How Do Arizona Foreclosures Work?
- Black's Law Dictionary defines foreclosure as the "[p]rocedure by which mortgaged property is sold on default of mortgagor in satisfaction of mortgage debt." The term mortgagor refers to a borrower. In a foreclosure, the secured party forecloses (terminates) the borrower's rights to the property.
- Arizona law allows two types of foreclosure: judicial and nonjudicial. As the name suggests, judicial foreclosure involves a lawsuit and obtaining an award from a judge. Nonjudicial foreclosure refers to a trustee's sale, in which the trustee sells the property at a public auction without having to go to court.
Lenders that secure loans with a deed of trust can foreclose with either method. But a mortgage can only be foreclosed judicially. - A nonjudicial foreclosure takes about four months to complete. Judicial foreclosure can take a year or longer, depending on the backlog in the courts and the extent to which the borrower defends against the foreclosure.
- All foreclosures start with a formal written default notice to the borrower. If the borrower does not cure the default within the grace period defined in the loan documents, then the lender can declare the entire loan balance immediately due and initiate foreclosure.
A judicial foreclosure starts with the bank filing a complaint in court and serving it on the homeowner. Assuming the lender establishes it has the legal right to foreclose, the court issues a judgment in favor of the lender for the unpaid balance of the loan plus attorneys fees and costs. The bank can then execute on the judgment by selling the property and applying the sale proceeds to the judgment.
Unless the loan qualifies for protection under Arizona's anti-deficiency statute, the bank can pursue the borrower for any part of the judgment not paid off by the property sale proceeds. - For a trustee's sale, the lender will usually appoint an attorney as the new trustee under the deed of trust by recording a notice of substitution of trustee. The trustee records a notice of trustee's sale that identifies the location, time and the date of the sale (which must be at least 91 days after the date the notice of trustee's sale records).
The trustee mails a copy of the notice of trustee's sale and a statement of breach describing the default to the borrower and anyone else with a recorded interest in the property. Trustees also have to publish notice of the sale in a local newspaper and at the property itself.
A borrower can prevent a trustee's sale and reinstate the loan by paying all past due payments, late fees and the lender's enforcement costs by 5 p.m. on the last business day before the trustee's sale.
On the date of the sale, prospective buyers register with the trustee to bid on the property and provide a $10,000 cashiers check as a deposit. The lender can also bid on the property using a credit bid for a portion or all of the amount owed. The highest bidder wins the auction and must pay the amount of the bid (minus the deposit already paid) to the trustee by 5 p.m. on the business day after the sale. The trustee will deliver a deed to the purchaser within seven business days thereafter.
Except for loans subject to the anti-deficiency statute described below, the lender can sue the borrower for any deficiency by filing a lawsuit within 90 days after the trustee's sale. A deficiency action is prohibited after a trustee's sale if the property is built on 2.5 acres or less and limited to and used as a single one-family or single two-family home.
