Foreclosure is a general term that describes the legal process that a mortgage company uses to obtain ownership of a piece of real estate where it holds a security interest in that real estate. In Arizona, the legislature has enacted statutes that make this a non-judicial process in most cases, meaning the lender does not need to file anything with the court to complete the foreclosure. This streamlines the process when compared to other states like Florida where each foreclosure requires a separate lawsuit and involves the procedural complexities that invariably accompany lawsuits. Provided the mortgage company complies with the procedural requirements as set forth in the Arizona Revised Statutes, the completion of the foreclosure process, wherein a Trustee’s Sale is held and title transferred to the successful bidder, will terminate the homeowner’s ownership interest and entitle the purchaser to evict the previous homeowner if he or she has not vacated the property.

Although the lender can usually start the foreclosure process as soon as a homeowner is late with a single mortgage payment, most lenders will make numerous demands and try to work out some other solution before initiating the formal foreclosure process. While its impossible to predict how long a lender might take before taking this step, it is not unusual – particularly during these trying economic times – to see homeowners 3-6 months past due before a lender begins foreclosure proceedings. Significantly, as long as the homeowner is past due it is up to the lender to decide when it is going to proceed, and in some instances the lender may decide to wait many months or even years before foreclosing.

Most homeowners in Arizona have a deed of trust as opposed to a traditional mortgage, which allows the lender to foreclose without going to court. Arizona does, however, still have a mechanism whereby a foreclosure may be pursued judicially in the rare instance there is not a deed of trust or if the lender simply chooses to proceed judicially in lieu of foreclosing on the deed of trust. In some cases the lender may realize a financial advantage by going to court, so homeowners who are served with a lawsuit instead of a Notice of Trustee’s Sale should consult with an attorney as soon as possible.

To effect a non-judicial foreclosure in Arizona, the lender must appoint a Trustee, who is the person or entity that is legally entitled to sell the property in a Trustee’s Sale. The Trustee’s first action is to record a Notice of Trustee’s Sale in the county recorder’s office, which is a legal notice identifying the precise time and date, as well as the location, when the home will be sold. Arizona law requires that the Notice of Trustee’s Sale must be recorded at least 90 days before the sale date. The Notice of Trustee’s Sale must also be published in an appropriate newspaper and copies must be delivered to the homeowner and other interested parties.

In Arizona, absent some agreement, rule or statute to the contrary, a lender can generally seek a deficiency judgment after foreclosing on a property securing a loan, if the property does not sell for enough money to satisfy the debt in full. Fortunately for most typical Arizona homeowners, the Arizona legislature has adopted anti-deficiency statutes that preclude such recourse in many typical fact scenarios. In addition, the parties to a real estate contract may expressly agree that the lender’s only recourse is foreclosure on the property itself.

In the absence of express agreement, Arizona law provides protection for borrowers against potential liability stemming from the sale of a property at less than market value in a foreclosure sale. The borrower, however, must act quickly to protect his or her rights. If the property sells for less than the amount owed to the lender, the borrower is entitled to ask a court to determine the property’s fair market value. In the event the court agrees that the far market value is higher than the sales price the buyer gets credit for the higher amount. This not only protects the borrower from an unfairly low price, but encourages lenders to make a credit bid for an amount near fair market value.

There is an even more favorable statute protecting borrowers against deficiency judgments involving single or dual-family dwellings on 2 1/2 acres or less where the loan is “purchase money,” meaning it was used to pay the purchase price of the property. Typically, loans used to refinance purchase money loans are also considered purchase money loans, although the use of some of the proceeds to pay other debts, obtain cash out, or for other uses may expose the borrower to recourse liability.

Significantly, even if the loan is not a purchase money loan, the lender’s election to utilize non-judicial foreclosure on the deed of trust renders it non-recourse by operation of law. The lender may, however, instead seek judicial foreclosure, which is more expensive and time-consuming, but preserves the ability of the lender to obtain a deficiency judgment. This anti-deficiency statute also allows a lender to seek a deficiency judgment against the borrower in the event of waste. Because interpretation of the Arizona anti-deficiency statutes and related real estate laws can be very complicated, borrowers and lenders are advised to seek the assistance of an experienced real estate attorney with any questions or concerns they may have.