It’s no secret that thousands of people across the country and in Arizona are losing their homes to foreclosure. One of the biggest issues I deal with as an Arizona real estate attorney handling foreclosure-related cases is the question of what happens to a second mortgage or home equity line of credit after the first mortgage is foreclosed. Answering this question requires an analysis of each individual’s specific situation, including the terms of their loan agreement, the circumstances of when they got the loan and what the funds were used for, and the distribution of the funds after foreclosure. of the property. . While most homeowners would do well to speak with an Arizona foreclosure attorney about their situation, the following article provides an overview of Arizona laws that affect a second mortgage lender’s ability to collect on the balance. owed after the first mortgage lender has foreclosed.

As an initial matter, it should be understood that this discussion only applies to loans secured by property located in Arizona. Arizona’s laws regarding a lender’s ability to collect on a deficient balance are substantially different from the laws of other states, and if you have a loan on property in another state, you should obtain the correct information from that jurisdiction.

One of the main distinctions in Arizona law regarding a second mortgage lender’s ability to collect on a deficient balance is found in Section 33-729(A) of the Arizona Revised Statute, which limits the ability of the lender to look for a deficiency if the money was borrowed.” is given to secure payment of the balance of the purchase price,” provided the property is a single-family or two-family dwelling and is two and one-half acres or less. In other words, if the loan was “purchase money” used to buy the home, the lender’s only option is to foreclose on default. If the lender can’t foreclose because the primary lender has already done so, they have no further recourse.

Of course, many Arizona homeowners facing foreclosure find themselves with second mortgages taken out after purchasing their homes, with the funds being used to make home improvements, pay off other debts, take vacations or purchase other items, or even used as a down payment on other homes. In cases like these, where the funds cannot be traced back to the original purchase of the property, the protections of Arizona law may not apply.

Tracing back to the original purchase is an important exercise for many lenders and homeowners, because many second mortgages are the product of one or more refinances and/or sales and assignments by lenders. Fortunately, the Arizona courts have made it clear that a refinanced loan retains its original character for purposes of the anti-deficiency statute, so a refinance will not affect the protection a homeowner may have under Section 33-729(A). .

However, because many refinances involved both buy-money and non-purchase-money elements, homeowners should understand that some second mortgage lenders will seek to recover at least the non-purchase-money portion of the loan. There are defenses available to such claims, and homeowners facing lender claims should seek the advice of an experienced Arizona foreclosure attorney to discuss how to respond to such lender claims.

Unfortunately, it is impossible to address every situation in a short article, and any homeowner facing foreclosure should seek additional guidance on the tax implications, how to handle the HOA, and how their specific loans will be treated under Arizona law after foreclosure. mortgage.