Arizona Anti Deficiency Law – SB 1271 – Explained

With questions pouring in about the Arizona anti-deficiency law SB 1271 I thought I would take a moment to try and explain what it is, what it means, and how it may affect you.

Currently if you own a property in Arizona and it is a one or two family dwelling on 2.5 acres or less and you default on the loan a first lienholder may not come after you for the deficiency.  Any junior lien holder where funds were used at the time of purchase to buy the home also may not come after you.

If you have a HELOC or did a cash-out refi at some point then the 2nd lienholder MAY come after you for the deficiency.  It is a common misconception that you can just stop paying your mortgage and let it go into foreclosure because you think that jr lien can’t do anything but they CAN pursue a deficiency if you did not use those funds to actually buy the property.

Investment property is included in this!  It doesn’t matter if its a second home, investment property, or primary residence, as long as it’s a single family home or duplex and on 2.5 acres or less it is exempt!  So your investment condo that you own and rent out?  Covered!   Duplex?  Covered!  Triplex?  Not covered.  Primary residence on 3 acres of property?  Not covered.

Now, with the passing of SB 1271 things have changed a bit.  You must now PROVE that you lived in a property for 6 consecutive months AND you must be able to show a certificate of occupancy.    Here’s where the issues with SB 1271 begin.

A certificate of occupancy is issued by the city in which you live and basically states that the property is in livable condition and meets building codes and laws.  Some cities, such as Mesa, do not issue certificates of occupancy!  And the city of Phoenix just started issuing them recently!  Historic homes may NEVER have had a COO given.

To get a certificate of occupancy if you don’t have one requires a home inspection.  And to pass that home inspection, you may need to make repairs, fix items, replace large ticket items, and basically pay for this entire fiasco out of your own pocket.  Most of the time people who foreclosed or did a short sale on their property don’t have extra money laying around to pay for inspectors, contractors, electricians, plumbers, etc. or to pay the local goverment for some ridiculous certificate that they never needed once while they lived there!

Let’s touch on the larger issue with SB 1271 which is the fact that INVESTMENT PROPERTY is now fair game for bank deficiency judgements.

If you lived in your property for 6  months consecutively or more then you should not be affected by this law directly as it probably won’t apply to you.  But your neighbors & neighborhood will be and this may drastically affect your property values dropping them even further than they have gone already!

Why?

I’ll give you an example that explains why — Let’s say you live in a new home subdivision.  You bought your house 3 months ago for $350,000 and you next-door neighbor bought the exact same house at the same time and at the same price.  After 3 months, his job relocated him to another state and he thought “Ok, no problem.  I’ll just rent the property for a while”.    But after 6 months of tenant troubles, dropping property values, and negative monthly cash flow he can’t afford it anymore.  So he asks the bank for a loan modification and they stall and stall and stall and finally deny him.  Meanwhile he has fallen behind on his payments and the bank immediately begins foreclosure proceedings.

In this scenario, the bank WANTS to foreclose on this property.  Let’s say they finally do and sell it at auction for $225,000 which is deficiency of $125,000.  Because the owner never lived there for 6 consecutive months the bank may now pursue this seller for the deficiency.  Sure, they want to get as much as they can for the house but we all know that foreclosures are usually priced pretty low and what does the bank care?  No matter what it sells for they’ll just go after the borrower for the deficiency and if he doesn’t pay they can garnish wages, go after his checking & savings accounts, any equity in any other property he owns, etc.

Not to mention that the house next to you just sold for $225,000 because the bank had no interest or concern about the neighbors or neighborhood.  If they did they would have worked with the borrower via loan modification or short sale.  Now your property is worth somewhere around $225k, the bank is pursuing the borrower for their deficiency but what can you collect?  SQUAT!

That’s just an example and you can feel free to change around the scenario all you want, the answer remains the same.  The banks will heavily pursue foreclosures as opposed to working out the terms like loan modifications or short sales because a law like this is basically another bank bailout!

“Hey, Mr. Banker — Even though you made all that money when the market was flying high and even now you continue to make money as a servicer but guess what?  Now you can pursue every person who doesn’t pay you because they’d rather put food on the table and you can go after them personally!  Go after every last penny they have!  And by the way, isn’t the President of one of the largest banks in the country in jail right now for fraud???   YES HE IS!!!!!”  (Google “Mozilo” & “Countrywide” for more on that story….)

It’s absolutely ridiculous.  We already used our tax money to bailout the banks and what did they do with it?  They bought more banks!  Now they want to be bailed out again!

Another major issue of this law is that it is retroactive.  That means that when you signed the loan 3, 6, 12, 24, 36 etc. months ago THIS LAW WAS NOT IN EFFECT!!!  You signed loan documents under the impression that you WOULD NOT be pursued for a deficiency.  Now they want to change the rules in their favor with 5 minutes to go in the game!  Now they want to tell you that  ”It doesn’t matter what you signed back then, this law applies to you NOW so tough!”

How fair is that?

So, here’s SB 1271 in a nutshell:

• You must live in the property for 6 consecutive months
• You must provide a certificate of occupancy
• It is up to YOU as the trustor (borrower, owner, mortgagor) to prove this

Here’s how it may apply to you (this law is written so ambiguously however that there is no defining terms so all we can do is speculate):

• Currently your primary residence and you have lived there 6+ months – You should be fine
• An investment property now but you lived in the property at some point for 6+ months and can prove it – You are probably fine
• 2nd home – Noone knows the answer to this but if you can’t prove 6 months consecutive occupancy then my guess is look out, here they come!
• Investment Property — They will just be drooling over the chance to foreclose and come after you!

So what can we do?

1.  Click here to goto the Governor’s contact page.  Send her a note saying you support the signing of HB 2008 and the FULL repeal of SB 1271.  Here, you can even cut & paste the following:

Governor Brewer – I am in full support of you signing HB 2008 and repealing the Arizona Anti-Deficiency Law SB 1271.  The law was not written in the best interest of Arizona homeowners and residents and by repealing this law you will be protecting the interests of your constituents and the people that you serve.  Thank you in advance for repealing SB 1271 and thereby preserving the better interests of myself, my family, and our future.

2.  Take action!  If you were thinking about doing a loan modification or a short sale, get started!  Even if this law is repealed it will be revisited probably in January and although should not be as one-sided I’m sure there will still be some repercussions for investors and second-home owners.

3.  Don’t bury your head in the sand! – Educate yourself, learn about your options to avoid foreclosure, move forward and take a stand!

Together we can fight this and make Arizona a better place for our families & our future!

If you have any additional questions regarding this law, short sales, loan modifications, or the like please call me at (480) 241-4406 and I’m happy to discuss it with you.  If you think a short sale may be your best option then we want to be your Arizona Short Sale Realtor of choice so visit our website at http://www.AzHomeHelp.com for more information or call us today!

Disclaimer:  I am  not an attorney and you should consult legal counsel about how this law pertains to your specific situation.

Related posts:

1. Arizonas Anti-Deficiency Law – SB 1271 – Law as it’s written
2. Trying to Beat the Anti-Deficiency Law SB 1271?
3. SB 1271 Arizona Anti Deficiency Law Repealed!!!
4. Arizona Anti-Deficiency Law Exceptions
5. SB 1271 – Arizona Anti Deficiency Law – Newest Update