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Posted by: National Bankruptcy Forum
Last updated Jan. 30, 2018.
When most families purchase a home, they don’t envision ending up facing a foreclosure sale, but in states like Arizona where the housing market has been particularly hard hit, foreclosure is an all-too-common event. In cases where a home has plummeted in value, borrowers have two main concerns:
- I’m afraid to lose my home.
- I’m afraid my lender will sue me for deficiency judgment after the foreclosure sale and my personal property will be attached.
Does Arizona law allow for a bank to sue a borrower after their property has been sold at foreclosure? When it comes to residential real estate, generally speaking, the answer is no, although the facts of each case will determine the outcome.
Below are some general principles to keep in mind when trying to determine whether you will be protected by Arizona’s anti-deficiency statute.
You Must be Underwater in Order for a Deficiency to Arise in the First Place
First and foremost, a lender cannot sue a borrower for a deficiency judgment where the foreclosure sale price is high enough to satisfy the outstanding mortgage balance.
By definition, a deficiency judgment arises when a home is underwater, the bank forecloses and the sale price is insufficient to pay back the mortgage balance. If your home sells at foreclosure for more than what you owe, there is no deficiency and can therefore be no deficiency judgment.
As a practical matter, the scenario where a foreclosure sale completely satisfies the mortgage debt simply won’t apply to most Arizona homeowners who are underwater on their property thanks to the national housing downturn. Assuming your home is underwater and you’re facing foreclosure in Arizona, we’ll move on to the next important set of facts, which deal with the type of mortgage you have and the size of your property.
Arizona Anti-Deficiency Statute: The Basics
Arizona’s anti-deficiency statute is codified in the Arizona Revised Statutes Sections 33-814.G and 33-729.A. Section 33 prevents a lender from seeking a deficiency judgment after foreclosure when the mortgage loan was made to help purchase the home, the property is less than 2.5 acres in size and less than two “dwelling units” in size.
We’ve included the exact language of 33-729.A below:
If a mortgage is given to secure the payment of the balance of the purchase price, or to secure a loan to pay all or part of the purchase price, of a parcel of real property of two and one-half acres or less which is limited to and utilized for either a single one-family or single two-family dwelling, the lien of judgment in an action to foreclose such mortgage shall not extend to any other property of the judgment debtor, nor may general execution be issued against the judgment debtor to enforce such judgment, and if the proceeds of the mortgaged real property sold under special execution are insufficient to satisfy the judgment, the judgment may not otherwise be satisfied out of other property of the judgment debtor, notwithstanding any agreement to the contrary.
What does this legalese mean? Well, a mortgage is given to “secure the balance of the purchase price” of a home when you take out a mortgage to finance your property. If you’re like most of us and couldn’t afford to buy your home in cash, you relied on mortgage financing to buy your house. If you did, the Arizona legislature believes that your lender shouldn’t be permitted to sue you for a deficiency and come after your personal assets after they’ve foreclosed on you. As long as your property is 2.5 acres or less in size and you used mortgage financing to purchase the property, you’re protected from a deficiency judgment.
Similarly, section 33-814.G prohibits the bank from seeking deficiency judgment where they have foreclosed by power of sale. We’ve included the language of the statute below:
If trust property of two and one-half acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling is sold pursuant to the trustee’s power of sale, no action may be maintained to recover any difference between the amount obtained by sale and the amount of the indebtedness and any interest, costs and expenses.
This provision adds an additional layer to the Arizona anti-deficiency laws. Foreclosure by power of sale is a quick, inexpensive way for lenders to take back property; however, because there is no judicial oversight, the process is more highly scrutinized by the court. In this regard, Arizona law says that a bank can foreclose by power of sale, but if they do they will not be permitted to seek a deficiency judgment.
How do you know whether your home is subject to power-of-sale foreclosure? Although Arizona allows both judicial foreclosure and power of sale foreclosure, power of sale is the most common. Look at your mortgage documents: If you have a Deed of Trust, your lender is entitled to foreclose by power of sale. It should be noted that the 2.5-acre requirement applies in the power of sale legislation just as it does in section 33-729.A.
HELOC Mortgages, Investment Property Not Protected
It is important to keep in mind that while Arizona’s anti-deficiency laws are consumer-friendly, they are not uniform in application. Section 33 limits protection from deficiency judgments not only to purchase money mortgages and properties that are smaller than 2.5 acres in size, but also requires that the number of dwelling units not exceed two (2). This limitation was put in place to protect homeowners from deficiency judgments while classifying real estate investors separately from homeowners.
For example, if you own a multifamily apartment building on property that is less than 2.5 acres in size and lose the building to foreclosure, you still will be subject to a deficiency lawsuit under Arizona law. Similarly, if you tapped into home equity by taking out a second mortgage on your property, that lender can pursue you for deficiency judgment as well because the money was not borrowed to finance the purchase of your home.
If you have additional questions about how the Arizona anti-deficiency laws apply to you, contact an attorney.