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In most foreclosures, when the property is sold to pay the mortgage, there is typically a discrepancy between the sale price of the home and the loan balance. The lender can recover the deficiency in many states. In other states, anti-deficiency laws prevent lenders from bringing an action against borrowers to cover the discrepancy between the balance on the mortgage and the price of the home at foreclosure. In states with anti-deficiency statutes, the lender’s recovery is limited to the proceeds of the foreclosure sale. The homeowner in such states does not owe any further debt in the form of a deficiency judgment.

Arizona’s Anti-Deficiency Statutes

Arizona has two anti-deficiency laws. A lender cannot pursue a deficiency judgment if the loan was initiated to help the purchaser buy the home (referred to as “purchase money”),the property size is less than 2 ½ acres, and used for either a single one-family or single two-family dwelling. These requirements set forth in A.R.S. § 33-729 are designed to protect borrowers who sought mortgage financing from losing their personal assets to cover the deficiency. This statutory protection excludes borrowers who borrowed money for a second mortgage on their property. The lenders on second mortgages are permitted to pursue deficiency judgments since the money was not borrowed for the purpose of purchasing the primary property.

A second restriction provides that the lender cannot seek a deficiency judgment where the foreclosure took place by power of sale pursuant to A.R.S. § 33-814. A power of sale clause, which is contained in a deed of trust or mortgage, authorizes the lender to sell the mortgaged property through a nonjudicial foreclosure to satisfy the balance of the loan if the borrower has defaulted.  Power of sale is a simple, low-cost method of recovering property for lenders because it does not require judicial intervention.

Amendments to Arizona’s Anti-Deficiency Statutes

In response to numerous legal disputes between lenders and borrowers over anti-deficiency judgments, the state legislature amended both of Arizona’s anti-deficiency statutes. The revised statute provides that A.R.S. §§ 33-729 and 33-814 do not apply to residential property that was: (1) developed by a builder for resale to another residential buyer; (2) never substantially completed; or (3) never utilized for dwelling purposes. These provisions (A.R.S. § 33-814(H) and A.R.S § 33-729(C)) apply only to mortgages that originated after December 31. 2014. Similarly, the Arizona Supreme Court ruled in BMO Harris Bank, N.A. v. Wildwood Creek Ranch, LLC, 236 Ariz. 363, 340 P.3d 1071 (2015) that the state’s anti-deficiency statutes applied only to residential properties that were completed and ready to be occupied.

Chernoff Law handles business and real estate litigation matters throughout Arizona. Contact us by calling 480-719-7307 to discuss your legal matter.