Arizona Homeowner Sued By Second Mortgage Lender After Foreclosure - Case Dismissed!

Harper Law recently represented a homeowner who lost her home to foreclosure in late 2008.  The lender on the homeowner's second mortgage filed a lawsuit to recover over $40,000 it alleged was owed on the second mortgage, which was a purchase money mortgage used to buy the house in 2006.

Our Arizona real estate lawyers filed a Motion to Dismiss the lender's lawsuit pursuant to A.R.S. § 33-729(A), which states:

If a mortgage is given to secure the payment of the balance of the purchase price, or to secure a loan to pay all or part of the purchase price…the lien of judgment in an action to foreclose such mortgage shall not extend to any other property of the judgment debtor, nor may general execution be issued against the judgment debtor to enforce such judgment, and if the proceeds of the mortgaged real property sold under special execution are insufficient to satisfy the judgment, the judgment may not otherwise be satisfied out of other property of the judgment debtor, notwithstanding any agreement to the contrary.

The legal effect of this statute is that a lender is barred from pursuing any action against a borrower if the mortgage secured by a deed of trust was obtained to purchase the home.  After receiving Harper Law's Motion to Dismiss in this case, the lender realized the futility of its action and immediately offered to dismiss the case and pay the client's attorneys' fees.

If you've been sued by a lender, please schedule a consultation with an Arizona real estate attorney to determine whether you might be protected by this or another applicable law.

(CB09)

Comments

[Kevin Harper]

Chris, there are reported Arizona cases stating that the loan retains its character after a refinance. This generally means that if anti-deficiency protection applied to the original loan, it will apply after the refinance. This case change, however, if cash is taken out or additional funds are obtained for other purposes.

[Chris Barczewski]

Hi Kevin,
I was wondering if a refinancing of the 1st after the original purchase would change anything regarding our liability of the lender seeking the deficiency after a voluntary foreclosure?

[Kevin Harper]

Peter:

It looks like the anti-deficiency laws may protect you here, but this is a complicated situation and you should definitely sit down with an attorney to review the transactions and take a look at the documents to make sure.

[Peter Lashinsky]

I bought my home with a purchase money loan. I subsequently refinanced the loan to a single closing construction loan, paying off the purchase money first. I subsequently added significant improvements to the home with the additional available funds on the single closing construction loan (and only to the home and not to fund any personal expenses). If the lender judicially forecloses, and there's a deficiency, can they win on a deficiency if it's under 2.5 acres, the home was owner occupied at all times even during construction, it was a single family home and in Arizona and 100% of the proceeds went for construction?

[Tony Gabrielli]

Hi Kevin - I am in a situation where my house will be auctioned June 5, 2009, but I have three offers in for a short-sale. The BPO has been done and my RE Agent is working with the negotiators for the 1st and 2nd mortgage now. The 2nd mortgage negotiator is asking for a $3000.00 check from me to "pay off" the 2nd lien ($100k). Questions: 1.) Should I get a Settlement and Lien Release document for the $3000.00 ( I have asked for one) and 2.) Will I be 1099 for the difference (I purchased the house in 2006)

Thanks!

Tony

[Kevin Harper]

Nick, there is no way to predict whether your lender will file suit, but if your lender does sue for the deficiency you should see an attorney immediately.

[Nick Dalesandro]

I have the same situation only my second is a HELOC but was totally used to purchase the property not for anything else. Will I be sued for the deficiency even though the HELOC was used as money purchase?