What is a foreclosure? In general, it is
the legal process that a lender uses to enforce
their lien against a parcel of real estate
when the borrower doesn’t repay the loan.
There are two methods by which this is done
in Arizona, known as judicial foreclosure
and trustee sale.
A mortgage and a deed of trust are the two
common methods of placing a lien against a
parcel of real estate to secure a loan, that
is, making a parcel of real estate collateral
for a loan. When a mortgage or a deed of trust
is recorded with the county recorder, the
real estate described in the document becomes
collateral, or security, for the loan.
The deed of trust is far more common in present-day
Arizona than the mortgage. In a deed of trust,
the borrower is called the trustor, the lender
is called the beneficiary, and a third party,
either a title company or a lawyer, is the
trustee. In a mortgage, the borrower is called
the mortgagor, the lender is called the mortgagee,
and there is no third party. In both a deed
of trust and a mortgage, the document contains
the description of the real estate that is
collateral for the loan and is recorded with
the county recorder.
Just as the deed of trust is much more commonly
used than the mortgage, the trustee sale is
by far the more common form of foreclosure
in Arizona. The trustee sale starts when the
person named as the trustee in the deed of
trust executes a notice of trustee sale. The
trustee records the notice of trustee sale
with the county recorder, publishes a copy
of the notice in the newspaper, posts a copy
of the notice on the property described in
the deed of trust and at the courthouse, and
mails a copy of the notice to everyone who
has a recorded interest in the property. The
date of the sale must be more than ninety
days after the notice is recorded.
The judicial foreclosure is the less common,
and more old-fashioned, method of foreclosure.
It is the only foreclosure method available
for a mortgage, although it can also be used
to foreclose a deed of trust. A judicial foreclosure
proceeds in more or less the same manner as
any other civil lawsuit up to the point where
judgment is entered. How long a judicial foreclosure
takes depends on a number of factors, but
it usually takes longer than a trustee sale.
After a judgment has been entered in a judicial
foreclosure, and at the time set for the sale
in a trustee sale, an auction is held. Anyone
can show up at the sale and bid. The property
is sold to the highest bidder. The highest
bidder must be prepared to pay the amount
of their bid within a day after the sale unless
the highest bidder is the lender, in which
case the lender gets a credit for the amount
they are owed.
What happens if the highest bid is less than
the amount the lender is owed? The answer
depends on what type of property is being
sold and the method of foreclosure. If the
parcel of real estate is larger than two and
one-half acres or is used for something other
than one house or a duplex, the lender can
obtain a judgment against the borrower (known
as a deficiency judgment) for the difference
between the amount owed (including the costs
of the sale) and the value of the property.
If on the other hand the parcel of real estate
is two and one-half acres or less in size
and is used for one house or a duplex, the
lender’s ability to pursue a deficiency
judgment depends on what method of foreclosure
was used and what type of loan was made. If
the lender used a trustee sale, the lender
cannot pursue a deficiency judgment. In other
words, if the lender uses a trustee sale on
a house or duplex on less than two and one-half
acres, all the lender gets is either the property
(if the lender is the highest bidder at the
sale) or the amount of the highest bid (paid
by the highest bidder).
If the lender used a judicial foreclosure,
then the lender can pursue a deficiency judgment
even if the property is a house or duplex
on two and one-half acres or less, but only
if the mortgage was not given to secure a
loan that was used to pay all or part of the
purchase price of the property. In other words,
if the loan was made for something other than
paying for the property, the lender can get
a judgment against the borrower for any difference
between the amount owed (including the costs
of the sale) and the value of the property.
It’s a dry subject, I know. With all
the various loans being offered today and
with more and more people investing in real
estate, however, these rules can affect a
growing number of people, although most people
probably don’t even know it. Just as
an example, most people probably don’t
understand the difference between foreclosure
of a loan that is used to acquire a house
and foreclosure of a home equity loan (a loan
that is used for something other than acquiring
the house). If the borrower ends up owing
the bank more than the house is worth (which
can happen, believe it or not), the bank’s
ability to collect the difference depends
on whether the loan is a home acquisition
loan or a home equity loan. It is not a situation
you want to find yourself in, of course, but
knowing the rules can help you make the right
choices even if you never have to deal with
a foreclosure.
IN OREGON, THE VOTERS HAVE SPOKEN:
ANY REGULATION ENACTED POST-ACQUISITION IS
A “TAKING”
In an apt postscript to my discussion last
month about when government regulation of
use of land amounts to a “taking”
for which the government must compensate the
land owner, the voters of Oregon have just
passed a ballot measure requiring that land
owners be either excused from or compensated
for compliance with regulations enacted after
they acquired their land. This means that,
in a state known for the most extensive land
use controls in the country, the voters have
effectively decided that enforcement of any
regulation adopted after a land owner acquired
his or her property is a “taking”
for which the government must pay compensation
to the land owner.
