Arizona’s mortgage deficiency statutes (A.R.S.
§§ 33-729, 33-814 and 12-1566) and the case law interpreting them are complex.
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Larry Folks |
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ALFN Angle |
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Arizona Attorney |
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Published by the American Legal & Financial Network (ALFN)
in the
Spring 2017 edition of Angle
magazine and by the State Bar of Arizona in the
December 2017 issue of Arizona Attorney
This article
includes a checklist of items to be considered to determine whether
a mortgage lender has the right pursuant to applicable Arizona law
to obtain a mortgage deficiency judgment against a borrower, or
guarantor, of a loan secured by real property subsequent to:
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an administrative non-judicial trustee’s
foreclosure sale of the subject property (trustee’s sale);
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a judicial foreclosure lawsuit upon the
subject property (judicial foreclosure); or
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a lawsuit upon the remaining unsecured
promissory note and/or guaranty obligation following the closing
of a short-sale pursuant to which the mortgage lender:
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releases its mortgage lien on the subject
property in exchange for receipt of funds in an amount less
than the loan balance, and
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obtains a written acknowledgement from the
loan obligors that the lender is not waiving its deficiency
rights (short sale).
The content of this article is not intended to
address every possible scenario of Arizona mortgage deficiency law.
Also, the term “mortgage” is used herein with the understanding that
the vast majority of mortgage liens in Arizona are evidenced by
recorded deeds of trust. Furthermore, this article should not be
used as a substitute for conducting current legal research.
Step
One
Determine
whether the mortgage loan is “purchase money” vs.
“non-purchase money.”
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A loan is a purchase money
obligation if it secures a mortgage given to secure the
payment of the balance of the purchase price, or to secure
payment of all or part of the purchase price, of the real
property being sold in the loan transaction.
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A construction loan is a purchase
money obligation when (i) the deed of trust securing the
loan covers the land and the structure constructed thereon;
and (ii) the loan proceeds were in fact used to construct a
single-family home or duplex (hereinafter, a “residence”)
subject to the “anti-deficiency” statutes.
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A home improvement loan unrelated to
the acquisition or construction of a residence is a
non-purchase money obligation.
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Home equity loans that are not 80/20
loans typically are non-purchase money obligations.
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A mortgage loan secured by a
borrower’s residence is a non-purchase money obligation if
the proceeds of the loan are used to purchase a different
residence, such as a vacation home.
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Refinancing a purchase money
obligation by the original, or a new, mortgage lender does
not, in and of itself, convert the nature of the obligation
to non-purchase money. The refinanced loan remains a
purchase money loan to the extent of the original purchase
money amount. In addition, refinance loan proceeds used to
pay interest, late fees and a mandatory construction deposit
directly related to the original purchase money loan and
rolled into to the refinanced loan are considered part of
the purchase money obligation. Conversely, refinance loan
proceeds used for any purpose other than to acquire or
construct the residence (such as interest, maintenance,
utilities, marketing fees and penalties) are not considered
part of the purchase money obligation.
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A mortgage lender may obtain a money
judgment for the traceable non-purchase money portion of a
mortgage loan in (i) a judicial foreclosure; (ii) a suit
upon its unsecured mortgage loan note after its mortgage
lien has been extinguished by a senior lien foreclosure; and
(iii) in a suit when the mortgage lender elects to waive its
collateral and sue directly on the mortgage loan note. This
remedy is typically available concerning a “cash out”
refinance loan of the original purchase money loan which
results in the borrower, or borrowers, receiving funds in
excess of the original loan balance from the refinance loan
proceeds.
Step Two
Determine whether the real property that
secures the loan fits within the statutory definition of a
“qualified property” protected by Arizona’s
“anti-deficiency” statutes.
The general rule is that deficiency
judgments are barred by Arizona’s anti-deficiency statutes
when the collateral for the subject mortgage loan is a
completed single-family home or duplex located on 2.5 acres
or less. Specifically, the plain language of the
anti-deficiency statutes provide that a “Qualified Property”
protected by Arizona’s anti-deficiency statutes means real
property of “2.5 acres, or less” and that is limited to and
utilized as a “single one-family or single two-family
dwelling.”
Concerning Loans Originated on or before
12/31/2014. Analyze the physical characteristics of the real
property which secures the mortgage loan to attempt to
determine whether it is a qualified property protected by
the anti-deficiency statutes:
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Vacant land cannot be “utilized as”
a dwelling and is not a Qualified Property.
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A single one-family or single
two-family residential structure, which is not completed,
cannot be “utilized as” a dwelling and is not a Qualified
Property.[1]
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Real property which secures a
mortgage loan and exceeds 2.5 acres in size does not fit
within the statutory definitions for anti-deficiency
protection and is not a Qualified Property. It does not
matter if a single one-family or single two-family
residential structure is located on the property if it
exceeds the acreage limit.
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Real property which has a structure
located on it that is not a single one-family or single
two-family residential structure, such as four condominium
units, does not fit within the statutory definition and is
not a Qualified Property.
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A 1/10th fractional interest in a
single-family residential condominium is a “dwelling” within
the anti-deficiency statutes definition and is a Qualified
Property.
The type of borrower and their intent
concerning use of the real property can be the determining
factor of whether or not it is a “qualified property”
protected by the anti-deficiency statutes.
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A completed single-family or single
two-family residential structure is a “dwelling” as defined
by the anti-deficiency statutes. If an individual homeowner
borrower, or borrowers, intend to occupy the structure as
their primary residence, regardless of whether they have
ever actually occupied the structure, it is being “utilized
as” a dwelling and, thus, is a Qualified Property.
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A completed single-family
condominium is a “dwelling” as defined by the
anti-deficiency statutes. If the condominium is owned by
investment borrowers who occasionally occupy and rent it
out, it is “utilized as” a dwelling and, thus, the
condominium is a Qualified Property.
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A partially constructed
single-family residence owned by a commercial
builder-developer borrower who is holding the residence for
eventual sale to its first occupant and does not intend to
occupy the residence is not “utilized” as a single
one-family dwelling and, as such, the partially constructed
residence is not a Qualified Property. This rule has been
extended to apply to fully constructed and never occupied
single-family homes owned by a commercial builder-developer
as well.
Concerning Loans Originated after
12/31/2014. On April 22, 2014, Governor Jan Brewer signed
into law House Bill 2018, which amended Arizona’s
anti-deficiency statutes to add identical new subsections
located at A.R.S. § 33-729(C) and (D) (applicable to
judicial foreclosures) and
§ 33-814(H) and (I) (applicable
to non-judicial trustee’s foreclosure sales). The amendments
apply to loans originated after December 31, 2014, and
clarify and expand the circumstances in which deficiency
judgments are allowed.
New subsections (H) and (I) added to
supplement A.R.S. § 33-814(G), the non-judicial trustee’s
foreclosure sale anti-deficiency statute, are set forth in
their entirety below:
H. For deeds of trust that are
originated after December 31, 2014, subsection G [the
anti-deficiency definition subsection] of this section does
not apply to trust property as follows:
1. Trust property owned by a person who
is engaged in the business of constructing and selling
dwellings that was acquired by the person in the course of
that business and that is subject to a deed of trust given
to secure payment of a loan for construction of a dwelling
on the property for sale to another person.
2. Trust property that contains a
dwelling that was never substantially completed.
3. Trust property that contains a
dwelling that is intended to be utilized as a dwelling but
that is never actually utilized as a dwelling.
I. For the purposes of this section, a
dwelling is substantially completed if either of the
following occurs:
1. Final inspection is completed, if
required by the governmental body that issued the building
permit for the dwelling.
2. If a final inspection is not required
by the governmental body that issued the building permit,
the dwelling has been completed in all material respects as
prescribed in the applicable ordinances and regulations of
the governmental body that issued the building permit for
the dwelling.
Subsections (C) and (D) added to A.R.S.
§ 33-729, the anti-deficiency statute applicable to judicial
foreclosures, include the same language. The statutory
amendments clarify that:
a lender may obtain a deficiency
judgment against a builder or developer concerning a
construction loan that the builder or developer obtained in
the ordinary course of business to construct a home and sell
it to a third-party; and
a lender may obtain a deficiency
judgment against any borrower if (i) a dwelling was never
substantially completed upon the property which secures the
mortgage loan; or (ii) the structure upon the property which
secures the mortgage loan was never actually utilized as a
dwelling.
These amendments were intended to
overrule the aforementioned Mueller Arizona Court of Appeals
decision.
The amendments include a specific
definition of a substantially completed dwelling to mean
either (i) that a final inspection has been completed by the
governmental body that issued the building permit for the
structure; or (ii) if no final inspection is required by the
government body, then the dwelling has been completed in all
material respects prescribed by the applicable governmental
ordinances or regulations.
Step Three
Consider whether contractual
anti-deficiency protection or fair market value waivers
included in the loan documents are enforceable.
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A borrower cannot prospectively
waive anti-deficiency statute protections.
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A guarantor can prospectively waive
anti-deficiency statute protections.
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Borrowers and guarantors cannot
prospectively waive the fair market value credit required by
the deficiency statutes and fully discussed below.
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A borrower can waive the right to a
fair market value credit determination after a non-judicial
trustee’s foreclosure sale commences. Although there is no
case on point, the same rule likely applies to guarantors as
well.
Step Four
Determine which of the four general
rules listed below apply to the mortgage loan to be sued
upon by the mortgage lender.
Rule #1: Purchase Money Loan + Secured
by a Qualified Property
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Trustee’s Sale: NO DEFICIENCY
JUDGMENT IS ALLOWED AGAINST THE BORROWER. Note that only
deeds of trust may be foreclosed through a trustee’s sale.
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Judicial Foreclosure: NO DEFICIENCY
JUDGMENT IS ALLOWED AGAINST THE BORROWER.
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Short Sale: NO DEFICIENCY JUDGMENT
IS ALLOWED AGAINST THE BORROWER. The mortgage lender cannot
elect the remedy to voluntarily release/waive the mortgage
lien on the real property collateral and sue the borrower
directly on the unsecured note.
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Unless prospectively waived in the
loan documents, a mortgage lender should presumptively
assume that any guarantor of the mortgage loan will receive
the same anti-deficiency protection against a deficiency
judgment as the borrower.
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An example of when Rule #1 applies
is if a mortgage lender has made a loan that the borrower
used to purchase a single-family home or duplex located on
2.5 acres or less.
Rule #2: Purchase Money Loan + Secured
by a Non-Qualified Property
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Trustee’s Sale: DEFICIENCY JUDGMENT
IS ALLOWED AGAINST THE BORROWER. A mortgage deficiency
lawsuit must be filed within 90 calendar days after the date
of the trustee’s sale. The 90-day statutory deadline after
the date of the Trustee’s Sale is an absolute bar against
filing a mortgage deficiency lawsuit after that date.
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Judicial Foreclosure: DEFICIENCY
JUDGMENT IS ALLOWED AGAINST THE BORROWER.
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Short Sale: DEFICIENCY JUDGMENT IS
ALLOWED AGAINST THE BORROWER.
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Mortgage lender can obtain a
deficiency judgment against a guarantor of the loan based
upon the independent guaranty contract.
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An example of when Rule #2 applies
is if a mortgage lender has made a loan to a borrower used
to purchase real property used for any non-residential
purpose (such as an office building, restaurant or other
business purpose).
Rule #3: Non-Purchase Money Loan +
Secured by a Qualified Property
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Trustee’s Sale: NO DEFICIENCY
JUDGMENT IS ALLOWED AGAINST THE BORROWER.
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Judicial Foreclosure: DEFICIENCY
JUDGMENT IS ALLOWED AGAINST THE BORROWER.
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Short Sale: DEFICIENCY JUDGMENT IS
ALLOWED AGAINST THE BORROWER.
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Unless prospectively waived in the
loan documents, a mortgage lender should presumptively
assume that any guarantor of the mortgage loan will receive
the same anti-deficiency protection against a deficiency
judgment as the borrower.
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An example of when Rule #3 applies
is if a mortgage lender has made a non-purchase money loan
to a borrower and the real property securing the loan is
located on 2.5 acres or less and is “utilized” as a
single one-family or a single two-family dwelling.
NOTE SPECIAL EXCEPTION: If a mortgage
lender holds a non-purchase money promissory note and junior
deed of trust lien upon a Qualified Property and a senior
lien holder completes a Trustee’s Sale of the property to
extinguish the mortgage lender’s junior lien, then the
mortgage lender can sue the borrower and/or guarantor upon
the remaining unsecured promissory note and/or guaranty for
a deficiency. This exception applies even if the same
mortgage lender holds both the senior promissory note and
deed of trust lien foreclosed upon and the junior promissory
note and/or guaranty and deed of trust lien extinguished by
the senior lien Trustee’s Sale.[2] In addition, the junior
mortgage lender may apply for any excess foreclosure sale
proceeds that result from the senior lien holder’s Trustee’s
Sale, apply them against the junior loan balance and still
sue the borrower for deficiency judgment. Furthermore, the
90-day limitations period does not apply to this type of
suit, because it is technically a suit on the junior
promissory note and not a deficiency lawsuit under the
foreclosure statute.
Rule #4: Non-Purchase Money Loan +
Secured by a Non-Qualified Property
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Trustee’s Sale: DEFICIENCY JUDGMENT
IS ALLOWED AGAINST THE BORROWER.
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Judicial Foreclosure: DEFICIENCY
JUDGMENT IS ALLOWED AGAINST THE BORROWER.
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Short Sale: DEFICIENCY JUDGMENT IS
ALLOWED AGAINST THE BORROWER.
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Mortgage lender can obtain a
deficiency judgment against a guarantor of the loan based
upon the independent guaranty contract.
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An example of when Rule #4 applies
is if a mortgage lender has made a non-purchase money loan
to a borrower and the real property securing the loan is a
real property used for a non-residential purpose (such as an
office building, restaurant or other business purpose).
Step Five
Consider the “fair market value” credit
limitation of any deficiency judgment obtained by the
mortgage lender.
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Any deficiency following a trustee’s
sale or a judicial foreclosure permitted against either a
borrower or a guarantor is subject to a “fair market value”
credit limitation.[3]
In particular, the deficiency amount is calculated as, and
limited to, the loan balance due on the date of the
foreclosure sale less the greater of the actual foreclosure
sale price or the “fair market value” of the property on the
date of the sale.
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Borrowers and guarantors cannot
prospectively waive the “fair market value” credit
limitation.
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The successful bid at a non-judicial
trustee’s sale does not per se constitute admissible
evidence of the “fair market value” of the property
foreclosed upon by the lender. The lender must offer
affirmative valuation evidence, such as an appraisal report
and expert appraiser testimony, to establish the “fair
market value” of the property as of the date of the
foreclosure sale.
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The “fair market value”
determination is made by the court and not a jury.
Miscellaneous Matters
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There is no statutory right of
“redemption” following a trustee’s sale.
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Any judgment debtor, or their
successor-in-interest, in a judicial foreclosure is granted
a statutory right of redemption, which allows them to
recover title to the subject property after the date of the
Sheriff’s sale of the property. The redemption period is
either 30 days or six months after the date of the sheriff’s
sale, as determined by the court pursuant to the
requirements of the judicial foreclosure statute.
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To redeem the property, the judgment
debtor must pay the purchase price at the Sheriff’s sale, 8%
interest accrued thereon, and certain taxes and assessments.
In addition, each judgment debtor is granted the right to
apply to the Court for a “fair market value” determination
within 30 days after the Sheriff’s sale of the property.
Moreover, failure of a judgment debtor to make a timely
request for a fair market value determination may result in
denial of the request. When any one judgment debtor applies
for a fair market value determination, the right to redeem
the property is extinguished as to all judgment debtors.
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An arbitration clause included in a
promissory note is enforceable to compel arbitration of a
mortgage deficiency action.
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The deficiency statute expressly
provides that any deficiency judgment obtained subsequent to
a non-judicial trustee’s sale may include interest on the
amount of the deficiency from the date of sale at the rate
provided for in the loan documents. Further, the deficiency
statute has been held to authorize an award of attorneys’
fees and costs by the Court.
Conclusion
The vast majority of residential
foreclosures conducted in Arizona concern trustee’s sales
related to loans secured by deeds of trust upon
single-family residences located on 2.5 acres or less. In
such cases, if the mortgage lender completes the trustee’s
sale, the lender may not obtain a deficiency judgment
against the borrower or a guarantor, unless they have waived
the anti-deficiency statute’s protection.
Despite the foregoing, as illustrated by
the rules above, there are many instances in which a
mortgage lender may pursue collection of a deficiency
balance from a borrower, or guarantor, subsequent to a
trustee’s sale, judicial foreclosure or short sale.
In such cases, if the mortgage lender
completes a trustee’s sale, the lender must file the
deficiency lawsuit against the borrower and any guarantors
within 90 days after the date of the foreclosure sale. This
limitations period is a strictly enforced, absolute bar date
for filing a mortgage deficiency lawsuit following a
trustee’s sale. In addition, the borrower and guarantors
shall receive a credit against the loan balance due as of
the foreclosure sale of either the actual sale price at the
foreclosure sale, or the “fair market value” of the property
foreclosed upon as of the date of the foreclosure sale,
whichever is greater, which is determined by the Court.
A useful resource to assist in
understanding the scope and applicability of the Arizona
mortgage deficiency statutes is the Ins and Outs of
Foreclosures, Third Edition 2010.
About the Author
Larry Folks is the founding member of Folks Hess, PLLC, which represents banks, credit unions and
mortgage servicers in every county of Arizona concerning a
broad range of legal services related to consumer and
commercial loan workout, bankruptcy, collection,
foreclosure, mortgage deficiency and other creditors’ rights
litigation cases.
Arizona Mortgage Deficiency Law, 2017
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