Before the foreclosure crisis, federal and state laws regulating mortgage servicers and foreclosure procedures were relatively limited and tended to favor foreclosing lenders. However, federal and state laws now heavily regulate loan servicing and foreclosure processes. And most of the laws give protections to borrowers. Servicers generally have to provide borrowers with loss mitigation opportunities, account for each foreclosure step, and strictly comply with foreclosure laws.
Also, most people who take out a loan to buy a residential property in Arizona sign a promissory note and deed of trust. These documents give homeowners some contractual rights in addition to federal and state legal protections.
So, don't get caught off guard if you're an Arizona homeowner behind in mortgage payments. Learn about your rights and each step in the Arizona foreclosure process, from missing your first payment to a foreclosure sale.
In an Arizona foreclosure, you'll most likely get the right to:
The period after you fall behind in payments, but before a foreclosure officially starts, is generally called the "preforeclosure" stage. (Sometimes, people refer to the period before a foreclosure sale happens as "preforeclosure," too.)
During this time, the servicer can charge you various fees, including late and inspection fees, and, in most cases, must let you know how to avoid foreclosure, and send you a breach letter (a preforeclosure notice).
Under federal law, the servicer usually can't start a foreclosure until the borrower is over 120 days delinquent on payments, subject to a few exceptions. (12 C.F.R. § 1024.41). This 120-day period provides most homeowners ample opportunity to submit a loss mitigation application to the servicer.
If you default on your mortgage payments in Arizona, the lender may foreclose using a judicial or nonjudicial method.
A judicial foreclosure begins when the lender files a lawsuit asking a court for an order allowing a foreclosure sale. If you don't respond with a written answer, the lender will automatically win the case.
But if you choose to defend the foreclosure lawsuit, the court will review the evidence and determine the winner. If the lender wins, the judge will enter a judgment and order your home sold at auction.
If the lender chooses a nonjudicial foreclosure, it must complete the out-of-court procedures described in the state statutes. After completing the required steps, the lender can sell the home at a foreclosure sale. Most lenders opt for the nonjudicial process because it's quicker and cheaper than litigating the matter in court.
Again, most residential foreclosures in Arizona are nonjudicial. Here's how the process works.
To officially start a nonjudicial foreclosure in Arizona, the trustee records a notice of sale in the land records. The sale date can't be any sooner than 91 days after the date the trustee records the notice. (Ariz. Rev. Stat. § 33-808(C)(1)).
Notice to the borrower. The trustee mails the notice of sale to the borrower by certified mail within five business days after recording it. (Ariz. Rev. Stat. § 33-809(C)).
Notice by publication. The trustee also publishes the notice of sale in a newspaper for four consecutive weeks, posts it on the property at least 20 days before the sale (if posting can be accomplished without a breach of the peace), and posts the notice in the court building. (Ariz. Rev. Stat. § 33-808).
The sale is a public auction held at the time and place designated in the notice of sale on a day other than a Saturday or a legal holiday between 9:00 a.m. and 5:00 p.m. Mountain Standard Time. (Ariz. Rev. Stat. § 33-808(B)).
At the sale, the lender usually makes a credit bid. The lender can bid up to the total amount owed, including fees and costs, or it may bid less.
In some states, including Arizona, when the lender is the high bidder at the sale but bids less than the total debt, it can get a deficiency judgment against the borrower, subject to some limitations (see below). If the lender is the highest bidder, the property becomes "Real Estate Owned" (REO).
But if a bidder, say a third party, is the highest bidder and offers more than you owe, and the sale results in excess proceeds (money over and above enough to pay off all the liens on your property), you're entitled to that surplus money.
A few potential ways to stop a foreclosure and keep your home include reinstating the loan, redeeming the property before the sale, or filing for bankruptcy. Working out a loss mitigation option, like a loan modification, will also stop a foreclosure.
Or you might be able to work out a short sale or deed in lieu of foreclosure and avoid foreclosure. But you'll have to give up your home.
Arizona law permits a borrower to reinstate a defaulted loan before 5:00 p.m. Mountain Standard Time on the last day, other than a Saturday or legal holiday, before the sale date. (Ariz. Rev. Stat. § 33-813).
One way to stop a foreclosure is by "redeeming" the property. To redeem, you have to pay off the full amount of the loan before the foreclosure sale.
Some states also provide foreclosed borrowers a redemption period after the foreclosure sale, during which they can buy back the home. Arizona, however, doesn't have a law permitting the former owner to redeem the home after a nonjudicial foreclosure. (Ariz. Rev. Stat. § 33-811(E)).
If you're facing a foreclosure, filing for bankruptcy might help. If a foreclosure sale is scheduled to occur in the next day or so, the best way to stop the sale immediately is by filing for bankruptcy.
Once you file for bankruptcy, something called an "automatic stay" happens. The stay functions as an injunction, prohibiting the lender from foreclosing on your home or trying to collect its debt, at least temporarily.
In many cases, filing for Chapter 7 bankruptcy can delay the foreclosure by a matter of months. Or, if you want to save your home, filing for Chapter 13 bankruptcy might be the answer. To find out the options available, speak with a local bankruptcy attorney.
State law extends the federal protections under the Servicemembers Civil Relief Act to members of the National Guard ordered to active duty by the governor in certain circumstances. (Ariz. Rev. Stat. § 26-168).
In a foreclosure, the borrower's total mortgage debt sometimes exceeds the foreclosure sale price. The difference between the total debt and the sale price is called a "deficiency." For example, say the total debt owed is $500,000, but the home sells for $450,000 at the foreclosure sale. The deficiency is $50,000.
In some states, the lender can seek a personal judgment against the debtor to recover the deficiency. Generally, once the lender gets a deficiency judgment, the lender may collect this amount—in our example, $50,000—from the borrower.
Arizona law limits the availability of deficiency judgments after nonjudicial (and judicial) foreclosures.
In Arizona, the lender can't get a deficiency judgment after a nonjudicial foreclosure if the property is:
Example. Say you took out a loan to buy a single-family home on a quiet street in Phoenix, and you move in. The lot is around 10,000 square feet. A few months ago, you lost your job and fell behind in mortgage payments. The lender recently started a nonjudicial foreclosure. Because the property is smaller than 2.5 acres and is a residential single-family home that you live in, your lender can't file a suit after the foreclosure to get a deficiency judgment against you.
But Arizona's anti-deficiency law doesn't apply to a property that contains a dwelling that was never substantially completed or one that contains a dwelling that is intended to be utilized as a dwelling but that is never actually utilized as a dwelling. (Ariz. Rev. Stat. § 33-814).
If the anti-deficiency law isn't applicable, the lender may generally obtain a deficiency judgment by filing a separate lawsuit within 90 days after the nonjudicial foreclosure sale. (Ariz. Rev. Stat. § 33-814(A)).
A deficiency judgment, if available, can be limited by the home's fair market value. (Ariz. Rev. Stat. § 33-814). If the property sells for less than the amount owed to the lender, the borrower may ask a court to determine the property's fair market value. If the court decides that the fair market value is higher than the sale price, the borrower gets credit for the higher amount. (Ariz. Rev. Stat. § 33-814).
So, for example, if your total mortgage debt is $500,000 and the lender's winning bid at the foreclosure sale is $450,000, the deficiency is $50,000. But if the court decides that your home's fair market value is $475,000, the lender could get a deficiency judgment for just $25,000 rather than $50,000.
If a deficiency judgment is allowed, the action to recover the deficiency must be brought within 90 days after the foreclosure sale. If no deficiency judgment is sought within the 90-day limit, the sale price paid is deemed a complete satisfaction of the debt secured. (Ariz. Rev. Stat. § 33-814).
For more information on federal mortgage servicing laws and foreclosure relief options, go to the Consumer Financial Protection Bureau (CFPB) website.
If you have questions about Arizona's foreclosure process or want to learn about potential defenses to foreclosure and possibly fight the foreclosure in court, consider talking to a foreclosure attorney.
Talking to a HUD-approved housing counselor about different loss mitigation options is also a good idea.