Q&A: What do I do if the housing market drops, I cannot afford to pay my mortgage, and I owe more on my mortgage than my home is worth?

Question: What do I do if the housing market drops, I cannot afford to pay my mortgage, and I owe more on my mortgage than my home is worth?

Answer, Per Benjamin Gottlieb, Esq.:

For most Americans, the economic pain experienced by the Great Recession is a not-too-distant-memory etched in our minds. This dark period encompassed an unprecedented string of mortgage foreclosures by American homeowners, real estate investors and commercial developers – with many innocent homeowners losing their homes.

During the financial crisis, and for some time thereafter, Arizona’s anti-deficiency statutes protected a lot of borrowers from having their lender sue them for the difference between the mortgage loan balance and the price the borrower’s home sold for at the foreclosure sale. In other words, if the home sold for $200,000 at a foreclosure sale, and the borrower owed the lender $300,000, the lender was precluded from filing a lawsuit against the borrower for the $100,000 difference, assuming the borrower qualified under Arizona’s anti-deficiency laws.

Since the Great Recession, home prices across Arizona climbed steadily. As consumer confidence rose, many homeowners tapped into home equity lines of credit, purchased larger homes, or added a portfolio of rental properties.

Recently, the Covid-19 pandemic – and the ensuing economic damage and uncertainty surrounding it – has revived fears in many Americans that a bad housing recession is looming in our near future, one that could resemble the gloomy times we experienced a decade ago.

While the federal government has swiftly moved to provide unprecedented stimulus and assistance to homeowners and small businesses, it is unclear what impact these measures may have on the housing market, with some experts predicting that a housing drop could occur if the stimulus ultimately causes an increase in mortgage rates. https://azbigmedia.com/real-estate/residential-real-estate/are-home-prices-in-peril-coronavirus-stimulus-may-hold-the-key/.

And although most large lenders – at least in the short-term – have agreed to suspend foreclosures for homeowners hurt by the health crisis, the picture beyond this period looks less clear for borrowers. https://www.usatoday.com/story/money/real-estate/catherine-reagor/2020/04/02/help-arizona-homeowners-who-cant-make-their-mortgage-payments/5104362002/.

Because there is a heightened risk that housing prices could significantly drop in the near future, and borrowers may lack the continued ability to pay their mortgage, revisiting the basics of Arizona’s anti-deficiency laws is especially useful at this time.

In general, in order to qualify for anti-deficiency protection in Arizona, a borrower needs to satisfy 3 main elements:

First, a borrower must determine is whether the loan is a “purchase money” obligation. A loan is a “purchase money” obligation when it is provided to secure payment of all or part of the purchase of the real property sold in the transaction. By contrast, a loan secured by a borrower’s residence to purchase a different real property is a “non-purchase money” obligation. In order to qualify for anti-deficiency protection in Arizona, the loan must be a “purchase money” obligation.

Second, the borrower must determine whether the real property securing the loan is situated on 2.5 acres or less. If the property is situated on less than 2.5 acres, then the borrower meets this requirement.

Third, the borrower must determine whether the real property is limited to and utilized as a “single one-family or single two-family dwelling.” This analysis is not as straightforward as it would appear and may require consultation with an attorney. Vacant land does not meet this requirement. If the borrower never intended to occupy the residence as his or her primary residence, then the borrower would not meet this requirement. The anti-deficiency laws as it relates to a builder or developer who obtained a construction loan add an additional layer of complexity to the analysis.

If the borrower cannot satisfy any of the foregoing elements, then the borrower will not receive deficiency protection.

No one knows with any degree of precision the extent COVID-19 will continue to ravage the economy and wreak havoc on Arizonans, or how the federal government stimulus package will ultimately impact interest rates or inflation, or to what degree the housing market will suffer from a downturn. Armed with knowledge of Arizona’s anti-deficiency law, however, borrowers can better navigate the challenges that may lie ahead when lenders resume their standard foreclosure procedures – if our worst predictions about the real market become a reality.