UPDATE ON ARIZONA’S ANTI-DEFICIENCY LAWS
In Arizona, certain loans on residential real property are subject to what are called anti-deficiency laws. These laws limit a borrower’s liability to its lender if certain requirements are met. However, there are many misconceptions about Arizona’s anti-deficiency laws, when they apply, and whey they don’t. Moreover, Arizona’s anti-deficiency laws have been in recent flux, increasing the confusion in the market and borrowers’ anxiety as they try to navigate a very difficult and stressful situation. Arizona Senate Bill 1271 was passed in the summer of 2009 and briefly became the law until repealed, most recently by Arizona Senate Bill 1004. As a result, Arizona anti-deficiency law will remain unchanged, at least for now. For an understanding of the additional requirements that Senate Bill 1271 would have imposed to get anti-deficiency protection, see prior blog posts at www.marcmccain.com.
With the foregoing as a backdrop, set forth below are the general anti-deficiency rules applicable in Arizona now that Senate Bill 1004 has taken effect. However, borrowers must understand these are only general rules — every situation must be analyzed carefully based on the relevant facts and applicable law. And remember, the law can and may change!
1. In Arizona, if a borrower fails to pay its loan, a lender can foreclose its Deed of Trust lien either judicially per A.R.S. § 33-721 et. seq., or non-judicially by conducting a trustee’s sale per A.R.S. § 33-801 et. seq.
2. If the foreclosure sale price does not pay a lender what it is owed, the lender may generally seek a deficiency against the borrower for the balance of the loan. However, Arizona has what is called an anti-deficiency law that bars a lender from seeking a deficiency in certain situations. The anti-deficiency laws with respect to real property loans in Arizona are found in 2 places – in A.R.S. § 33-729(A) (regarding judicial foreclosures), and A.R.S. § 33-814(G) (regarding trustee’s sales).
3. In determining if Arizona’s anti-deficiency rules apply, the first step is to confirm what law applies to the loan, particularly the lender’s remedies under the Promissory Note. The applicable law should NOT be assumed. Read your Promissory Note and other loan documents carefully and understand their terms and what law will most likely apply to the lender’s rights under the Promissory Note.
4. Assuming Arizona law applies to the lender’s rights under the note, in both judicial foreclosures and trustee’s sales in Arizona, anti-deficiency rules apply only if the property being foreclosed meets the following criteria: (a) 2½ acres or less; and (b) limited to and utilized as a single one-family or single two-family dwelling.
5. For judicial foreclosures under A.R.S. § 33-729(A), there is the additional requirement that the loan be a purchase money (“PM”) loan for the borrower to get anti-deficiency treatment.
6. However, the trustee’s sale statute, A.R.S. § 33-814(G), does NOT require that the loan be a PM loan.
7. Special rule regarding purchase money loans: a PM loan does NOT lose its PM nature when it is refinanced. However, cash out refi’s raise interesting issues.
8. In judicial foreclosures, if the loan on qualifying residential property is a non-purchase money (“NPM”) loan, then the lender is not prevented from seeking a deficiency following a foreclosure or from suing borrower on the note. Only lenders that made PM loans on qualifying residential property are prevented from seeking a deficiency or suing the borrower on the note. However, for several reasons, judicial foreclosures on residential property in Arizona are relatively rare — most lenders foreclosure via a trustee’s sale.
9. In a trustee’s sale, both a PM and NPM lender that conducts the trustee’s sale on qualifying property will be prevented from seeking a deficiency after the foreclosure and from suing the borrower directly on the note.
10. Junior liens extinguished by a 1st position foreclosure may be able to sue on the note. The issue is whether the junior loan was a PM or NPM loan – if it was a PM loan on qualifying property, the lender can NOT sue the borrower on the note following the foreclosure; if it was a NPM loan, the lender CAN sue the borrower.
11. Arizona’s Supreme Court has ruled that a PM lender on qualifying property can NOT waive its security and sue directly on its note. This rule should prevent a PM lender on qualifying property from suing a borrower on the note before or after a foreclosure or after a short sale. However, other Lender claims are not barred – e.g. voluntary waste of the property. Moreover, many lenders are ignoring Arizona law in collection efforts and short sale approvals and negotiations.
12. Under the trustee’s sale statute, there is NO requirement that the trustor use the property as a dwelling – just that the property be used by someone as a dwelling. Thus, in most cases, residential investment or rental properties qualify for anti-deficiency treatment, even if they are not owner occupied properties.
13. However, Arizona’s Supreme Court has held that commercial properties and loans secured by residential homes being developed for sale but never utilized as dwellings do NOT qualify for anti-deficiency treatment under the statutes.
14. In addition, Arizona’s courts have ruled that a deed of trust that is a lien against more than one property will not be subject to anti-deficiency rules — the deed of trust needs to be a lien against a single trust property.
15. Even if anti-deficiency rules apply, a borrower will be liable to a lender for any diminution in value of the trust property due to voluntary waste. In other words, don’t damage the property, take fixtures, A/C units, etc., or let the property go to waste.
16. Real property taxes are NOT an owner’s personal obligation, but only a lien against the real property.
17. However, HOA assessments ARE an owner’s personal obligation and if not paid can result in credit damage, lawsuits and other collection efforts.
18. Arizona’s rules governing foreclosures and deficiency issues may apply to short sales, but a borrower must understand the law and its loan and realize that the outcome can be different in a short sale vs. a foreclosure, e.g., a short sale on a NPM loan will generally permit a lender to collect the balance due on its note whereas a trustee’s sale on the same loan will prevent the lender from seeking a deficiency. Short sales also present the parties with the chance to negotiate terms of the short sale and deficiency issues.
19. Consult with qualified tax professionals BEFORE deciding to do a short sale or foreclosure. 1099 income, gains, losses and other tax consequences may result from foreclosures, short sales and loan modifications. Know what tax consequences you will face!
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