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

Tax lien investors need to understand the importance of sub-taxing their tax liens in Arizona.  When a tax lien investor purchases a tax lien at the February Pima County tax lien sale, for example, that investor then has the right to purchase the next year's delinquent taxes if the owner does not pay the subsequent year's taxes prior to June 1st of each year.  

For example, if a tax lien investor purchased a 2008 tax lien at the 2010 Pima County tax lien sale and failed to sub-tax in subsequent years, that tax lien investor subjects herself to another tax lien investor redeeming out her position, thus losing her priority position.  Additionally, and perhaps more troubling, is the ability of an owner of record to redeem the tax lien investor's tax lien.  Suppose the tax lien investor, who owns the 2008 tax lien, wishes to begin the tax lien foreclosure process after three years (2013).  In this example, all the owner of record would have to do is redeem the 2008 tax lien and the investor's lawsuit has been thwarted.  However, had the 2008 tax lien holder sub-taxed the 2009, 2010, 2011, and 2012 taxes, not only would there have been no competing tax lien holders, in order for the owner of record to redeem, that owner would have to pay the delinquent taxes for 2008 through 2012, as opposed to just 2008. 

While there is certainly the possibility of successfully obtaining a property by only buying a single year's tax lien and not sub-taxing, the chances of redemption by another tax lien holder or the owner of record are substantially higher.  If you can afford to sub-tax your liens, do it. 

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Bank of America, which bought Countrywide Financial for $4 billion in stock in early 2008, has come under pressure from the Massachusetts Attorney General, as a result of Countrywide's notorious lending practices.  Bank of America's move is part of an agreement to settle claims over certain high-risk loans made by Countrywide.  See link to Wall Street Journal article.

Bank of America's program is limited to Countrywide borrowers whose loan balance is at least 120% of the estimated home value, who are at least 60 days overdue, and who can show that financial hardship makes them unable to meet current payments. The bank estimated that 45,000 customers will qualify for principal reductions averaging more than $60,000.  In the end, only the riskiest loans will be eligible. They include sub-prime loans; "option adjustable-rate" mortgages entailing minimal payments now but big increases later; and certain loans that have a fixed rate for two years and then adjust annually.

Any thought that principal reduction is the path the lenders are heading in should consider the limited scope of the agreement between Bank of America and the Massachusetts Attorney General.  Nonetheless, the action by Bank of America is notable because it is the largest mortgage servicer, collecting loan payments on one of every five home loans in the U.S. At the end of last year, 14.76% of them were at least 30 days past due or in foreclosure, versus an industry average of 12.31%, according to Inside Mortgage Finance. 

Principal reduction is clearly the direction that the large majority of underwater borrowers clearly are hoping the major banks are leaning towards.  Given that lenders must incur substantial costs in foreclosing, only to take a wash when they sell the foreclose property as a Real Estate Owned property, it only seems practical to try and keep people in their homes by reducing the principal.  I have seen many properties where the bank ended up selling a foreclosed property for substantially less than they would have made had they just worked with the homeowner.  No one claims that reason is driving this ship. 

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In the tax lien foreclosure world, appropriate service of process is absolutely crucial.  Consider what is at stake in a tax lien foreclosure case - the potential forfeiture of the right of the owner of a property to pay off their delinquent property taxes, which practically speaking means the likely loss of their property.  If you are going to foreclose on someone's property, for their failure to pay property taxes for five consecutive years, you better give them adequate notice of the pending case against them.  

A recent memorandum decision from Division 2 of the Arizona Court of Appeals, Leveraged Land, Montgomery, v. Hodges, 2 CA-CV 2009-0057, deals with the issue of what happens in a tax lien foreclosure case where the owner of record has only been served by publication in a newspaper.   Memorandum decisions, while instructive for lawyers to consider how the courts may rule in a future case, unfortunately cannot be cited by as legal authority.  

In Hodges, the tax lien investor filed a complaint to foreclose the owner's (Hodges) right to redeem the tax lien.  The tax lien investor apparently was unable to serve Hodges personally and served Hodges by publication.  A default judgment was eventually entered against Hodges and the tax lien investor obtained a Treasurer's Deed and then sold the property.  Hodges later filed a motion to set aside the default judgment, arguing in part that the judgment was void because he had "good cause" entitling him to a new trial.  The trial court denied his motion and Hodges appealed. 

Hodges argued in his appeal that he was "ready, willing, and able to redeem the property" and that entilted him to a new trial.  Under Rule 59(j)(1) of the Arizona Rules of Civil Procedure, when a judgment has been entered on service by publication, and the defendant has not appeared, a new trial may be granted upon application of the defendant for good cause shown by affidavit, made within one year after the judgment has been entered.  Relying on a 1942 case that was very similar in facts, the appeals court held that because Hodges was "ready, willing and able to redeem the property," the trial court erred in not granting the new trial.  The court remanded the case back to the trial court stating that the trial court should give Hodges a new trial. 

After sending the case back to the trial court, Hodges paid off the property taxes after working with some third-party investor who took a partial legal interest in the property.  The tax lien investor appealed the new judgment of the trial court arguing that Hodges did not have the ability at the time of the original case to pay off the tax lien, which Hodges admitted he did not.  The appeals court went on to rule that "the end result of a successful Rule 59(j) challenge is the restoration of a defendant's right to redeem."  The appeals court, applying equitable principles, stated that "purchasing tax liens entails risk and the onus is on the purchaser to protect its own interests."  The Court also stated that the tax lien investor must understand that any default judgment obtained through service by publication is open to attack for a year, and the fact that the tax lien investor decided to sell the property before that time had run was their own fault. 

Warning tax lien investors: if you are going to get into the tax lien investment world; beware, as there are pitfalls that come up that late night infomercials do not tell you that. 

Warning attorneys: do your due diligence upfront and get people served personally. 

Additional warning attorneys: it seems pretty clear that the court does not look too favorably on tax lien investing. 

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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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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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In cases involving real property, a plaintiff often will file what is called a "lis pendens," which is Latin for suit pending. The purpose of filing a lis pendens is to secure a plaintiff's claim on a property so that a sale, mortgage, or encumbrance of the property will not diminish the plaintiff's rights to the property, should the plaintiff prevail in its case.

The practical effect of filing a lis pendens is to alert a potential purchaser of the property in dispute that the property's title is in question, which obviously makes the property a whole lot less attractive to any potential buyer. In other words, once the lis pendens is recorded, it serves to place a cloud on the title to the property in question until the lawsuit is resolved and the notice is released or expunged. More importantly, the lis pendens has the effect of preventing most lenders and title companies from lending money on the security of land that is subject to a lis pendens.

Arizona's lis pendens statute is found in Arizona Revised Statutes Section 12-1191(A), which states in part that in "an action affecting title to real property, the plaintiff at the time of filing the complaint, or thereafter, . . . may file in the office of the recorder of the county in which the property is situated a notice of the pendency of the action or defense." A recent decision from the Arizona Court of Appeals in Sante Fe Ridge Homeowners' Association v. Carla Bartschi discussed under what circumstances does an action affect title to real property.

In Sante Fe, the Sante Fe Homeowners' Association filed a complaint against Carla Bartschi alleging breache of contract and sought injunctive relief for Bartschi's alleged violations of the Association's CC&R's. Sante Fe alleged that Bartschi had failed to maintain the landscaping on her property. In conjunction with its lawsuit, Sante Fe filed a lis pendens against Bartschi's property. Bartschi answered Sante Fe's complaint and filed a counter claim for wrongful recordation of the lis pendens, and sought statutory damages , attorney's fees, and costs under Arizona Revised Statutes Section 33-420(A). The trial court eventually granted Bartschi's request for statutory damages, ruling that Sante Fe's action did not affect title to real property and the lis pendens was prematurely recorded.

On appeal, the Arizona Court of Appeals ruled that Sante Fe's action did not affect rights incident to title to real property. The court reasoned that a "lawsuit affects a right incident to title if any judgment would expand, restrict, or burden a property onwer's rights as bestowed by virtue of that title." The Court ruled that Sante Fe's recordation of the lis pendens was premature because at the time it recorded the lis pendens no basis existed to conclude that a lien would be imposed on real property. If Sante Fe had obtained a lien against Bartschi, a basis may have existed to conclude that Sante Fe's action affected title to real property.

As a practitioner, it is nice to have additional guidance from the courts on issues like these, but it is troubling to think how much Sante Fe was willing to pay to appeal the decision. I have to wonder if the Association members were aware of Sante Fe's decision to appeal the trial court's ruling, and whether they would have allowed the Board to authorize the appeal if they knew how much money the Association stood to lose if Sante Fe lost on appeal, which in large part they did.

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Looks like Freddie and Fannie needs Daddy's credit card. With $5.3 TRILLION in combined mortgage debt (about 1/2 of the total mortgage debt in the United States), when Wall Street and the Feds begin to worry about Freddie and Fannie's financial health, there is good reason to be concerned.

Freddie and Fannie are the MAJOR players in buying and guaranteeing loans in the secondary mortgage market. Well, last night the federal government moved on two fronts to shore up Freddie and Fannie and try an allay the markets before they open on Monday. First, the Treasury said it would provide additional liquidity as needed (Remember Bear Stearns?). Unlike the Bear Stearns melt-down however, Freddie and Fannie generally have not faced liquidity problems. But as their problems proliferate, there is always a danger that they might face funding difficulties, thus, the need for daddy's credit card, just in case.

The feds also moved on another front - recapitalization. Freddie and Fannie are seriously undercapitalized. Freddie and Fannie are known as government sponsored enterprises ("GSE's"). As GSE's, Freddie and Fannie do not have to follow the same rules as others. Freddie Mac, for example, had about $16 billion in shareholder capital at the end of the last quarter, supporting $2.1 trillion in assets. Any real private financial sector institution operating with than kind of capitalization would be required to raise more money. But it seems that Freddie and Fannie don't have to play by real rules because the government has their back. That is why Freddie and Fannie can exist in a world where all their assets are invested in the mortgage market - not the place to be right now, right?

Nonetheless, it is interesting to not that last week Fed Chairman Ben Bernanke and Henry Paulson, appearing before the House Financial Services Committee stated that the Office of Federal Housing Enterprise Oversight (Freddie and Fannie's regulator), found both companies adequately capitalized. Indeed, Democrat Chris Dodd, the Senate Banking Committee Chairman also said that "Fannie and Freddie are in sound situation. They have more than adequate capital -- in fact, more than the law requires. They have access to capital markets. They're in good shape. The chairman of the Federal Reserve has said as much. The secretary of the Treasury as said as much."

The only thing stopping Daddy (Treasury/Henry Paulson) from extending credit is Congress. While this situation reeks of a potential bailout, the silver lining in all this is that Fannie and Freddie not only have a rich daddy, they happen to be backed by pretty decent mortgages, not the subprimes that tanked many mortgage lenders. Still, their shares have been battered, down nearly 45% last week. The real purpose in all this is to assuage market fear. The feds don't want market turmoil, otherwise, the house of cards comes tumbling down.

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