Foreclosure And Deficiency Judgments In Arizona

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Foreclosure And Deficiency Judgments In Arizona

A.R.S. 33-814, Arizona’s residential anti-deficiency statute, generally prohibits a deficiency judgment against a borrower for a loan secured by the borrower’s personal residence if the property is two-and-a-half acres or less and is used for a single one-family or two-family dwelling. In pertinent part, the statute provides that,

If trust property of 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 is sold pursuant to the trustee’s power of sale, no action may be maintained to recover any difference between the amount obtained by sale and the amount of the indebtedness and any interest, costs, and expenses.

A.R.S. § 33–814(G).  However, there are exceptions to this rule, such as when the loan is not a purchase money loan, the lender does not foreclose on the home, or the property is vacant and not being used as a dwelling.

Residential Purchase Money Loans

Residential purchase money loans (i.e., loan for the purchase of the subject property) are entitled to statutory anti-deficiency protection; that is, the lender cannot seek a money judgment against the borrower.  Helvetica Servicing, Inc. v. Pasquan, 470 P.3d 155 (Ariz. 2020).  Such protection extends to “construction loans” but not to “home improvement loans.” Id.  Whether a loan is a construction loan or a home improvement loan is a question of fact that the trial court must resolve. Id.

Non-Foreclosure Lawsuits

A lender who holds a deed of trust as security for a loan may sue on the note as long as the proceeds of the loan were not used as purchase money. Wells Fargo Bank, N.A. v. Brewer, 1 CA-CV 12-0383, at *8-9 (Ariz. Ct. App., 2013)(citations omitted). The extension, renewal, or refinancing of a purchase money loan retained the original loan’s character as a purchase money note.  Id.  In other words, A.R.S. 33-814 does not prevent a lender form waiving its right to foreclose its lien on the property and instead sue the borrow directly for breach of the underlying debt, typically evidenced by a promissory note, and obtaining a money judgment for breach of the loan.

Not Used as a Dwelling

Arizona’s anti-deficiency statute does not bar a deficiency judgment against an owner of vacant property. BMO Harris Bank, N.A. v. Wildwood Creek Ranch, LLC, 236 Ariz. 363 (Ariz. 2015). By its terms, A.R.S. 33-814 applies only to property that is “utilized for either a single one-family or a single two-family dwelling.” Id.  The court noted that the legislature recently amended A.R.S. § 33–814 to clarify that,

subsection (G) does not apply to trust property that was (1) developed for commercial resale to a third party, (2) never substantially completed, or (3) never used as a dwelling .A.R.S. § 33–814(H).

The court also noted that a vacant property is not being utilized for a dwelling even if the borrower intends someday to construct and occupy a home there. Id at 366.

Arizona law affords homeowners with substantial protections against home lenders, but beware: there are exceptions that may expose you to substantial liability.

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