Complex Financing

Q. Arizona is an anti-deficiency state, so purchase money lenders cannot seek repayment of any deficiency between the trustee sale price and the mortgage owed at time of default. There are also many scenarios where the second position non-purchase money (HELOC for example) and even short sale deficiency fall under the anti-deficiency protections.

So my question is: when loans fall under the anti-deficiency protection statute, are those creditors allowed to report the deficiencies (or full loan amounts) as open debt balances? It doesn’t seem right that they report debt that cannot be collected as open debt. Are the state anti-deficiency laws and case law that apply to anti-deficiency protection, a basis for getting those accounts deleted, or at least moved to $0 balance?

Would you have to dispute directly with the creditor?

A. Despite the question being posed hypothetically, I’m assuming your are asking this question for yourself. I’m going to further assume assumption that the home was foreclosed on (trustee’s sale).

Once the lender forecloses the 2nd lien holder (2nd mortgage or HELOC) gives up rights to the collateral (the home). If the loan was a second mortgage with fixed payments, the loan becomes an unsecured installment loan. An equity line of credit (HELOC) becomes an open unsecured loan like a credit card.

You’ve correctly defined anti-deficiency laws in regards to first mortgages. Arizona is indeed an anti-deficiency state, and you are safe for any amount outstanding on your first mortgage.

Anti-deficiency laws usually provide no protection for second mortgages or home equity lines. Lucky you, Arizona anti-deficiency applies to a second mortgage in some cases. Under Arizona law, anti-deficiency protections are extended to second mortgages if the following is true:

1. If your house is a single or dual family residence; and
2. it is on 2.5 acres or less; and
3. you, or someon0ne, has actually lived in the residence; and
4. 100% of the debt owed to the bank was used to purchase the property

When would a second mortgage be used to purchase a home? Mortgage insurance is usually required in cases where the loan amount is more than 80% of the value of the home and can add several hundred dollars to the mortgage payment. To avoid paying mortgage insurance, buyers sometimes use a loan combination commonly referred to as “80-10-10″.

In the 80-10-10 scenario, a buyer puts down 10%, takes out a first mortgage for 80% and a second mortgage for 10% of the remaining purchase price. For second mortgages originated this way, Arizona anti-deficiency protections would apply.

Where protections would not apply: if you took “cash-out” of your home through an equity line of credit (HELOC). In this case, you would have no protection against collection on the outstanding balance of this loan.

You imply that you have protection under the Arizona anti-deficiency laws on your second mortgage. How was this protection status determined? Is this an assumption based on the fact that the lender has not sued you or pursued other collection avenues? This is dangerous – just because they haven’t done so doesn’t mean they won’t in the future. With all the loan restructuring going on right now, lenders are incredibly busy.

In my opinion, until you work out a settlement deal with the lender, they can legally report your HELOC as being open and with a balance on your credit report. Even if you are afforded anti-deficiency protection, the loan amount is still open, they just can’t collect. As in credit cards – even if a credit card debt is past the statute of limitations and is uncollectible, it can be reported on your credit card for 7 years from date of last payment.

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