Am I protected from my lender seeking a deficiency?
We receive many calls a month from concerned property owners wondering whether they will be liable for the difference between the value of their home and the amount they owe if they are foreclosed on. The answer to this question depends on several factors but in most cases the answer may be determined without much difficulty. The threshold question of the applicability of the relevant statutes in Arizona can resolve most questions.
The “anti-deficiency” statutes in Arizona are found in Title 33 of the Arizona Revised Statutes. Ariz. Rev. Stat. §33-729 governs whether a deficiency may be sought in a judicial foreclosure action. Ariz. Rev. Stat §33-814 governs whether a deficiency may be sought after a non-judicial foreclosure, otherwise known as a trustee’s sale. The first determining factor is whether the type of property involved is a qualifying property under the statutes. Both statutes only apply to single or two-family dwellings on two and one-half acres or less. Commercial properties, multi-family housing projects, vacant land and properties in excess of two and one-half acres are not protected from a deficiency being sought unless the loan and/or security documents applicable to the loan secured by the property contain a non-recourse provision protecting the borrower.
The other factor that may determine whether a deficiency may be pursued is the action taken by the lender. Ariz. Rev. Stat. §33-729 protects against a deficiency in the case of a judicial foreclosure only in the event that the amount borrowed is “purchase money.” Purchase money funds are those funds borrowed to purchase the single or two-family dwelling or to refinance the original purchase money obligation. Generally if a lender files a foreclosure action, they can seek a deficiency if the funds borrowed were not purchase money. When a refinance of purchase money is made and cash is taken out in addition to paying off the remaining purchase money obligation, there is a question as to whether the borrower is protected. This issue is currently winding its way through the appellate process to hopefully determine with more clarity whether the non-purchase money portion of a refinance loan can be sought as a deficiency by a lender who files a foreclosure action.
When a lender chooses to conduct a trustee’s sale on a qualifying property, they are barred from filing an action seeking a deficiency judgment after the sale. It does not matter whether the obligation secured by the property sold at the trustee’s sale was purchase money or not. It could even be a home equity loan from which the owner used the proceeds to purchase something completely frivolous. If the lender chooses the non-judicial remedy of trustee’s sale and the property is a single or two-family dwelling on two and one-half acres or less, the lender cannot seek a deficiency judgment. If, however, the property is not a qualifying property the lender has ninety days after the sale in which to file a deficiency action in court seeking the difference between the fair market value of the property at the time of sale and the amount owed. However, a subordinate lender who has made a non-purchase money loan secured by an otherwise qualifying property that has their security interest terminated by a trustee’s sale on a superior deed of trust is not prohibited from suing the borrower for breach of contract due to non-payment of the note that is no longer secured by the property. This issue is especially important to consider by those who have significant home equity lines of credit that they have borrowed against prior to the current real estate market decline.
The above paragraphs answer the primary questions that have to be answered when determining whether a deficiency may be pursued by a lender. However, there are many nuances that can affect the applicability of the statutes to a given situation. Since there are also many questions beyond the initial determination of the applicability of the anti-deficiency statutes that should be considered, clients of real estate professionals should always be advised to seek legal and tax counsel prior to making a decision concerning their secured loans. Any time a client is questioning whether they should stop paying and allow foreclosure of a residence or to attempt a short-sale of their property, they should be referred to a professional to help them reach an informed decision.