It’s no secret that thousands of people across the country and in Arizona are losing their homes to foreclosures. One of the biggest issues I deal with as an Arizona real estate attorney when dealing with foreclosure-related cases is what happens to a second mortgage or home equity line of credit after foreclosure on the first mortgage. The answer to this question requires an analysis of each individual’s specific situation, including the terms of their loan agreement, the circumstances of when they received the loan and what the funds were used for, and the distribution of funds in the property foreclosure. Although most homeowners would be wise to speak to an Arizona foreclosure attorney about their situation, the following article provides a general framework of Arizona laws that affect a second mortgage lender’s ability to collect any shortfall owed after the first mortgage lender’s foreclosure .
First, it should be clear that this discussion applies only to loans secured by Arizona real estate. Arizona’s laws regarding a lender’s ability to collect a shortfall differ significantly from the laws of other states, and if you have a loan on property in another state, you must obtain the correct information from that jurisdiction.
One of the key distinctions of Arizona law regarding a second mortgage lender’s ability to collect a shortfall is found in Section 33-729(A) of the Revised Arizona Statute, which limits the lender’s ability to seek a shortfall when the money borrowed “is given to secure payment of the balance of the purchase price” provided the property is a single family or duplex and is two and a half acres or less. In other words, if the loan was “purchase money” used to purchase the home, the lender’s only choice is to foreclose on non-payment. If the lender cannot foreclose because the primary lender has already done so, they have no further recourse.
Of course, many Arizona homeowners facing foreclosure find themselves with second mortgages taken out after their homes were purchased, with the funds being used to make improvements to the home, pay off other debts, take vacations, or other items to buy or even to use as a down payment for other houses. In cases like these, where the funds cannot be traced back to the original purchase of the property, the protections of Arizona law likely do not apply.
Tracing back to the original purchase is an important exercise for many lenders and homeowners since so many second mortgages are the product of one or more refinances and/or sales and assignments by the lender. Fortunately, the Arizona courts have clarified that a refinanced loan retains its original character for anti-deficiency statute purposes, so refinancing does not affect the protections a homeowner may have under Section 33-729(A).
However, because many refinances involve both purchase money and non-purchase money elements, homeowners should understand that some second mortgage lenders will attempt to recover at least the non-purchase money portion of the loan. There are defenses to such claims, and homeowners faced with claims from lenders should seek the advice of an experienced Arizona foreclosure attorney to discuss how to respond to such lender’s claims.
Unfortunately, it’s impossible to cover every situation in a short article, and any homeowner facing foreclosure should seek additional guidance on the tax implications, dealing with the HOA, and treating your specific loan under Arizona law obtain a foreclosure.