Judicial vs Non-Judicial Foreclosure

Posted by: “Tony M., CPA” Uploaded from AZ-CHORE Group Site 2008

Most home mortgages are actually deeds of trust which is a three-way contract. There is the lender, the homeowner, and a trustee. If the homeowner defaults under the loan the trustee has the right to act on your behalf and sell the home for the benefit of the lender. In other words,when you signed that deed or trust you gave the authority to sell your home to the trustee.

What does that mean? If the homeowner defaults it goes to a trustee sale (as opposed to a sheriff’s sale) because it is a NON-JUDICIAL foreclosure. A lot of these trustee sales get cancelled or delayed. Many times it is due to the rights we have under ARS 33-813. It’s a bit wordy but here it is a little more plain English. When you fall behind 2, 3, or more months the lender will begin foreclosure. You have the right to catch up those payments including any interest or collection costs and the lender must stop the trustee sale. Even if you fall behind over and over again, the bank is not allowed to say “I am tired of dealing with you and I am going to foreclose because you keep falling behind.

That being said though, if the property does go through the trustee sale then the trustee IMMEDIATELY transfers the property to the new owner and there is no 6-month redemption period. All of your rights to “redeem” are prior to the sale under that statute I mentioned.What has been bad for our community, and many others, is that the bank, if it ends up owning the property, fails to pay the monthly association fee. Some communities are 30% or more bank-owned. To me this is a ripe target to sue for unpaid assessments. While I will bend quite a bit here and there for a “regular” homeowner, I will go after the bank for every last cent – late fees, interest, collection costs, “self help”, and monetary penalties/fines.

Now to HOA foreclosures. These types of foreclosures are JUDICIAL forecloses and must first go through a civil case to get a judgment. Then the HOA can choose to pursue collection against the owner’s wages, bank accounts, etc. or against the property and foreclose. If (I mean when) they chose to foreclose this time it would be a sheriff’s sale. The sheriff conducts the auction, collects the money from the highest bidder, and then sits on his butt for 6 months to see if the homeowner redeems the property. It actually takes almost 8 month now because of the backlog and the sheriff records a sheriff’s deed and the property changes hands. There is a question on who is responsible for the association’ s assessments during the 6 month (or 8) redemption period. I have spoken with three different attorneys and they all say it is a gray area. The main reason is that the new owner does not actually get a deed until after the redemption period and cannot do anything with the property in the meantime.

Foreclosure Comments

Posted by: “Tony M., CPA” 2009

Just to let you know, you can always transfer title to someone else, however, in a “standard” sale the liens remain attached to the property. It is the title company and lender that require that the property be cleared of all known liens. If there are any unknown liens, they are still attached to the property but that is what title insurance is for. So you can always get title to a property in any sale it is just that the liens come with it.

Foreclosures are a different beast. Most likely what we are talking about here is a foreclosure by the first mortgage company. In that case, the property is sold to the highest bidder. The money is used to pay off the costs of the sales and then the first mortgage. If there is anything left over then the junior liens get paid off, usually starting with the HOA. If there is nothing left then the HOA lien, and all other junior liens get squashed and do not remain attached to the property. With so many people upside down on their homes, HOA liens have been getting squashed left and right.

Now the HOA can pursue the previous owners personally and go after wages and bank accounts. But if the owner can’t pay for the property there is a good chance there is nothing to get personally and it could be a lot of money spent for nothing. If the owner filed bankruptcy then even that avenue of recovery is no longer available.

We have written off several properties ourselves due to squashed liens and bankruptcies and I am sure there will be more.

Some Examples

#1) Balance on loan is $100,000 and the HOA is owed $5,000, property sells for $90,000. The mortgage company gets the $90,000 and the HOA gets nothing and the $5,000 lien is gone. The HOA’s only recourse is to pursue wages or other property.

#2) Same situation except the property sells for $102,000. The mortgage company gets $100,000 and the HOA gets $2,000. The remaining $3,000 lien is gone. Again the HOA can pursue wages or other property.

#3) Same situation except the property sells for $150,000. The mortgage company gets $100,000 and the HOA gets $5,000. The remaining $45,000 will go to the next lien holder or to the owner if no additional liens are on the property. (Of course, if it was worth that much why would the owner let it be foreclosed. Unusual but it does happen).

Once the new owner takes possession, they are SUPPOSED to pay the ongoing assessments but banks usually do not do this. If you are aware of that in your neighborhood, I would take the bank to court. We are still going hard at a vacant, bank-owned property who has not paid since Jun 2008.