically include a provision releasing the borrower from the debt. Thus, if you have sold property in a short sale and there was a deficiency, the terms of the contract with your lender will determine whether you still owe the debt. Neither is the lender required to specifically tell you that you will still owe money after the short sale because the short sale agreement only binds the lender to allow you to sell the property for less than you currently owe the lender without a formal foreclosure. Moreover, the lender is not required to sue to collect the debt within ninety days, as is the case with foreclosures. They can come after you years after the short sale is completed.

It is important to remember that every case is different and dependent on specific facts.  Whether considering a shortsale or dealing with a HELOC deficiency after a short sale, it would be best to consult an attorney to determine the best possible course of action.  To qualify for free or reduced free legal assistance in foreclosure, consumber, or bankruptcy matters, use the Arizona Access to Justice Online Intake System at www.azlawhelp.org/accesstojustice.