As a result of the declining real estate market, many homeowners are faced with the prospect of losing their home to foreclosure. If the proceeds of the foreclosure sale of the property secured by a mortgage or by a deed of trust are insufficient to pay the full loan balance, the mortgagee or the beneficiary may be entitled to a judgment against the homeowner known as a “deficiency”. The question then becomes when can a lender pursue a homeowner in the event of a deficiency?
The Arizona Legislature enacted two anti-deficiency statutes barring the right of certain beneficiaries and certain “purchase money” mortgagees from seeking a deficiency judgment for certain types of residential loans. The Arizona statutes that prohibit deficiencies are found in A.R.S. §§ 33-729(A) and 33-814(G).
Purchase Money vs. Non-Purchase Money Loans
The Arizona anti-deficiency statutes protect borrowers against deficiency judgments involving single or two-family dwellings on 2 ½ acres or less where the loan is “purchase money”, meaning it was used to pay the purchase price of the property. In this instance, the homeowner has no personal liability for the loan, unless the lender has committed waste to the home. Therefore, the lender’s only recourse after loan default is to foreclose on the home, and the lender cannot waive foreclosure and sue to collect the balance owed on the loan. If, however, the loan was not used to purchase the home, i.e. a home equity line of credit, the lender can waive foreclosure and sue to collect the remaining balance on the loan.
Even if the loan is a non-purchase money loan, the lender will be barred from seeking a deficiency judgment if the lender chooses to foreclose by a trustee sale rather than a judicial foreclosure. Trustee sales are an option for the lender when the loan is secured by a deed of trust. Trustee sales are quicker and less expensive than judicial foreclosures.
Impact of Refinancing
What happens in the event of a refinancing? In Bank One, Arizona, N.A. v. Beauvais, 188 Ariz. 245, 934 P.2d 809 (App. 1997) the Arizona Court of Appeals dealt with the extending, renewal or refinance of purchase money loans. The Court held that the extension, renewal or refinancing of a purchase money note retains its character as a purchase money note. Therefore, the anti-deficiency statute would protect a refinance of a purchase money loan in the same way as the original loan.
Beauvais did not resolve the issue of whether a homeowner who refinances a purchase money loan and borrows funds in addition to the remaining balance of the original loan amount will receive protection under the anti-deficiency statutes for the total amount of the new loan, or whether the amount can be bifurcated for the purpose of determining the purchase money and non-purchase money amount. This issue was recently addressed in the Arizona Appeals Court case of Helvitica Servicing Inc. v. Pasquan, 1 CA-CV 10-0418.
In Pasquan, the Court of Appeals held that in the event of a “cash-out” refinance, the purchase money portion of the loan is eligible for anti-deficiency protection while the cash-out portion is not. In the future, Pasquan may be appealed to the Arizona Supreme Court, but for now it provides some clarification to the unanswered question in Beauvais concerning the application of the anti-deficiency statutes to “cash-out” refinances.
If you are facing foreclosure, contact a knowledgeable attorney to discuss the facts of your particular situation.