Foreclosure in Arizona Real Estate

Instructor: Racquel Fulton
When the U.S. economy recently slipped into a recession, Arizona's real estate market was one of the hardest hit. Properties once sold to the highest paying homebuyer were being auctioned off to the highest bidder at foreclosure auctions. In this lesson, we will explore how the foreclosure process works in Arizona.

Facing Foreclosure

Maggie lost her job, fell behind on her bills, and now might lose her home. She is unable to make her monthly mortgage payment. A mortgage is a pledge made by a borrower, like Maggie, to a creditor (a mortgage lender or a bank). The creditor provides the borrower with a loan to buy a home and the borrower signs a mortgage pledging their property as collateral until the loan is repaid. If the borrower fails to repay the loan, the creditor has the right to take the house through a legal process called foreclosure.

In the U.S. there are three types of foreclosures:

Strict

A strict foreclosure is handled through a court order. The creditor files a request with the court and the court transfers the title from the borrower to the creditor. The title, which is a group of rights including the right to live in, enjoy, and sell a home, is immediately seized from the borrower. However, before taking action through the court, the creditor customarily gives the borrower time to pay back what they owe. Strict foreclosures are only allowed in Connecticut and Vermont.

Judicial

A judicial foreclosure is the most common type of foreclosure. The creditor files a lawsuit against the borrower and if the court finds that the borrower is guilty of failing to pay the loan, a judgment is awarded on behalf of the creditor. After the creditor wins the lawsuit they can file a 'writ of execution'. The writ is a declaration instructing the court to take action. To execute the writ the court will turn the judgment into a lien. A lien is a legal claim that a business or individual has to someone else's property. After a writ is filed, the court enforces payment of the lien by ordering the home to be sold at an auction (such as a sheriff sale). In some states, after a property is sold through a judicial foreclosure the borrower may still be able to get their home back within a specific period of time (known as a redemption period). Some states limit the borrower's right of redemption to before the start of an auction or within six months after a sale. In Arizona, property owners do not have a right of redemption.

Non-Judicial

Like with most foreclosures in Arizona, Maggie is facing a non-judicial foreclosure. A non-judicial foreclosure is handled by a trustee instead of a court system. A trustee is an individual or business with no financial interest in the home. A trustee is appointed because Arizona customarily operates as a 'title theory' state. The theory is that a borrower like Maggie does not fully own her home until her mortgage is paid in full. In a 'lien theory' state such as New York, the borrower is considered the complete owner of a property and a mortgage is only a lien on the title. When a homeowner takes out a mortgage in a title theory state, a trustee oversees the transaction until the loan is paid back. Once the loan is repaid the trustee cancels the creditor's rights to the property and the title belongs solely to the borrower. However, if the borrower does not pay the loan back the trustee can conduct a foreclosure outside of a court of law.

So, when Maggie signed documents agreeing to the mortgage she signed a deed of trust instead of a standard mortgage document. The deed of trust transferred her property's title into a trust (an account used to hold something for safekeeping). The deed of trust also contained a 'power to sale clause' giving the creditor authority to handle a foreclosure outside of a court of law.

Deficiency

To prepare Maggie's property for foreclosure the trustee ordered a title report. The report shows that there is a mechanics lien against Maggie's property. A mechanic's lien is filed by a licensed contractor for failure to pay for labor and or supplies for home improvements such as a kitchen renovation. In Arizona, unpaid mechanics liens may also cause a foreclosure. The contractor must enforce the lien within six months of filing it through a court of law.

The trustee is concerned about whether there will be enough money made from the foreclosure to settle all of the debts against Maggie's property. When there is not enough money from a foreclosure sale, the creditor can make the borrower liable by filing a lawsuit and winning a deficiency judgment. However, in Arizona, unlike many states, there are several restrictions that make it difficult for creditors to pursue deficiency judgments.

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