Real Estate Mortgage Anti-deficiency Laws
Arizona has two laws which prevent certain lenders from seeking a "deficiency judgment" for certain types of residential loans. The laws are commonly known as "Anti-Deficiency Laws" and may allow you as a real estate owner and debtor to walk away from a property without owing a deficiency judgment amount.
Arizona's Anti-Deficiency Laws
If your house is secured by a Deed of Trust, generally then the lender may not recover any deficiency if (1) the property is 2.5 acres or less; (2) it is used for a single one family one family residence and (3) is sold pursuant to the Trustee's power of sale. In the unlikely circumstance that the home is secured by a mortgage (instead of a Deed of Trust) the same criteria applies. There is one wrinkle in the case of a mortgage or a deed of trust and that involves a home owner who causes a reduction in value of the property by not taking care of it or damaging it. Commercial properties and vacant land are not protected by these laws. VA loans and FHA loans have special considerations and may not be covered by these statutes because of federal law.
The protection of the Anti-Deficiency Laws for home owners apply whether the property is your primary residence or not. As long as the property is 2.5 acres or less and is being used as a single one or two family residence, the owner is often but not always protected from a deficiency.
What happens if, like many homeowners, you took advantage of increasing property values and low interest rates to refinance the loan? Do the anti-deficiency laws apply when there is a default in payment of that loan? Again, it depends. The answer turns on whether the loan is secured by a purchase money security device such as a deed of trust or mortgage.
The leading case in Arizona on this issue is Bank One of Arizona, N.A. v. Beauvais. That case suggests that a typical refinance loan keeps the character of a purchase money loan and is protected. This result could be different if the refinance added funds to the original loan. A consolidation loan where a first purchase money loan and a second loan are bundled together into a single loan, the protection would still apply where the first loan is larger.
What about a home improvement loan or home equity loan? This presents a problem for the home owner. A separate loan that is taken out for a purpose other than to buy the property is not a "purchase money" loan and therefore the anti-deficiency laws do not prevent a lender from waiving its security and suing the homeowner directly.
If a home owner fears that he or she does not qualify for this anti-deficient exception, one way a deficiency judgment may be avoided is by deeding the property back to the lender prior to foreclosure and securing a release. This is known as a deed-in-lieu of foreclosure. By accepting the deed, the lender is agreeing to accept the property for the amount that the person owes, thus eliminating any potential deficiency.
This article is a short summary of the law and there are many issues which may affect the application of these laws to the facts of your case.
To discuss your anti-deficiency or foreclosure concerns, please contact our office or call 623-239-4422 to speak with one of our experienced Arizona real estate attorneys.