Tucson Land Use Lawyer & Attorney : Fleishman Law Firm : Tax Liens, Foreclosures, Zoning

As the foreclosure wave has grown into a tsunami-like crisis, advocacy groups such as the Association of Community Organizations for Reform Now (ACORN) have taken to the streets in campaigns to lobby legislators about implementing new regulations that will help stem the foreclosure crisis and curtail predatory lending.  When I left the Pima County courthouse yesterday, there was an ACORN protest taking place at the same time that a Trustee's Sale was going on.  An interesting contrast between ACORN's bullhorn calls to action and the trustee calling out bids. 

Unquestionably, the foreclosure epidemic has resulted in some very impassioned debate as to whether and how the government should act.  Rick Santelli's recent rant highlights just how impassioned this debate has become.  While Santelli's rant has garnered much of the media hype, Stuart Varney's recent interview with ACORN's Bertha Lewis demonstrates just how zealous some people have become at the prospect of the government aiding struggling homeowners, who many view as irresponsible.  Varney was incredulous at ACORN's suggestion that people on the verge of foreclosure should stay in their homes.

As always, the foreclosure epidemic is far more nuanced than many of the talking heads are willing to discuss.  Predatory lending certainly was in force and many people were not informed of what they were getting into.  Likewise, many, many people bought far more home than they could ever afford.  Only time will tell whether massive government intervention or the force of the market will prevail. 

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It is clear that that lending industry has been slow to confront the ever-widening foreclosure crisis that began to pick up steam in 2007.  Indeed, Sandor E. Samuels, the former chief legal officer of Countrywide Financial was quoted as saying "We are going to keep making these loans [subprime teaser loans] until the last second they are legal."  Samuels' comments seem to reflect some of the general industry denial about the problem.  Despite such denial, many have been advocating changes that will help address the crisis. 

Last month, Arizona Attorney General Terry Goddard, along with twenty one other Attorneys General sent a letter to the U.S. House and Senate leadership urging an amendment to the bankruptcy code that would permit federal bankruptcy courts to order loan modifications, also known as "cramdown authority" in Chapter 13 bankruptcies.  The Attorneys General are advocating broader authority in the bankruptcy courts to stem the foreclosure tide. 

However, the lending industry has been actively lobbying against granting such cramdown authority, which they argue would reward irresponsible borrowers and result in higher borrowing costs.  The general intransigence is perhaps better explained by the accounting nuances involved in allowing wide-scale modifications.  Aubrey Cohen has a good blog post that describes how the securitization of loans has complicated the process. 

Nonetheless, Citi recently dropped its opposition to cramdown authority, but has stood alone among the lending industry.  One is left to wonder whether Citi was pressured into such a stance given that it has come to the Treasury trough twice in recent months for bailout funds.  Meanwhile, the Mortgage Bankers Association recently launched a "Stop the Bankruptcy Cram Down Resource Center" to try and ward off any further attempts to empower the bankruptcy courts to force modifications.  Time will tell whether the banks are able to ward off continued congressional pressure to force modifications.  No small task. 

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RealtyTrac just released its 2008 U.S. Foreclosure Market Report, which reported that there were a total of 3,157,806 foreclosure filings (default notices, auction sale notices, and bank repossessions) on 2,330,483 properties during 2008.  That was an 81 percent increase over 2007 and a 225 percent increase over 2006.  To get a feel for the breadth and scope of just how serious the foreclosure Juggernaut is, take a look at this map to see just how hard hit certain parts of the country were in 2008.

Arizona reported the third highest foreclosure rate of all states in 2008.  4.49 percent of all housing units in Arizona received at least one foreclosure filing during the year.  Indeed, 116,911 properties in Arizona received a foreclosure filing, which also put Arizona third for total foreclosure filings.  Amazingly, foreclosure activity in Arizona during 2008 increased 203 percent from 2007 and 665 percent from 2006.  That last percentage far surpasses the two top foreclosure activity states - California (412 percent increase since 2006) and Florida (412 percent increase since 2006).  

Not surprisingly, Pinal and Maricopa County were particularly hard hit.  The Phoenix metropolitan area reported 97,684 foreclosure filings in 2008, an increase of 220.77 percent from 2007.  That put the Phoenix metropolitan area fifth on the top 100 metropolitan areas, which is fairly consistent with its metropolitan population ranking.  The Tucson metropolitan area reported 9,043 foreclosure filings in 2008, an increase of 113.33 percent.  The Tucson metropolitan area ranked 37th on the top 100 metropolitan areas, which is again fairly close to the Tucson metropolitan population ranking. 

The burn-off of the Arizona housing bubble seems to be gaining momentum faster than the meteoric rise in real estate prices.  For example, take a look at the graph of median home prices in Phoenix between 1989 and 2009.  Look at the incredible bell curve between about 2005 and 2008.  The scary thing that some commentators are noting, is that while the bell curve has basically been erased and median prices are near 2004 levels, the current inventory of homes is far greater than 2004 levels, not to mention, it is much more difficult to qualify now.  Looks like we may not hit a bottom for a while yet.  The bubbly hangover may be more painful than the euphoria of the upswing, eh? 

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So a borrower defaults under a promissory note and the deed of trust.  Normally, the lender in that circumstance will exercise the power of sale clause in the deed of trust and begin the foreclosure process by noticing a trustee's sale.  However, the lender may also choose to call the note due and accelerate the entire amount and proceed with a judicial foreclosure.  Most lenders choose to go the trustee's sale route because it is faster and cheaper than a judicial foreclosure. 

What I recently discovered, is that many attorneys do not know about a borrower's statutory right of reinstatement and how that right applies in the context of both a trustee's sale and a judicial foreclosure.  Under Arizona Revised Statute Section 33-813(A), the trustor under a deed of trust (borrower) may reinstate (or cure the default under the promissory note) by paying the lender "the entire amount then due . . ., other than the portion of the principal as would not then be due had no default occurred . . ."  In other words, the borrower only needs to come up with the amount he or she is in default, not the entire amount due under the promissory note.  Nonetheless, many lenders' attorneys seem to believe that if the lender calls the promissory note due and exercises its right to accelerate the promissory note, the borrower must immediately pay the entire amount owed under the promissory note in order to cure the default, not just the defaulted amount. 

However, in Chapparral Development v. RMED Intern, 170 Ariz. 309, 823 P.2d 1317 (App. 1991), the Arizona Court of Appeals ruled that under A.R.S. Section 33-813(A), a trustor has an absolute right to reinstatement whether a lender chooses to foreclose by means of trustee's sale or a judicial foreclosure.  The difference being, if a lender chooses to pursue judicial foreclosure, a borrower's statutory right of reinstatement is cut off once the lender files the judicial foreclosure action and the borrower will have to pay the entire amount owed on the promissory note.  On the other hand, in the context of a trustee's sale, the borrower can reinstate up until 5:00 p.m. the day before the date of the trustee's sale.  But once the trustee's sale has been held, that right of reinstatement is extinguished.

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It has been interesting to watch the transition in the State Land Department, whose long-standing mission has been "to enhance value and optimize economic return" for the State Land Trust.  In practice, the Department has simply sold trust land to the highest bidder at public auction, which historically have been developers.  Despite ongoing attempts at State Land Trust reform through the initiative process, it seems that the State Land Department has slowly begun to internalize changes as to how state trust lands are to be managed.

The Town of Oro Valley's proposed annexation of nearly 9,000 acres of State Trust Land known as "Arroyo Grande" is a case in point.  On November 19, 2008,the Town of Oro Valley voted 6-1 to adopt a general plan amendment, which will allow the process to begin for the possible annexation of Arroyo Grande.

Arroyo Grande will likely be a proving ground for the future of how the State Land Department manages the state trust lands.  Various stakeholders already have been very active in the process.  Interestingly, while Oro Valley initiated the annexation discussion with the Department, Pima County has effectively dictated much of the development of the conceptual plan.  Pima County, who has been the prime orchestrator of the Sonoran Desert Conservation Plan, has been openly critical of Oro Valley's commitment to preserving open space.  Pima County Administrator Chuck Huckelberry recently sent a memo to Oro Valley Town Manager David Andrews expressing concern over the absence of wording in the general plan ensuring that open space in Arroyo Grande and a wildlife corridor are sold for below-market value for conservation purposes.  Despite Pima County's desire to purchase some 6,000 acres of the Arroyo Grande, it recently abandoned such efforts.

Oro Valley's Andrews recently responded to such criticism by stating that "The preservation of open space in perpetuity is a deal breaker for the town."  The next phase - the pre-annexation development agreement - will prove the most interesting as the stakeholders hammer out what actually will be included in the final annexation agreement.  Whether Oro Valley is truly committed to the same goals as Pima County remains to be seen.  Nothing better than watching jurisdictions joust. 

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Despite unending attempts to step the flow of illegal immigration to the United States through an increasingly militarized border, the mortgage lending industry was not about to pass up the chance to capitalize on the estimated 12 million illegal immigrants in the United States looking for their own slice of the American dream. 

Enter the "ITIN Mortgage."  During the expansion of the housing bubble, many lenders offered home-mortgage loans to undocumented immigrants without requiring Social Security numbers.  While lenders used to require a Social Security number and verified income, those requirements obvioiusly changed during the loose lending days.  Indeed, if lenders were willing to lend money to legal residents without a job or income (think "NINJA" loans), why not lend to people who are not even legal residents of the United States? 

As the lending industry loosened, lenders began allowing illegal foreign nationals to use a taxpayer identification number ("ITIN") to qualify for a mortgage.  The IRS issues ITINs to both resident and nonresident aliens so they can pay taxes.  Obviously, the U.S. Government is not going to pass up a chance to collect taxes from undocumented residents.  According to the Government Accounting Office, a significant number of the nearly 9 million holders of ITINs are illegal immigrants. 

Tim Sandos, President and Chief Executive of the National Association of Hispanic Real Estate Professionals estimates that since 2000, illegal immigrants have taken out more than $1 Billion in ITIN mortgages.  Interestingly, as National Public Radio recently reported, ITIN mortgages have on average out performed conventional mortgages.  In part this is due to borrowers putting 20-30% down on a mortgage.  More than can be said of most borrowers today.  Amazingly, it has been reported that ITIN mortgages have had a delinquency rate of one half of one percent, compared to 6.4% for all home loans.

While ITIN mortgages have been big business, the tightening credit market has necessarily impacted this area of lending.  Moreover, as the immigration debate has intensified, these mortages have come under increasing pressure.  Indeed, Tim Sandos, when he worked for Citigroup received death threats because he was working with illegal immigrants.  In 2007, Representative John T. Doolittle  of California introduced a bill in Congress that would prohibit financial institutions from providing home mortgages to anyone who lacks a Social Security number.  The bill, H.R. 480, would have amended the Truth in Lending Act to make ITIN mortgage lending illegal. 

Given the surprising stability of ITIN mortgages, lenders certainly are not inclined to shed these solid performers, but the political and credit climate is changing that.  Indeed, as recently reported in an Active Rain blog, Banco Popular, the largest niche provider of ITIN mortgages, will no longer provide such loans.  Perhaps the ITIN mortgage will disappear like the American Ninja. 

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Under Arizona Revised Statutes Section 42-18202, a tax lien investor who wants foreclose the right of a property owner to redeem a tax lien is required, among other things, to send a notice of intent to file a foreclosure action by certified mail to the owner of record.

In 2005, the Arizona legislature amended Section 42-18202 by adding subsection C, which states: "If the purchaser fails to send the notice required by this section, the purchaser is considered to have substantially failed to comply with this section. A court shall not enter any action to foreclose the right to redeem under this article until the purchaser sends the notice required by this section."

A recent case from the Arizona Court of Appeals - DuPont v. Reuter - addressed the issue of what it means to substantially fail to comply with Section 42-18202.  In DuPont, the tax lien holder sent the owner of record the required statutory notice of intent to foreclose, but failed to send the notice by certified mail.  The tax lien holder subsequently obtained a default judgment and a Treasurer's Deed.  The trial court later ordered that the Coconino County Treasurer cancel the issued Treasurer's Deed. 

The Court of Appeals reversed the trial court's orders and the judgment, holding that the requirement to serve the notice of intent to foreclose by certified mail was not jurisdictional.  Relying on Section 42-18101(B), the Court of Appeals reasoned that an insubstantial failure to comply with each and every element of the tax lien and foreclosure statutes does not preclude a tax lien holder's ability to foreclose.  In the end, the Court of Appeals held that sending a notice of intent to foreclose by regular mail instead of certified mail was an "insubstantial failure" and did not automatically void the judgment and the issued Treasurer's Deed.

In contrast to the recent Court of Appeals decision in Roberts v. Roberts, here, the Court of Appeals seems to have grasped that the stated objective of the tax lien statutes is to secure the payment of unpaid delinquent taxes by preserving and enhancing the marketability of tax liens and Treasurer's Deeds, which is essential to the maintenance of county government. 

The DuPont case frankly amazes me.  Here you have a property owner that was willing to pay what likely amounted to tens of thousands of dollars to an attorney to fight for a property that the same owner had effectively forgotten about.  The property owner in DuPont admittedly received notice that the tax lien owners were going to foreclose on the property.  However, instead of paying off her back taxes, the property owner was willing to fight out the issue of whether she should have received notice by certified mail instead of regular mail.  This woman had been delinquent on her property taxes for over thirteen years, and the delinquent taxes totaled some $240,000.  Coconino County certainly could have put that money to good use.  In the end, the property owner in the DuPont case, like property owners generally, have to take some level of responsibility in the care and ownership of property, which includes paying property taxes.  The legislature has clearly codified a system in which an insubstantial failure to strictly follow the tax lien foreclosure rules will not prevent a tax lien investor from obtaining a Treasurer's Deed to any given property.

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You have to wonder why an initiative (Proposition 201) entitled the "Homeowner's Bill of Rights" is sponsored by Local 359 of the Sheet Metal Workers International Association.  

According to the Home Builders Association of Central Arizona, the union used the threat of an initiative as a pressure tactic in a campaign to get Chas Roberts, an Arizona heating and cooling company, to unionize.  Interesting tactic.  Given the breadth and scope of this initiative, someone else is steering the ship.  Well, union officials respond that they're just trying to give extra legal protection to their members, who are also home buyers. 

Whatever the rationale for putting the initiative to Arizona voters, the initiative has run into formidable opposition in the form of  Arizonans Against Lawsuit Abuse, which is funded by The Coalition for Affordable Housing and The Home Builders Association of Central Arizona and supported by the home builders, several chambers of commerce, and Realtor groups.  Perhaps forcing the home builders to raise money to defeat Proposition 201 was sufficient grounds to put the proposition to the voters.

Not surprisingly, the opposition's strategy is to buck-shot shot the lawyers.  Indeed, one of the recent ads in opposition shows a lawyer sleeping on a couch in his office while the lawyer dreamily states: "I should fly to Arizona and change their laws.  What if they tried to sell a house and were forced to go to court?  Big money for me.  Wait, wait, what if when they tried to buy a house, they were forced to go to court then too?  Big money for me again.  And what if, even if they were just shopping for a house they could go to court?  Big money comes my way one more time.  With all these lawsuits, lawyers will be dancing in the aisles."

The opposition's entire focus is how this Proposition will line the pockets of lawyers.  There is no question that Proposition 201 may provide additional work for Arizona attorneys.  However, Proposition 201's foes are likely much more concerned about the fact that if Proposition 201 passes, home builders will have to provide a 10 year warranty on materials and workmanship, provide the owner of the home the choice of at least three qualified licensed contractors for each contract or subcontract for repair or replacement of any defect, disclosure of a seller's financial relationship with any financial institution, refund 95% of a purchase contract deposit within 100 days of execution, and extension of a dwelling action to ten years from the current eight year period. 

The opposition is rightfully concerned that Proposition 201 prevents any purchase contract from having a provision requiring the purchaser to pay the attorney's fees or expert fees of the seller under any circumstances.  While this certainly sounds heavily skewed in the buyer or owner's favor, the fact is, Arizona law (A.R.S. Section 341.01) still provides that the prevailing party in any dispute arising out of contract is entitled to recovery of their reasonable attorney's fees.  

In the end, while the opposition to Proposition 201 fears that lawyers will be the winners in the end, their attacks fail to recognize that purchasers of homes would still be responsible for footing the bill for their own legal expenses, which is a built-in mechanism for limiting frivolous lawsuits, not to mention that sanctions (Rule 11, Arizona Rules of Civil Procedure) remain available to ward off such suits.  Forget the attorney's fees and "lawyer" abuse, the home builders should be much more concerned about having to offer 10 year warranties, fully disclose their relationships with lenders and title companies, and actually fix or pay for defects.

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When Congress established the Territory of Arizona in 1863, Congress set aside sections 16 and 36 of each township of the Territory of Arizona for the benefit of the Common Schools, a practice first established by the Northwest Ordinance in 1787.  Congress recognized then the value of land and the importance of public schools to the developing nation.  In addition to the land set aside by Congress in 1863, the 1910 Arizona-New Mexico State Enabling Act, which allowed the Territory of Arizona to prepare for statehood, also set aside sections 2 and 32 of each township to be held in trust for the Common Schools.  The set aside for the Common Schools in Arizona currently totals approximately eight million acres. 

One of the early actions by the Arizona legislature after statehood was to create the State Land Commission, who were charged with assessing, evaluating, and making recommendations about the use of the state land trust .  The Commission, which later became the Arizona State Land Department, concluded that Arizona should not sell its Trust land outright, as other states had done.  Instead, it should put the lands to their "highest and best use."  This concept may well have been gleaned from the General Mining Act of 1872, which effectively states that mining on federal lands is deemed to be the "highest and best use" of that land.

The "highest and best use" concept has historically led the Arizona State Land Department to attempt to maximize the revenue for the designated beneficiaries of the trust, namely the Common Schools.  Increasingly, this concept has been criticized because it fails to incorporate any potential for conservation of those lands. 

Indeed, a 2006 initiative attempted to give the state of Arizona more power in managing the state land trust and also attempted to set aside over 600,000 acres of state trust land for conservation purposes.  However, that initiative failed.  A similar initiative will be on the ballot in 2008, which proposes setting aside some 570,000 acres of state trust land.  Undoubtedly, the competing interests of maximizing revenues for the state land trust and the pressure to conserve sensitive state trust lands will continue to play out in both the Arizona legislature and through the public initiative process.

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