What are Arizona's "Anti-Deficiency" Statutes for Residential Mortgages and Why Should You Care?

If you are an Arizona homeowner, or know someone who is, you should be familiar with Arizona's "anti-deficiency" statutes.  

The anti-deficiency statutes answer this question: Can a lender who forecloses on a residential mortgage sue the former homeowner for the difference (the "deficiency") between what is owed on the home and what the home was sold for at auction?  Let's look at an example:

$250,000 owed by the homeowner at time of foreclosure LESS $150,000 received by the lender at auction EQUALS a $100,000 deficiency. Can the lender sue the homeowner for the $100,000 that remains due?

First, the most common answer: the  majority of residential foreclosures in Arizona concern Trustee’s Sales related to purchase money loans secured by deeds of trust upon single- family residences located on 2.5 acres or less. In such cases, the lender may not obtain a deficiency judgment against the borrower.

It is not always easy to determine if you qualify for protection under the statutes.   Here are Steps and Rules to help:

Do You Qualify?

STEP 1: DETERMINE WHETHER YOUR MORTGAGE LOAN IS “PURCHASE MONEY” OR “NON-PURCHASE MONEY”

• A loan is purchase money if it secures a mortgage given to secure the payment of all or part of the purchase price of the subject real property.
• A mortgage loan secured by a borrower’s residence is not purchase money if the proceeds of the loan are used to purchase a different residence such as a vacation home.
• Home equity loans that are not 80/20 loans typically are not purchase money.
• A construction loan is purchase money if the proceeds of the loan are used to build a residence and: (i) the deed of trust securing the loan covers the land and the dwelling; and (ii) the loan proceeds were in fact used to construct the residence.

STEP 2:  DETERMINE WHETHER YOUR PROPERTY IS A “QUALIFIED PROPERTY “ PROTECTED BY THE ARIZONA “ANTI-DEFICIENCY” STATUTES

•  A “Qualified Property” protected by Arizona’s “anti-deficiency” statutes means real property of 2.5 acres or less and that is limited to and utilized as a single one-family or single two- family dwelling. Real Property, regardless of its use, located on more than 2.5 acres of land is not a Qualified Property.
•  Is the property  being “utilized” as a single family dwelling?

STEP 3: DETERMINE WHICH OF THE FOUR GENERAL RULES LISTED BELOW APPLY TO YOUR LOAN

RULE #1: PURCHASE MONEY LOAN + SECURED BY A QUALIFIED PROPERTY

• Trustee’s Sale: NO DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.
• Judicial Foreclosure: NO DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.
• Short Sale: NO DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER—the mortgage lender cannot elect the remedy to voluntarily release/waive the mortgage lien on the real property collateral and sue the borrower directly on the unsecured note.

RULE #2: PURCHASE MONEY LOAN + SECURED BY A NON-QUALIFIED PROPERTY

• Trustee’s Sale: DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.
• Judicial Foreclosure: DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.
• Short Sale: DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.

RULE #3: NON-PURCHASE MONEY LOAN + SECURED BY A QUALIFIED PROPERTY

• Trustee’s Sale: NO DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.
• Judicial Foreclosure: DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.
• Short Sale: DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.

RULE #4: NON-PURCHASE MONEY LOAN + SECURED BY A NON-QUALIFIED PROPERTY

• Trustee’s Sale: DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.
• Judicial Foreclosure: DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.
• Short Sale: DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.

STEP 4: CONSIDER THE “FAIR MARKET VALUE” LIMITATION OF ANY DEFICIENCY JUDGMENT OBTAINED BY THE MORTGAGE LENDER

• Any deficiency following a Trustee’s Sale or a Judicial Foreclosure permitted against either a borrower, or a guarantor, is subject to a “fair market value” limitation. In other words, the deficiency amount is calculated as the difference between the loan balance due on the date of the foreclosure sale less the greater of the foreclosure sale price or the “fair market value” of the property on the date of the sale.

Finally, a word of caution.  There are numerous exceptions to the Rules listed above, and not every example under each Step has been provided because of the complexity of circumstances that may exist in unique situations.  As with any information posted on this blog, you should consult with a competent attorney if you have questions.