Marc McCain

I recently attended a seminar that provided very interesting insight into the minds of lenders and why they continue to press rights against borrowers in certain contexts.  Below is a summary of issues that lenders and their counsel believe are unsettled in Arizona, despite the strong policies behind Arizona’s anti-deficiency statutes as discussed in several reported Arizona cases:

1.  Refinances of an original purchase money mortgage where no additional money is distributed to the borrower.  Lenders are arguing that no Arizona case clearly addresses whether a refinance of a purchase money mortgage, especially from a new lender, retains its purchase money character.  Lenders point to cases from other states that hold a loan loses its purchase money character when refinanced.  Of course, even if a loan is non-purchase money, if the trust property is 2.5 acres or less, has been utilized as a dwelling and the lender actually conducts a trustee’s sale, then the lender will be barred from seeking a deficiency since the trustee’s sale statute does not require the loan to be purchase money in order for the borrower to get anti-deficiency treatment.  However, for junior loans that are refi’s of prior purchase money loans, lenders could conceivably make this argument and sue a borrower under the Baker Court’s rational (i.e., if a loan is non-purchase money, the lender can sue the borrower on the note). From a borrower perspective, if Arizona courts were to accept this lender argument, consider the practical effect. Many borrowers took advantage of cheap loans over the past decade and refinanced their initial purchase money loans.  If all of these borrowers were suddenly deemed to lose purchase money protection, the potential impact on Arizona consumers and the Arizona economy would be huge.  Thousands of borrowers would suddenly be subject to potential lawsuits and deficiency actions.  Moreover, given the Beauvais decision, coupled with the policy behind Arizona’s anti-deficiency statutes and the reasoning in the Baker decision, I find it hard to believe an Arizona court would strip borrowers of purchase money protection in this context, although nothing is impossible.  As I remind clients, anyone can be sued at any time, for any reason.  For this reason, an amendment to Arizona’s anti-deficiency laws would provide great clarity on this and other issues.    

2. Short sales do not get anti-deficiency treatment since they are voluntary transactions that are not in the foreclosure context.  Although consumer counsel like myself could not disagree more, if lenders want to make this argument in a court of law, they can, and a borrower must defend the lawsuit or face a possible default judgment.  Moreover, litigation is costly, even if you have the better argument. So, if a lender were to sue a borrower for a deficiency following a short sale, a borrower must make a difficult decision as to how to spend its resources – fighting the lender, attempting to settle, or perhaps seeking bankruptcy protection. As a result, I will continue to stress that it is imperative to seek a lender’s express written waiver or release of any deficiency rights in a short sale.  If a lender is unwilling to give such a release, then a borrower must carefully analyze its risks and whether it should go through with a short sale.  Moreover, since a lender typically requires a borrower to submit financial information as part of the short sale process, a borrower must contemplate the risk of disclosing its assets to a lender and having that information used against it in subsequent collection efforts (whether after a short sale, or if a short sale is not consummated, in a deficiency action or suit on a note following a foreclosure).

 3.  Construction loans on residential lots can not get anti-deficiency protection (at least not under the judicial foreclosure statute) because the loan was not made on a single 1 or 2-family dwelling, even if the dwelling is subsequently constructed and utilized as a dwelling.  Lenders may take the position that a construction loan for a new residence on 2.5 acres or less should not get anti-deficiency protection because the statutes should be interpreted to mean that the dwelling existed and was in use at the time the loan was made.  This reasoning seems to runs contrary to the Arizona Supreme Court’s decision in the Mid-Kansas case.  Moreover, if a trustee’s sale is actually held, the clear statutory language of 33-814(G) should prevent the lender from seeking a deficiency where the 1 or 2-family dwelling is complete and has been utilized.  However, if lenders want to push the issue, like noted above, they can, and a borrower will have to weigh its options and their respective costs and risks.