Phoenix, Arizona residents experienced massive appreciation in their homes during the mid 2000′s. This resulted in homeowners across the valley refinancing their home loans to take “cash out” and buy more properties, buy vehicles or even take vacations.
Scenario one: “Sally Johnson” purchased her home in 2002 with a loan of $125,000. She refinanced the home in 2005 with a new $275,000 loan, and took $150,000 “cash out” to buy a new BMW, go on a cruise and invest in a little Phoenix condo rental. Sally can no longer afford her mortgage payments on this $275,000 loan and must sell her home except that it is now only worth about $125,000 and yet, she owes $275,000. If Sally completes a short sale or forecloses on the home, can her lender collect the $150,000 “cash out” from her?
in a recent communication from Arizona Attorney, Chris Combs, Esq, on March 20, 2012, the Arizona Court of Appeals answered “yes” to this question. Refer to Helvetica Servicing, Inc. v. Pasquan, 1CA-CV 10-0418 (decided March 20, 2012). This Helvetica decision involved a lender’s claim for a deficiency after a judicial court-ordered foreclosure of a loan. Note: More then 99% of foreclosures in Arizona are non-judicial, i.e., trustee’s sales. Unlike judicial court-ordered foreclosures which do allow a deficiency claim after foreclosure of a loan not used to purchase the home, there can never be a deficiency after foreclosure by a trustee’s sale of any loan secured by a home.
In this Helvetica decision the Arizona Court of Appeals ruled that the lender could pursue a deficiency action for the “cash out” refinancing after a judicial court-ordered foreclosure. The Arizona Court of Appeals reasoned that sound public policy should not allow a borrower to protect the “cash out” when refinancing the original loan.
In other words, in the scenario above, if the borrower did not refinance the original $150,000 loan, but took out an additional $150,000 home equity line of credit (“HELOC”), the lender could bring a collection action against the borrower for this $150,000 HELOC. The Arizona Court of Appeals reasoned that there should be no legal distinction between the borrower’s liability for this $150,000 whether a “cash out” refinancing or a HELOC.
Therefore, unless this Helvetica decision is overruled by the Arizona Supreme Court, the lender should be able to sue the borrower in a collection action for the $150,000 “cash out” refinancing similar to the lender’s ability to sue the borrower in a collection action for a $150,000 HELOC.
The “bottom line” is that lenders have already occasionally filed collection actions against borrowers for the amount of the “cash out” refinancing, but in light of this Helvetica decision there should be many more collection actions by lenders against borrowers for “cash out” taken when refinancing.
Finally, the Helvetica decision also ruled that, a construction loan used to build a home is generally protected as a purchase money loan, and that a refinancing of the original loan with a different lender is also protected.
This post is not intended to give legal advice or speak to any specific situation. Kelli Grant is not a real estate attorney. If you have questions regarding a loan or legal matter, you should contact an attorney. Chris Combs is one well-known attorney in the state of Arizona. www.combslawgroup.com