Verlin Vink and The Vink Team

I consult with property owners several times each week concerning their risks, protections and obligations under Arizona’s foreclosure laws, as well as the legal, tax and practical implications of alternatives to foreclosure, such as short sales, deeds in lieu of foreclosure or loan modifications.  One recurring issue that I address has to do with misinformation people are receiving from real estate agents and other sources – even legal professionals- concerning short sales.

A common assumption of many home owners and real estate agents is that Arizona’s anti-deficiency statutes always apply to protect borrowers in a short sale as well as a foreclosure. This is incorrect. The anti-deficiency protections clearly apply where a purchase money lender forecloses on an Arizona property. In a foreclosure situation, Arizona statutes and case law define the circumstances in which a lender is prohibited from pursuing a deficiency action against the borrower. In many situations, the statutes allow the lender to pursue such an action against a borrower after foreclosure…

When a borrower short sells a property, there is no automatic protection from a lawsuit by the lender for the balance of the note. Although there are cases that suggest a purchase money lender may be not be allowed to obtain a judgment against the borrower for balance of the note if the property also qualifies for anti-deficiency protection, the borrower must be sure to negotiate for a release from the lender to be protected. I am aware of situations in which a home owner, ecstatic to obtain the bank’s approval of a short sale, quickly signs the approval agreement without carefully reading and understanding its terms. In many cases, the bank has a right to sue and reserves its right to sue the borrower in the future for the balance owed on the note.  It is also important to note that the 90 day limitation after a trustee’s sale for filing the deficiency action against the borrower/home owner does not apply in a short sale situation. Normal statutes of limitation apply and can run for up to 6 years in cases where the bank has the right to sue.

It is critical that all homeowners and realtors are aware of this important distinction and do not rely on misinformation when deciding whether to consummate a short sale transaction.

Whether a homeowners ’s decision to allow his or her lender to foreclose is based on a presently existing financial hardship, anticipated financial strain over time, or to strategically divest themselves of a bad investment, the debate rages as to whether such a decision on the part of the borrower is morally wrong or financially sound.

It is important to examine this issue from an objective standpoint, weighing well-informed arguments from both sides of the debate. An excellent commentary on ‘strategic walkaways’ by Mike Bell and the ensuing robust debate on this topic can be found here:  The Ethical Dilemma of Strategic Walk-Aways.

For another view, see Arizona Republic reporter Russ Wiles’ story in the February 14, 2010, called “Walking away’ comes with drawbacks.”  The story says,

But the prospect of mass “strategic defaults,” where homeowners who can afford their payments nevertheless walk away, has sparked sharp words from both sides.  That’s partly because these actions don’t just affect borrowers and their lenders, but other parties, too.

Update:  See an MSN Money article called “Are you foolish to pay your mortgage?” and “Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis” by Professor Brent T. White, University of Arizona College of Law.  The abstract for this article states:

Despite reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences.  Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations – and to ignore market and legal norms under which strategic default might be both viable and the wisest financial decision.  Norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility.  This norm asymmetry leads to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse.

By Jeana Morrissey, on February 12th, 2010