trustee’s sale by curing the default

Pursuant to Arizona law, a borrower has the right to “reinstate” a loan during the trustee’s sale by curing the default. Even if the lender purports to accelerate the balance of the note, the borrower still has the right to reinstate up until the last business day before the trustee’s sale. But if the lender files a judicial foreclosure, the acceleration remains effective. Obviously, if the loan has matured on its own terms, then there are no reinstatement rights short of paying off the entire balance of the note.

Lender’s Strategy: Use a judicial foreclosure only if there is a compelling reason to either (1) accelerate the debt, or (2) to pursue a deficiency judgment for a residential “non-purchase money” loan.

Pursuing a Deficiency Lawsuit After a Trustee’s Sale.

If the proceeds of the trustee’s sale of the property secured by the deed of trust are insufficient to pay the full loan balance, the beneficiary may be entitled to a personal judgment against the borrower, known as a “deficiency.” If a lender desires to obtain a deficiency judgment after a trustee’s sale, Arizona law requires the lender to file a lawsuit within ninety days after completing the trustee’s sale. The amount of the deficiency is determined by the total debt at the time of the trustee’s sale (which includes principal, interest, late charges, attorney’s fees, trustee’s fees and other costs allowable under the note), less the greater of either (i) the trustee’s sale bid price or (ii) the fair market value of the property at the time of the sale.

If the lender places a full credit bid at the sale there will be no deficiency, even if the total debt exceeds the fair market value of the property. Therefore, before making a credit bid, a lender should carefully consider whether it wants to keep the option open to later pursue a deficiency lawsuit. Further, the possibility of a deficiency judgment can give the lender leverage if the borrower alleges some type of lender liability claims.

In the vast majority of trustee’s sales, the lender is the only bidder, and therefore the lender has the luxury to place a lower credit bid and still be assured it will prevail at the trustee’s sale. If other persons bid at the sale, the lender can always begin with a lower credit bid (i.e., a portion of the debt) and then bid higher if such higher bid is necessary to obtain the property. Because there is no downside to making a lower credit bid, the lender can safely make a lower credit bid just to reserve its rights.

Lender’s Strategy: Never bid the full credit bid unless it is necessary to outbid other bidders, or the lender is certain there is no deficiency to pursue.
nt and Acceleration.

Pursuant to Arizona law, a borrower has the right to “reinstate” a loan during the trustee’s sale by curing the default. Even if the lender purports to accelerate the balance of the note, the borrower still has the right to reinstate up until the last business day before the trustee’s sale. But if the lender files a judicial foreclosure, the acceleration remains effective. Obviously, if the loan has matured on its own terms, then there are no reinstatement rights short of paying off the entire balance of the note.

Lender’s Strategy: Use a judicial foreclosure only if there is a compelling reason to either (1) accelerate the debt, or (2) to pursue a deficiency judgment for a residential “non-purchase money” loan.

III. Pursuing a Deficiency Lawsuit After a Trustee’s Sale.

If the proceeds of the trustee’s sale of the property secured by the deed of trust are insufficient to pay the full loan balance, the beneficiary may be entitled to a personal judgment against the borrower, known as a “deficiency.” If a lender desires to obtain a deficiency judgment after a trustee’s sale, Arizona law requires the lender to file a lawsuit within ninety days after completing the trustee’s sale. The amount of the deficiency is determined by the total debt at the time of the trustee’s sale (which includes principal, interest, late charges, attorney’s fees, trustee’s fees and other costs allowable under the note), less the greater of either (i) the trustee’s sale bid price or (ii) the fair market value of the property at the time of the sale.

If the lender places a full credit bid at the sale there will be no deficiency, even if the total debt exceeds the fair market value of the property. Therefore, before making a credit bid, a lender should carefully consider whether it wants to keep the option open to later pursue a deficiency lawsuit. Further, the possibility of a deficiency judgment can give the lender leverage if the borrower alleges some type of lender liability claims.

In the vast majority of trustee’s sales, the lender is the only bidder, and therefore the lender has the luxury to place a lower credit bid and still be assured it will prevail at the trustee’s sale. If other persons bid at the sale, the lender can always begin with a lower credit bid (i.e., a portion of the debt) and then bid higher if such higher bid is necessary to obtain the property. Because there is no downside to making a lower credit bid, the lender can safely make a lower credit bid just to reserve its rights.

Lender’s Strategy: Never bid the full credit bid unless it is necessary to outbid other bidders, or the lender is certain there is no deficiency to pursue.

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