Anthony J. Meier Real Estate Law Blog on Lawyers.com

A recent CNNMoney.com article highlights a hidden danger for some distressed homeowners - deficiency liability to their mortgage lender. Although Arizona and several other states have laws that restrict the lender's ability to sue a borrower for any portion of a mortgage that is not paid off from foreclosure proceeds, the laws vary from state to state and not all home loans qualify for protection from deficiency lawsuits.

A deficiency is any amount owed to the lender that is not satisfied from the proceeds of the foreclosure. Arizona has two anti-deficiency statutes. A.R.S. Section 33-729(A) applies to mortgages and A.R.S. Section 814(G) applies to deeds of trust. The language of the two statutes is different, but it is important to review both because a lender can choose to judicially foreclose a deed of trust in the same manner as a mortgage. Lenders usually prefer a trustee sale because it is faster and less expensive than judicial foreclosure. However, lenders sometimes choose judicial foreclosure in order to preserve their ability to pursue the borrower for the deficiency. This strategy results from differences in Arizona's anti-deficiency statutes for judicial and non-judicial foreclosure.

The two statutes each apply to a one or two family dwelling constructed on 2.5 acres or less that is limited to and used as a residence. A.R.S. Section 33-814(G) applies to all such properties regardless of how the loan proceeds were used by the borrower. A.R.S. Section 33-729(A) contains a significant additional requirement for a borrower to qualify for protection.

The anti-deficiency statute for judicial foreclosures (A.R.S. Section 33-729(A)) only applies to “purchase money” mortgages. A purchase money mortgage secures a loan that was used to pay the purchase price for the property, or that refinances such a loan.

Arizona's anti-deficiency statutes protect a borrower with a qualifying loan regardless of whether it is a first, second or third mortgage. Borrowers are more likely to face potential deficiency liability for a second mortgage though because many second mortgages are used for a purpose other than purchasing the house, such as paying off credit cards or remodeling the house.

Short sales and deeds-in-lieu of foreclosure also subject homeowners to potential deficiency liability. Those transactions involve agreements with the lender that can further complicate the issue. Borrowers often sign forms presented to them by their bank for a short sale or deed-in-lieu without realizing the forms state they will remain liable for the deficiency. Arguably, a court should find such an agreement unenforceable if the anti-deficiency statutes would have otherwise protected the borrower, but no Arizona case law currently exists to resolve that specific question.

People facing the possible loss of their home should seek legal advice to understand how the anti-deficiency laws apply to their specific situation. Arming themselves with information can help them evaluate their options and avoid being surprised years later

Tony Meier is a real estate and business law attorney in Phoenix who founded The Meier Law Firm, PLC in 2009 with the purpose of providing individuals and businesses with high quality, efficient legal solutions to help them achieve important business goals. This business law firm in Phoenix utilizes an innovative flat fee structure for all services to be cost-effective for your business and manage your legal services budget.  Call The Meier Law Firm, PLC at 888-630-5749 to discuss how we can help you with your business and real estate legal matters.