The Difference Between a Mortgage Foreclosure and a Deed of Trust Trustee’s Sale
In the current economy you should be well versed in the difference between a judicial foreclosure and a trustee’s sale. The differences are significant. Part of this discussion leads to the question of why virtually all loans on real estate in Arizona are secured by a deed of trust versus a mortgage. Do you know the reasons why that is?
The simple answer why deeds of trust are so commonly used today in Arizona is due to the ease of “foreclosing” out the debtor’s in a parcel of real estate. Let’s examine the difference.
Deed of Trust vs A Mortgage in Arizona
If a debtor borrows money (s) he signs a promissory note to repay the debt. Then the debtor posts a parcel of real property as collateral to secure the obligation in case the promises contained in the promissory note are not fulfilled by the debtor. If the debtor secures his or her real estate utilizing a mortgage, which was the standard in the United States for hundreds of years, it is necessary for the lender to file a lawsuit to foreclose out the debtor. If the debtor answers the lawsuit the suit can take a significant amount of time to resolve and the process can be expensive.
Additionally, at the end of the lawsuit when the lender finally obtains a judgment against the debtor the debtor has an additional six months within which to redeem the property by paying back the obligation of the promissory note in full plus an additional ten percent (10%) penalty. During those six months the lender is in a dilemma since how does one sell a property when the debtor has the right to redeem for six additional months. A purchaser could purchase the property but the debtor could come back and take the property away by paying back the full amount of the obligation. A major advantage of using a mortgage is that if there is a default the lender may accelerate the entire balance of the debt. Thus the debtor can only reclaim the property by paying off the entire debt.
Deed Of Trust
If the lender accepts the real estate as collateral using a deed of trust the process of “foreclosing” is much simpler and quicker. First it is important to note that the term ‘foreclosure’ is a terms used to describe the process of the lender claiming the collateral when a mortgage is used. When the lender claims the collateral when a deed of trust is used it is call a trustee’s sale. However the term ‘foreclosure’ is commonly used interchangeably.
When a debtor defaults where a deed of trust has been used the process does not require a lawsuit. Instead a notice is sent to the debtor advising they have thirty (30) days to resolve the matter by paying up any deficiency or correcting the breach before a trustee sale procedure is initiated. Assuming the matter is not resolved then a notice of trustee’s sale is sent to the debtor. A sale date is set and referenced in the notice of trustee’s sale. The trustee’s sale must be conducted at least ninety (90) or more days after the date of the notice of trustee’s sale. The debtor then has that period of time to pay up the delinquent amounts due (not the entire balance of the loan like in a mortgage foreclosure) or to rectify the breach. If the deficiency is paid by the debtor then the trustee’s sale is cancelled and the debtor continues making his regular payments as usual.
The trustee’s sale procedure is much simpler and expeditions. Thus most lenders prefer that process. It is rare, although it does occur, where the debtor pays up during the notice period and is reinstated in good standing. If that occurs the trustee’s sale procedure ends and the debtor is reinstated. However, there are costs associated with the trustee’s sale procedure that must be paid by the debtor to the lender as part of the reinstatement.
If a mortgage is used it must be judicially foreclosed. With a deed of trust the lender has the option to utilize the trustee’s sale procedure or, at the option of the lender, (s) he can elect to judicially foreclose. Thus the deed of trust is more versatile. It is also simpler, more efficient, and cheaper and there is no six month right of redemption for the debtor at the end of the process. The deed of trust trustee’s sale procedure has thus almost totally replaced mortgages in Arizona.
Arizona Anti-deficiency Statutes
Knowing the difference between a mortgage and deed of trust is also important as it relates to the anti-deficiency statutes. The anti-deficiency protection for residential borrowers is contained in two anti-deficiency statutes, namely; A.R.S. §33-729(A) – mortgages- and A.R.S. §814(G) – deeds of trust.
If the lender utilizes the foreclosure statute – A.R.S. §33-729(A) – for the debtor to be able to claim the benefit of the anti-deficiency statute, the obligation must secure a property of two and one half acres or less and must be a purchase money obligation. The obligation must also be on a single family or duplex residential unit where the obligation is given to secure the payment of the balance of the purchase price or to secure a loan to pay all or part of the purchase price. This is a narrow definition. Under this definition there is not anti-deficiency protection for debtor who assumed a mortgage on their property, mortgaged the property to acquire another property or is a home equity loan not used for the acquisition of the property.
In the case of deeds of trusts which are “foreclosed” using a trustee’s sale pursuant to A.R.S. §814 (G) the anti-deficiency statute applies whether or not they are purchase money deeds of trust. Like A.R.S. §729(A), the obligation must secure a property of two and one half acres or less and must be on a single family or duplex residential property. However, the loan does not have to be purchase money obligations as applies to mortgages to have the protection of the anti-deficiency statute.
The situation can get more complex. That is why one should have as much understanding of the laws in this area as possible. Lenders are more prone today, than they were even six months ago, if they hold a second deed of trust that gets wiped out by the first lien, to sue on the promissory note if the debt was not a purchase money obligation. For instance, if the second is a line of credit where the owner/borrower cashed out and used the money to acquire another property the lender may simply sue the borrower on the promissory note because the second deed of trust (the security) was wiped out when the first conducted a judicial sale or a trustee’s sale.
The homeowner today should understand all the nuances of what might occur if a decision is made to allow the property to go into “foreclosure”