Understanding Risks of Foreclosure and Your Liability

Both homeowners and investors from our community are facing the problem of owning a home that has no equity. For some individuals, buying a new home for third of the price of their current one, that is bigger with several upgrades, might seem like the better financial solution and wish to walk away from their current home. For other homeowners who are struggling to stay current on their current home loans will have no other option, but to allow a foreclosure to happen. These types of decisions are a foreign concept to most of us in our community. Given the impact of our economy on the housing market, these never spoken of decisions, have become a reality for so many homeowners.

However, before you agree to short sale or allow a foreclosure to occur, it is important for you understand your liability on the loans securing your home. Even applying for a loan modification can modify your rights under certain Arizona law.  Law relating to the rights of lenders and defenses available to the homeowner can be complex, so it is important that your decision to walk away, or allow a foreclosure, short sale, or even a loan modification to occur, is a decision that is an informed one.

As a Bankruptcy Attorney, I often have clients who either agreed to a short sale or allowed a foreclosure to occur and have been left with the question “Am I still liable for the deficiency?” The answer is not a simple one and is one based on case specific factors. However, understanding what defenses the Anti-Deficiency Statute in Arizona can provide you is important.

Before you agree to short sale or allow a foreclosure to occur, it is important for you understand your liability on the loans securing your home.

Houses in a neighborhood (Photo by Breno Assis on Unsplash)

To schedule a consultation, call Patel Law PLC., at (602) 266-2169.

What is the Anti-Deficiency Statute?

Arizona is one of few states who have adopted the “Anti-Deficiency Statutes”, which provides protection from a deficiency judgment for consumers and homeowners and can prohibit lenders in some cases from seeking deficiency judgments under certain types of residential loans.

Arizona’s anti-deficiency laws are found in Arizona Revised Statutes § 33-729(A) (regarding judicial foreclosures of mortgages and deeds of trust), and Arizona Revised Statute § 33-814(G) (regarding trustee’s sales under a deed of trust). General rule summed up in these two statutes is, if both the borrower’s property and the loan qualify for anti-deficiency protections, the lender will have no recourse against the borrower other than foreclosing on the property that secures the loan. 

Your Legal Obligation to Pay the Deficiency

The amount of paperwork that a homeowner signs at closing is overwhelming and can be confusing. Among the massive amount of documents, there are two that are important in understanding your liability under your home loan: a promissory note and a deed of trust.

When a borrower signs a promissory note, the borrower promises to pay the lender a specific amount of money according to the conditions stated in the promissory note. Lenders frequently require that the borrower secure the promise to pay with a lien on real estate.  Arizona real property owners who grant a security interest in their real estate do so by signing a mortgage or a deed of trust that is recorded in the county in which the real property is located.  Almost all Arizona lenders use a deed of trust rather than a mortgage because it is usually cheaper and quicker to foreclose under a deed of trust than under a mortgage.  A lender can foreclose its deed of trust lien either judicially by filing a lawsuit in superior court or non-judicially by conducting a private trustee’s sale.

When a foreclosed property is sold at an auction, the amount that the lender does not receive from the mortgage balance and expenses due is called a deficiency.  A deficiency is the difference between the total amount owed to the lender (principal + interest + foreclosure expenses + other amounts due under the loan documents) and the amount received by the lender at a foreclosure sale.  The lender may exercise the option to get a judgment in this amount, called a “deficiency judgment,” against the borrower. The Anti-Deficiency Statute protects the borrower from facing a judgment for this deficiency amount.

Purchase Money Loan Requirement under the "Anti-Deficiency Statute"

There are several requirements stated in the statutes to qualify for protection under the Anti-Deficiency Statues. There is a purchase money loan requirement, as well as certain property requirements. Keep in mind, this area of law is under constant revision, and application of the law depends on pending case law.

A.R.S. §33-729(A) applies to purchase money mortgages. A purchase money mortgage is a loan “given to secure the payment of the balance of the purchase price, or to secure a loan to pay all or part of the purchase price.” However, the statute would not protect borrowers who have assumed the mortgage on the property, mortgaged one home to purchase another, or have obtained home equity lines of credit. It is unclear whether second mortgages taken for improvements of the property fall under the protection of the Anti-Deficiency Statute. A.R.S. §33-814(G) applies to deeds of trust foreclosed by trustee’s sale. The Statutes do not provide for non-purchase money mortgages. It is also unclear whether a borrower, who received a loan modification, where the original mortgage was modified to create a new loan, would qualify for protection under the Anti-Deficiency Statute.

Property Requirements under the "Anti-Deficiency Statutes"

Under both of the statutes, property requirements are the same: the property securing the loan must be “two and one-half acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling.” A.R.S. §§ 33-729(A) and 33-814(G). Generally, the statutes do not protect borrowers of commercial properties, raw land, and residential property with more than two units. To qualify under the statutes, the home secured by the Deed of Trust must satisfy the following: 1. It is on a parcel that is two and half acres or less; 2. The home itself is a completed (fully constructed), single, one or two family dwelling; and 3. The home is at least occasionally occupied by the owner or another party (it is the borrower’s personal residence, a second home, or a rental/investment property that was or is being leased to a tenant).

There continues to be a gray area in the Anti-Deficiency laws which have not been sufficiently addressed by the appellate courts in this state. For example, the law is not clear whether a new refinancing of an existing purchase money loan is subject to the anti-deficiency protections. The law is also unclear to what extent will a construction loan be considered a purchase money loan if the home is actually completed and used as a residence prior to the foreclosure or suit on the promissory note.

If you have questions about Arizona’s Anti-Deficiency Law or the legal consequences of short sale or foreclosure, please call our office to set up a consultation. Attorney Chhayal Patel would be happy to review your situation and answer your questions.