A common question from potential clients is whether a mortgage lender can sue for any deficiency amount owing after a foreclosure. It is imperative for a person facing any foreclosure to consult with a competent Arizona real estate lawyer, Arizona foreclosure lawyer or Arizona bankruptcy lawyer to determine the correct analysis to this scenario.
Arizona Anti-Deficiency Statute
Under Arizona law, if you took out a mortgage for property consisting of two and one-half acres or less utilized as a residence (either by yourself or another person, such as a renter) and a trustee sale occurs (which is the primary method lenders use to foreclose on property in Arizona) by that mortgage lender, the lender generally cannot sue you for any deficiency amount. For example, if you took out a $100,000 first mortgage and the house is only worth $70,000 at the time this lender forecloses, the lender cannot sue you for the $30,000 deficiency balance.
Furthermore, a borrower will not be liable for any deficiency amount in connection with any loan used to acquire property of two and one-half acres or less utilized as a residence, even if that lender was in second position and did not initiate the foreclosure. For example, if you have a first mortgage for $100,000 and a second HELOC mortgage for $50,000 that you used to make home improvements, and the house is worth $70,000 when the first lender forecloses via a trustee sale, the first lender received the entire $70,000 because it was in first position. That first lender cannot sue you for the $30,000 deficiency you owe because the Arizona anti-deficiency applies to any trustee sale of a residence on two and one-half acres or less (regardless as to whether the loan was used to purchase the house). However, the second lender, which received none of the $70,000 because it was in second position, can sue you for the entire $50,000 because that lender did not conduct the foreclosure, and the $50,000 was not used to purchase the house.
Remember that the anti-deficiency statute only applies with residential mortgages. If you took out a loan for $500,000 to purchase commercial property or vacant land and your property was worth $400,000 when the foreclosure occurred, the lender can sue you for the $100,000 deficiency because the Arizona anti-deficiency statute does not apply to non-residential loans. In addition, the anti-deficiency statute does not apply to a mortgage loan by the Veterans Administration, even if such loan was used to purchase the residence.
Other Types of Loans
What if you took out a mortgage for $100,000 at 10% to purchase your home but later refinanced it with a different lender for the same amount at 5% interest? Do you still have protection under the anti-deficiency statute? Yes. What if you took out a $100,000 loan, but later refinanced it for $150,000, tapping into some of your home’s equity? Does the anti-deficiency statute apply? Based on a recent Arizona Court of Appeals case, the anti-deficiency statute does apply to that portion of the loan that refinanced previous purchase money. Furthermore, another Arizona Court of Appeals case recently held that the anti-deficiency statute does apply to a residential construction loan, even if a foreclosure occurs on such loan before the construction of the residence is completed.
Also, be careful with short sales. The Arizona anti-deficiency statute may not apply to a deficiency balance after a short sale because a short sale is not a foreclosure.
If you talk to a competent Arizona bankruptcy lawyer, the number one defense against any lawsuit where the anti-deficiency statute does not apply is to file a bankruptcy. That will relieve you from liability. However, you may be able to assert a “statute of limitations” defense in lieu of filing bankruptcy. Generally speaking, a mortgage lender that forecloses on your property has 90 days after the foreclosure to sue you for any deficiency amount (assuming the anti-deficiency statute does not apply). A lender in second position (i.e., a HELOC lender) does not have to comply with such 90 day period if that lender was not the lender that initiated the foreclosure. That lender can sue you, usually within 6 years after you defaulted on that loan.