If i have a 2nd mortgage on my house and the bank forecloses on the house. Does the 2nd get paid off when the house is sold

Asked over 5 years ago - Phoenix, AZ

if i have a 2nd mortgage on my house and the bank forecloses on the house. Does the 2nd get paid off when the house is sold

Attorney answers (3)

  1. Mark L Fowler

    Contributor Level 8

    Answered . If the foreclosure sale (the trustee's sale) produces enough sale's revenue to cover the first mortgage and the second then it will be paid off. More likely in Phoenix's current market is that the sale will not produce any bidders other than the bank holding your first mortgage so there will be no funds to cover the second. How the lender for the second mortgage proceeds depends on how the money from the second was used. This distinction is important to determine whether the second loan is covered under Arizona's anti-deficiency statute.

    Under anti-deficiency laws, if the mortgage is a purchase money mortgage for the purchase of a dwelling occupied by the purchaser, the purchaser will not be held responsible for any deficiency the lender can only recover the property and the proceeds of a subsequent sale, the purchaser does not pay any deficit between the sale proceeds and the outstanding loan balance.

    Anti-deficiency laws typically provide no protection for other than purchase money mortgages (such as a second mortgage obtained after the original acquisition) and there is no protection when the property is not used as the primary residence of the purchaser.

  2. Marc D McCain

    Contributor Level 12

    Answered . the first answer was correct on whether the 2nd gets paid off in a foreclosure -- in short, only when the foreclosure sales price is sufficient to pay the first lender all that it is owed and the remainder is sufficient to pay the 2nd lender all it is owed.

    The 2nd loan will be wiped out by a foreclosure of a first lien. However, the answer regarding anti-deficiency laws in Arizona was not altogether correct. Only in a judicial foreclosure or a trustee's sale by a senior lien holder where a junior lien holder gets wiped out is there a need to distinguish between a purchase money and non-purchase money loan. Where a 2nd gets wiped out, only a purchase money second is barred from seeking a deficiency under Arizona law. A 2nd that is a non-purchase money loan would be able to seek a deficiency (unless the loan specifically barred such a deficiency).

    Because the facts of each loan matter, I would consult with an experienced real estate attorney in Arizona to understand your rights and obligations with respect to your mortgage loans.

    McCain & Bursh, PLC, Attorneys at Law

    www.mccain-bursh.com

    www.marcmccain.com

  3. Marc D McCain

    Contributor Level 12

    Answered . This answer is intended to supplement this and other Avvo answers on the topic given recent events and changes in Arizona law regarding anti-deficiency requirements for residential properties. I have more extensive information on my blog -- www.marcmccain.com, and will attempt to update the blog as current events and any new legislation unfold. Below is a general discussion of current anti-deficiency issues in Arizona.

    In Arizona, certain loans on residential real property are subject to what are called anti-deficiency laws. These laws limit a borrower’s liability to its lender if certain requirements are met. However, there are many misconceptions about Arizona’s anti-deficiency laws, when they apply, and whey they don’t. Moreover, Arizona’s anti-deficiency laws have been in recent flux, increasing the confusion in the market and borrowers’ anxiety as they try to navigate a very difficult and stressful situation. The recent changes to Arizona’s anti-deficiency laws were the result of Arizona Senate Bill 1271 which took effect on September 30, 2009 (for an understanding of the additional requirements imposed under Senate Bill 1271, effective since September 30, 2009 and until HB 2008 takes effect, see prior blog posts at www.marcmccain.com or contact the author).

    However, Arizona House Bill 2008 was recently passed and signed by Governor Brewer and is slated to become law in late November, 2009. HB 2008 contained a repeal of the changes to the anti-deficiency law made by Senate Bill 1271 and included a clause that made the repeal retroactive to September 29, 2009. Thus, local practitioners have been operating under the premise that HB 2008 will be applied retroactively as written and that the requirements implemented by SB 1271 will never by applied in practice. However, the banks have now sued Governor Brewer to stop the repeal of SB 1271 from taking effect, or at least to increase their leverage in introducing new legislation that would limit the broad application of Arizona’s anti-deficiency laws.

    With the foregoing as a backdrop, you can find a general summary of anti-deficiency rules applicable in Arizona once HB 2008 takes effect later this month (assuming that is the case). If banks are successful in keeping SB 1271 on the books, a borrower must understand how the changes made by SB 1271 affect their situation. Moreover, if your foreclosure or workout falls within the “window period” of September 30, 2009 until the date HB 2008 and its change to the anti-deficiency law takes effect, you should consider the additional risks related to your foreclosure or workout given the potential application of SB 1271. However, borrowers must understand these are only general rules -- every situation must be analyzed carefully based on the relevant facts and applicable law. And remember, the law can and may change!

    McCain & Bursh, PLC Attorneys at Law
    www.mccainbursh.com
    www.marcmccain.com

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