Monday, September 26, 2011

Short Sale v. Foreclosure

Since the beginning of the current financial crisis, foreclosures have cost the top five U.S. lending institutions $66 Billion, according to Bloomberg, L.P.  Yet, there doesn't seem to be any end in sight.  The banks don't seem interested in a solution and the government hasn't yet been able to do anything to help. 

Do to today's economic climate, many find themselves at the crossroads of either a foreclosure or a short sale, unsure of which direction to turn.  So, what is a distressed homeowner to do? 

In Arizona, a foreclosure is a non-judicial (no court is involved) legal action, that allows your bank to sell your home at an auction, following a default under the loan documents.  A short sale is similar to a typical "sale" of your home, except that your bank (or banks) agree to accept a lessor amount that what is actually owed. 

Here are a few key points:

1.  One of the biggest differences between a foreclosure and a short sale is that Arizona's anti-deficiency statutes (A.R.S 33-729 and 33-814) do NOT apply to short sales; they only apply to foreclosures.  Arizona's anti-deficiency statutes give certain automatic protections to homeowners in the event of a foreclosure.  These protections are NOT automatically available for a short-sale.

2.  A short sale is basically an amendment to your contracts with the bank.  They agree to let you sell your home for less than you owe.  However, it is not unusual for the banks to require certain conditions.  For instance, oftentimes a second lien holder will require some amount of money (in the form of a new promissory note or a lump sum payment at the close of escrow) in order for their permission to proceed with the sale.  Some lenders will reserve their rights to pursue the seller for a deficiency; such an action could happen years following a short-sale. 

3.  In either case (foreclosure or short sale) the bank will issue a 1099-C.  This matters because the IRS considers forgiven debt to be "income" for tax purposes.  There are exclusions and exemptions, but whether or not these exemptions apply should be discussed with a legal or accounting professional BEFORE making the decision to foreclose or short sale.

4.  The presence of a second lien (a second mortgage or a line of credit) can complicate your situation.  You need to understand the difference between "purchase money loans" and "non-purchase money loans".  It matters.

5.  You also need to understand what happens to delinquent property taxes, HOA fees and property insurance premiums.

6.  Both a foreclosure or short sale will negatively impact your credit.  How bad of a hit will it be?  How long with the hit last?  When can you purchase a new home?  All of these questions should be discussed with someone who understands the process BEFORE you move forward.

Foreclosures and short sales can be minefields.  We can help you find your best path forward.  If you have questions on what road is best for you, please don't hesitate to contact us today.  

Monday, September 12, 2011

Show Me the Note!

Um...not quite the same thing.
"Show Me the Note!"  No, it doesn't mean the same thing as "Show Me the Money!"  "Show Me the Note" is a legal argument based on "standing"; it requires a lender, before they can foreclose on your home, to show that they hold the Promissory Note.  If they can't, then they won't be permitted to foreclose in states where this defense is accepted.  So, does "Show Me the Note" work in Arizona? 

First, a little background.  In the State of Arizona, whenever you purchase a home, you sign two important documents.  One is the Promissory Note; the other is the Deed of Trust.  The Promissory Note, or simply the Note, is the document that you give to the lender that says, "I owe you the money you lent to me so that I could purchase my home."  Like a personal check, it can be indorsed to succeeding parties.  Who ever holds the original Note is the party that has the ultimate right to hold you accountable for the money you borrowed. 

On the other hand, the Deed of Trust is the document that gives your lender a security interest in your home.  Besides yourself, there are two important parties in a Deed of Trust.  First, there is the beneficiary.  The beneficiary is typically the bank that gave the loan.  They benefit from the security interest.  The second important party is the trustee.  The trustee is the party that is trusted to insure compliance with the Deed of Trust.  Like a Note, a Deed of Trust can be assigned and transferred to various parties.  It is not unusual to have only the beneficiary's rights, or just the trustee's rights, transferred to another party.   

In today's world of Securitization, the Banks often lose track of the original Note and subsequent transfers of the Deed of Trust.  As a result, it is not unusual for a party to attempt to foreclose on a home, when that party cannot show that it has a valid interest in either the Deed of Trust or the Note.

In several states (mostly in the Eastern United States), lenders are required to go to court and get permission to foreclose. This is referred to as "judicial foreclosure."  However, under Arizona Law, either the beneficiary or the trustee under a Deed of Trust is allowed to foreclose on a home, without going to a Court.  This is called "non-judicial foreclosure."  Basically, after giving the borrower a Notice of Default and a chance to cure, followed by a Notice of Trustee's Sale, a trustee or beneficiary under a Deed of Trust can hold an auction and foreclose on the home.

One way that those in "judicial foreclosure" states fight foreclosure is to force the foreclosing party to "Show Me the Note."  In many instances, those courts will require the party to show that they have an interest in the Note, before the court will permit foreclosure.  But, Arizona is NOT a typical "Show Me the Note" state.

Let's look at a typical "Show Me the Note" case in Arizona:  Hogan v. WAMU

This case was decided on July 26, 2011, in the Court of Appeals for the State of Arizona.  In 2004, the Hogans purchased a home here in Arizona and they signed a Note and a Deed of Trust (a "DOT") to Long Beach Mortgage Company, their lender.  Three years later a Notice of Substitution was filed wherein WAMU was named as the beneficiary under the DOT.  The Hogans stopped paying their mortgage and WAMU filed a Notice of Trustee's Sale on September 28, 2008.  On October 10, 2008, the Hogan's received a notice from the federal government indicating that WAMU had been shut-down by government and the FDIC had been appointed to manage its assets.  Chase Bank then purchased the Hogan's loan from the FDIC.  Chase also received an assignment of the beneficiary's rights under the DOT.  

In September of 2009, The Hogans filed suit against WAMU and Chase on a "Show Me the Note" theory, since the Hogans believed that there was no document showing the transfer of their original Note from Long Beach Mortgage Company to either WAMU or Chase.

The lower Court dismissed Hogan's suit and the Appellate Court agreed.  Why? In Arizona, the beneficiary or trustee under a DOT has the right to foreclose, even if it doesn’t hold or own the note.

BUT...

Let's look at a case that recently came down in Bankruptcy Court for the District of Arizona:  Sardana v. Bank of America

This case was decided on June 7, 2011 by the 9th Circuit Bankruptcy Appellate Panel.  Back on September 23, 2008, Sardana filed for Chapter 13 bankruptcy protection.  In her bankruptcy schedules, she listed B of A as the lien holder on her home in Chandler.  Sardana stopped making her house payments and on April 13, 2010, B of A filed a motion for relief with the Court, indicating that they wanted the Court's permission to foreclose on Sardana's home.  B of A was the lender identified in the Note and they were the beneficiary under the DOT.  Sardana fought the motion for relief by arguing that B of A did not hold the Note; they were merely the servicer under the pooling and servicing agreement.  She also proved that B of A had transferred the Note to Fannie Mae.  In other words, she said, "Show Me the Note!" 

The lower Court rejected Sardan's argument.  It cited the many authorities that state that Arizona is NOT a "Show Me the Note" state.  In fact, the lower Court stated, “Even if the note had been transferred, the right to foreclose the deed of trust…remains with the beneficiary of record."

However, on appeal, the BAP Court noted that, (i) A.R.S. §33-801(1) defines a beneficiary as, “the person named or otherwise designated in a trust deed as the person for whose benefit a trust deed is given, or the person’s successor in interest"; (ii) A.R.S §33-817 states further, “the transfer of any contract or contracts secured by a trust deed shall operated as a transfer of security for such contract or contracts.”

As a result, if the holder of the beneficial interest in a note changes, even if the beneficiary under the DOT does not change, then the beneficiary’s right to enforce the note obligation and foreclose on the DOT must by based on some further agreement with the new owner or holder of the note. (see Hill v. Favour, 52 Ariz. 561, 568, 84 P.2d 575, 578 (1938)).  Hence, B of A should be required to establish that it retained the rights to enforce the note.

Sardana is currently back in front of the lower Court and it remains to be seen if B of A can produce the documents necessary to satisfy the Court.  Meanwhile, Sardana is still in her home.

The bottom line here is that Arizona is NOT a "Show Me the Note" state, but more and more, the Bankruptcy Courts are willing to require "Show Me the Note" type documentation, before permitting a party to foreclose on a home. 

If you are facing foreclosure and you'd like to discuss your options, please don't hesitate to give us a call.