Anti-deficiency Statute Doesn't Apply in Mexico

  Question: We bought through a Mexican trust a condominium in Rocky Point, Mexico, during the “boom” time. The mortgage financing for the purchase of this condominium was with our bank in Arizona. Although we have managed to stay current on our mortgage payments, we are at least $200,000 underwater, and we no longer can afford the mortgage payments. One of our neighbors has gone with us to Rocky Point several times. He wants to buy our condominium from us but at a lower price than the amount owed on our mortgage. In other words, a short sale would need to be approved by our bank in Arizona. If our bank will not approve the short sale, we are thinking about letting the condominium go to foreclosure, and our neighbor would then try to buy the condominium at the foreclosure sale. Would we have any liability for the underwater loan if there was a foreclosure? In other words, does Arizona’s anti-deficiency statute, which prohibits any liability for a deficiency after foreclosure of a loan used to purchase a home, apply to our condominium?

  Answer: Puerto Peñasco (Rocky Point) is located in the state of Sonora, which to my understanding does not have an anti-deficiency statute. Therefore, although your bank is in Arizona, the property is in Mexico and Arizona’s anti-deficiency statute should not apply after foreclosure. A good option for you would be to do a short sale with your neighbor, and in the short-sale agreement with your bank in Arizona, request that the mortgage loan be treated as a non-recourse loan with no deficiency and no tax consequences. If there is a foreclosure, you probably would have personal liability to your Arizona bank for a deficiency. Mexico does not have private foreclosures such as the trustee’s sales in Arizona, which can take place in the offices of a lawyer or a title company. Mexico requires judicial foreclosure lawsuits in Mexican courts.