Second Mortgages and Foreclosure in Arizona - What You Need to Know

During the economic boom that preceded the recent fall, many homeowners throughout the country and in the State of Arizona took out second mortgages on their homes. As many homeowners now face foreclosure, they should ensure they understand the ramifications under Arizona’s unique foreclosure laws – particularly as applicable to the lender’s right to seek a deficiency judgment.

In many States, after foreclosing on a home a mortgage lender may file a lawsuit against the borrower to recover the difference between what was owed on the mortgage and the amount received by the lender in the foreclosure auction. There are some situations where this is still true in Arizona, but many homeowners are protected by Arizona’s unique anti-deficiency laws. These laws apply to preclude such actions as long as the real estate involved is a single-family home on two-and-one-half acres or less, and the lender at issue instituted a trustee’s sale, and/or if the money loaned was used to purchase the property. To ensure whether you might be covered by these statutes you should discuss the particular details of your situation with an experienced Arizona real estate lawyer.

Because the anti-deficiency statutes apply to block almost all deficiency actions by first mortgage lenders who elect to foreclose, the real doubts arise in the case of second mortgage lenders where the money may not have been used, in whole or in part, to purchase the home. In these cases the lender may be entitled to file a separate lawsuit to recover the funds loaned pursuant to the terms and conditions of the Promissory Note.

Another unique situation arises in the case of the borrower who stops paying on the second mortgage but not the first. In today’s real estate market, the second mortgage lender will often have little incentive to foreclose because there may be no equity in the property – meaning that once the first mortgage is paid there won’t be anything left for the second mortgage lender. This effectively makes many second mortgages in Arizona unsecured debts, at least for the time being.

The fortunate news for many homeowners in Arizona is that Arizona’s anti-deficiency laws preclude actions that might be allowed elsewhere. Moreover, the lack of security in the property and difficulty in collecting judgments that might be pursued, often provide incentives for second mortgage lenders to renegotiate the terms of the loans in the borrowers’ favor.

If you have questions about mortgage loans, anti-deficiency laws, or any other related matters, you should discuss them with an experienced real estate lawyer sooner rather than later.

Second Mortgages and Foreclosure in Arizona - What You Need to Know