Although Arizona’s anti-deficiency statutes have been on the books for over 40 years, the application of these laws has undergone a continual evolution as circumstances in the real estate market have changed. That evolution continued earlier this year when the Arizona Court of Appeals finally clarified a glaring ambiguity that had existed since 1997.
Arizona’s anti-deficiency statutes, codified as Arizona Revised Statutes §§33-729(A) (mortgages) and 33-814(G) (deeds of trust), were implemented to protect consumers from the financial ruin of not only losing their home to foreclosure but also losing all of their nonexempt personal property on the execution of a deficiency judgment by the lender.
Further, the statutes shifted the risk of inadequate security to the lender who is assumed to be in a better position to evaluate the proper value of the collateral used to secure a loan. However, these rules were limited to specific types of loans, foreclosures, borrowers, and properties. Regardless of these attempts to narrowly define the purpose of these statutes, questions as to how they were to be applied began to arise.
In 1997, the Arizona Court of Appeals faced such a question in the case of Bank One, Arizona, N.A. v. Beauvais, 934 P.2d 809, 188 Ariz. 245 (Ariz. App Div. 1, 1997). Previous interpretations of the statutes and Arizona case law had established that lenders could not obtain deficiency judgments against borrowers in the case of a non-judicial foreclosure or in the case of a “purchase money” mortgage (when a loan was procured to purchase the property that secured the loan). But in a market when loans are constantly assigned, restructured, extended, renewed, and refinanced, under what circumstances would the character of a “purchase money” loan change?
In the Beauvais case, the borrower took out a purchase money loan, then took out a second loan which was consolidated with the purchase money loan. The consolidated loan was subsequently renewed and extended through a final loan. The lender argued that it was suing on this final loan which should not be considered purchase money because it was not the loan used to purchase the security interest, but a new loan used to pay existing obligations.
The Beauvais Court rejected this argument and held that a purchase money loan would not lose its character when extended, renewed, or refinanced. Beauvais also stated that a loan that contains both purchase money and non-purchase money would not lose statutory protection. This ruling was a boon to borrowers and went a long way to help define the rights of the parties in such common transactions. However, the Beauvais case raised a new question and explicitly left it unanswered.
Almost 15 years to the day after the Beauvais decision, the Court answered the question so many borrowers facing foreclosure on their refinanced loans had wondered. Would they be liable for the equity they had taken out of their homes? In Beauvais, the Court brought up but immediately punted the issue as to whether a lender could sue for only the non-purchase money portion of a mixed loan. With the prevalence of refinancing during the housing boom, many mortgages were partly purchase money (monies used to pay off the original loan) and partly a cash loan that borrowers had used to improve their homes, pay off other debts, or any number of other purposes.
The Court of Appeals now has once again stepped in to clarify the application of the anti-deficiency statutes. In Helvetica Servicing, Inc., v. Pasquan, (Ariz. App. 2012), the Court struck a landmark decision granting lenders the right to trace, segregate, and recover the non-purchase money portions of mixed money loans in a deficiency action against a defaulting borrower.
If you are facing foreclosure, there are still many factors that come into play when determining your potential liability. The rules of what constitutes purchase money were expanded by the Helvetica decision and the remedy of tracing non-purchase money in a deficiency action is only available to lenders using specific types of foreclosure. If you have questions about your home loan, feel free to contact our office for a consultation.