ALTERNATIVES TO FORECLOSURE IN ARIZONA
In the wake of the latest real estate tsunami, survivor homeowners desperately cling on to the flotsam of bad mortgages and declining home values, where each month they are battered by yet another wave of payments. The rescue ship of economic recovery is nowhere to be seen, hope fades, and these survivors give in to a suffocating fate – foreclosure.
Although many survivors believe that their fate is predetermined and foreclosure imminent, the reality is that there are several alternatives to foreclosure that may apply to distressed homeowners. This article will explain what some alternatives to foreclosure are, and what legal protections may serve as a life preserver for some survivors. To begin with, however, it is important to understand some of the basics of foreclosure.
In Arizona, when a buyer of real estate seeks to purchase a property he or she, in most instances, take out a bank loan (commonly referred to as a mortgage). In such instances, the lender (Bank) will require the borrower to sign a promissory note (“Note”) which evidences the borrowers promise to pay back the loan according to the terms set forth therein. The lender will also require a borrower to put up the property as collateral for the loan, and require them to execute a deed of trust in its favor, which is recorded in the County recorder’s office in order to give notice to the world that a lien exists on the property. A deed of trust is the most commonly used instrument in Arizona, and differs from a mortgage in that it always involves at least three parties, where the third party (a “trustee”) holds the legal title. In contrast, in the context of mortgages, the lender gives legal title directly to the borrower.
The Note recites the “rules” the borrower must abide by and which, to an extent, the trustee enforces by way of the deed of trust instrument. If the borrower breaks any of those rules, it typically results in a “default” of the terms of the agreement, allowing the creditor to exercise any rights it may have, as outlined in the Note and/or deed of trust. The most common event of default is the borrower’s failure to pay in accordance with the terms of the Note. For that reason, trust deeds typically contain (1) an acceleration clause and (2) a power of sale clause. The acceleration clause allows the creditor to call the entire loan balance immediately due and payable upon an event of default. The power of sale clause authorizes the trustee to proceed with foreclosure without court supervision (judicial foreclosure), and to sell the property by trustee’s sale.
The analysis seems pretty simply – if you don’t pay your mortgage you are going to lose your house. Generally speaking this is true. Notwithstanding, there are several alternatives to foreclosure available to many home owners. In order of best to worst (in my opinion) those alternatives are as follows: (1) refinance; (2) loan modification; (3) short sale; (4) deed in lieu of foreclosure; and (5) bankruptcy. Of course, not all of those options are available to homeowners.
For example, it is pretty difficult to refinance your house when it is worth (substantially) less than what you purchased it for and when, as the case may be, your credit has taken a hit during this economic downturn. In order to qualify for loan modification a homeowner typically must (a) occupy the property, (b) be employed, and (c) be able to show some economic hardship. Additionally, a short sale (selling your property for less than what is owed on the Note) is certainly not automatic; particularly if you have more than one mortgage on your property where the second lienholder is unwilling to compromise and accept less than what is owed, or mortgage insurance. And, a deed in lieu of foreclosure also often has certain prerequisites including, among other things, attempting to sell the property first.
If you are a distressed homeowner and want to avoid foreclosure, certain alternatives may be available to you. Determining which option(s) you qualify for and, more importantly, which one(s) make sense for you requires some analysis; each alternative may have detrimental legal, tax and credit consequences. In some instances, it may make most sense simply to allow the foreclosure to proceed. In other instances, typically those in which a homeowner is not protected by the anti-deficiency statutes of Arizona (A.R.S. §§ 33-729(A) and 33-814(G)), it may be that any alternative is better than foreclosure.
Whatever the case, it is important to know that you do not have to “go down with the ship.” If you are interested in exploring what alternatives to foreclosure are available to you, I encourage you to seek the advice of an experienced real estate attorney who can help steer you to financial freedom.
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