Most of you are familiar with the fact that Arizona has in place an anti-deficiency statute that generally protects homeowners from lending institution claims where the amount of the loan is greater than the value of the home for the amount received at a trustee’s sale. This protection applies to purchase money mortgages with a residential dwelling of 2.5 acres or less.

Example:

original purchase price of the home:                            $200,000.00
down payment:                                                           $50,000.00
amount borrowed and current balance owed:               $150,000.00
current value of home and amount of home
sold at foreclosure sale:                                              $125,000.00
amount outstanding and due and owing to
lending institution:                                                      $25,000.00
(deficiency).

In this example where the purchase money mortgage is involved, the homeowner is protected by any claim from the lending institution before or after the trustee’s sale.

There are several scenarios where the anti-deficiency protections of A.R.S. 33-814 are not afforded the homeowner.

Second Mortgages
Where a homeowner took out an equity line of credit (HELOC) and the money was not used to purchase the home but may have been used for personal expenses such as a car or boat, Arizona’s anti-deficiency law does not protect the homeowner from a claim by a lending institution under a second deed of trust in the event of a foreclosure. The lending institution may pursue a separate lawsuit after the trustee’s sale and pursue the homeowner for the amount due on the second deed of trust.
Therefore, it is important to deal with the second lien holder early, even before the default has taken place and most certainly during the foreclosure process. Once the homeowner is not financially able to make payments on the first deed of trust, the homeowner should consider various options. One important option would be to attempt to sell the home in a “short sale” with the hope that the prospective buyer would pay the lion’s share of the first mortgage even if the value of the home is insufficient to pay the first mortgage and the second mortgage. If the home is listed as a short sale, any offers must be presented to both the first and second lien holders. In most instances, the lending institutions request financial information from the homeowner in order to confirm that the homeowner has insufficient capacity to make ongoing payments on a current basis.

It is not uncommon for a first lien holder to agree to use a portion of the sales price to apply to the second lien holder even in those instances where the sales price does not fully reimburse the first lien holder. The advantage of settling with the second lien holder is that the homeowner avoids having the second lien holder pursue the full amount of the obligation by a separate lawsuit after the trustee’s sale.

In conclusion, where a home equity line of credit was not a part of the purchase price of the home, the homeowner should be proactive in attempting to deal with and settle with the lien holder early on and seriously consider a short sale prior to the trustee’s sale.

Unimproved Land and Subdivision Lots
The anti-deficiency statute does not protect the property owner after a trustee’s sale if there is no residential dwelling or if the size of the property is greater than 2.5 acres. For instance, where the value of the property and the bid at the trustee’s sale was $50,000 less than the amount owed to the landholder, the lender can pursue a lawsuit for the balance of the amount owed. The lender, however, has only a 90 day period of time to file such a lawsuit, otherwise the claim is barred.

In general, the courts have held that this deficiency lawsuit must be brought within 90 days of the trustee’s sale and therefore operates as a statute of limitations barring further claims from the lending institution after the trustee’s sale. Arguably, this is also true even in instances where the lending institution, as part of the initial loan, has requested the waiver of the anti-deficiency protections under Arizona law.

Lat J. Celmins
lcelmins@mclawfirm.com
480-994-2000