The Arizona anti-deficiency statute is a hallmark of consumer protection. Many clients inquire whether a mortgage lender can sue for any deficiency amount owing after a foreclosure. A person facing any foreclosure should consult with a competent Arizona real estate lawyer, Arizona foreclosure lawyer or Arizona bankruptcy lawyer to determine the correct analysis.
How do lenders conduct foreclosures in Arizona?
In Arizona, most foreclosures occur as “trustee sales”. A trustee sale is an auction and does not require a lawsuit to initiate the foreclosure. The lender will send the borrower written notice of the date and time of the trustee sale auction. The auction usually takes place approximately 90 days after the date the lender issued the notice.
Trustee sale anti-deficiency statute
If all of the following are true, the lender generally cannot sue you for any deficiency amount:
1. The property consists of two and one-acres or less;
2. The property consists of a residential dwelling unit intended to be occupied (including a tenant); and
3. The lender conducts a trustee sale auction.
For example, assume you have a first mortgage with a $100,000 balance and have stopped making payments. The lender schedules a trustee sale auction. At the auction, the highest bid is $70,000, which is not enough to satisfy the $100,000 balance. The lender cannot sue you for the $30,000 deficiency balance. It makes no difference how you used the loan proceeds or why you took out the loan. The Arizona anti-deficiency statute applies with respect to any trustee sale involving property consisting of two and one-half acres, and utilized as a dwelling unit.
Purchase money anti-deficiency statute
The second Arizona anti-deficiency statute involves a mortgage the borrower used to purchase the home. Like the first Arizona anti-deficiency statute, the property must consist of a dwelling unit on two and one-half acres or less. Under these circumstances, the borrower will not be liable for any deficiency amount.
This statute comes into play primarily with second mortgages, such as a home equity line of credit (HELOC), after the senior lender forecloses. The junior mortgage lender does not usually initiate a trustee sale if the house is worth less than what is owed on the primary mortgage.
For example, assume the borrower has a first mortgage with a $100,000 balance and a second HELOC mortgage with a $50,000 balance. The borrower paid for home improvements with the HELOC proceeds. During a recession, the house depreciates, and the borrower stops making payments on both loans. The first mortgage lender schedules a trustee sale auction. The successful bidder pays only $70,000 at the auction. The first lender received the entire $70,000 to reduce its $100,000 loan balance because it was in first position. Because the balance of the first mortgage was $100,000, the borrower still owes the first lender the $30,000 deficiency. But that first lender cannot sue the borrower for the $30,000 deficiency. Remember the first Arizona anti-deficiency applies to any trustee sale of a residence on two and one-half acres or less.
What about the second HELOC lender with the $50,000 loan balance? It received none of the $70,000 bid because it was in second position. The borrower used the HELOC to make home improvements. As such, the second lender can sue the borrower for the entire $50,000. The second lender did not conduct the trustee sale, and the borrower did not use the $50,000 to purchase the house.
The Arizona anti-deficiency statutes do not apply to other mortgages
The Arizona anti-deficiency statutes only apply to residential mortgages involving dwelling units on two and one-half acres or less. If you obtained a $500,000 loan to purchase commercial property or vacant land that only fetches $400,000 at an auction, the lender can sue you for the $100,000 deficiency. In addition, the anti-deficiency statutes do not apply to any government loan, such as a VA mortgage loan or secured Small Business Administration (SBA) loan.
What about a loan used to purchase vacant land to construct a dwelling unit on two and one-half acres or less? The Arizona Supreme Court held that if a foreclosure occurs before the construction is completed and before anyone utilizes the house as a dwelling unit, the Arizona anti-deficiency statutes do not apply. Because the property was vacant at all times, the Supreme Court found that the property was not “utilized as a dwelling.” The borrowers’ intent to eventually occupy the dwelling was irrelevant.
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.
Statutes of limitations to sue for the deficiency amount
There are other defenses to liability that are not necessarily barred under the Arizona anti-deficiency statutes. For example, you may be able to assert a “statute of limitations” defense in lieu of filing bankruptcy. Generally speaking, a mortgage lender conducting a foreclosure has 90 days after its foreclosure to sue you for any deficiency amount if the anti-deficiency statute does not apply. However, a lender in second position (i.e., a HELOC lender) does not have to comply with such 90 day period if that lender didn’t initiate the foreclosure. The second position lender can sue you, usually within 6 years after the foreclosure.