Real Estate Law | October 2011
Anti-Deficiency Protection and the Pitfalls of Arizona Foreclosure
To take full advantage of the
protections afforded to homeowners during the foreclosure
process, it is imperative to have a full understanding of
the potential pitfalls associated with Arizona’s
It is no secret that the number of
Arizona foreclosures that has sharply increased since the real
estate crash began in 2007. Along with the rise in foreclosures
has come an increase in lender lawsuits seeking deficiency
judgments against former homeowners.
A “deficiency” occurs when a lender
sells a foreclosed property for less than the amount that is
owed against it. For example, if the borrower owes $150,000 on a
home that, after foreclosure, sells for $100,000, the amount of
the deficiency would be $50,000.
Anti-Deficiency Protection. In an
effort to protect homeowners in foreclosure, during the last two
the Arizona legislature passed A.R.S. §§
generally known as Arizona's "anti-deficiency statutes."
Specific to this discussion, A.R.S. § 33-814(G) prohibits foreclosing lenders from pursuing
a deficiency judgment after the foreclosure of a single one- or
two-family dwelling that occupies 2˝ acres or less. While this
protection may seem fairly straightforward, there are certain
intricacies and limitations that the homeowner must be aware of
before permitting a foreclosure to occur, or else face potential
financial liability for the balance of the loan after the sale.
While Arizona’s anti-deficiency statutes
provide a certain amount of protection for the homeowners
against these sorts of lawsuits, real estate lenders are
becoming increasingly sophisticated in trying to circumvent
those protections. Therefore, for many homeowners facing
foreclosure it is vital to understand – before the foreclosure
process begins – the anti-deficiency statutes and the potential
holes in the protection they are intended to provide.
First, and most important, the
protections afforded by Arizona’s anti-deficiency statutes are
generally available only in the case of “purchase money” security
interests, i.e., security interests that secure the purchase
price of the property.1 If a homeowner takes out a
loan for purposes other than the purchase of the house (for
example, refinanced funds used for remodeling or other
purposes), the homeowner may be liable to the lender, after
foreclosure, for the unpaid portion of the loan. In other words,
depending on the specifics of the case, anti-deficiency
protection may not
be available to homeowners who used loan proceeds for
purposes other than to
buy the house.
Another potential (but yet to be
litigated) pitfall is the utilization requirements of A.R.S. §
33-814(G). That statute provides that anti-deficiency protection
is available for qualified properties that are “utilized” as
single one- or two-family residences. While there is no clear
decision on this issue, it is certainly conceivable that this
language requires that the property continue to be occupied up
until the foreclosure sale. Otherwise, if the property is
abandoned prior to the sale, it can be argued that it is not
being utilized as envisioned by lawmakers and therefore
is not entitled to the law’s protections.
A third potential pitfall, attributable
to banks’ increasing sophistication and desire to cut their
losses, is the danger of pre-foreclosure “setoff.” To lessen the
loss caused by anti-deficiency protection, many lenders are
attempting to garnish – prior to the sale of the foreclosed
property – the accounts held by the homeowner at that
institution. In other words, banks are taking any and all money
they can get their hands on prior to the foreclosure sale,
knowing that the opportunity will be lost after the sale occurs.
All of these potential pitfalls result
in an inescapable conclusion: the foreclosure process is
complicated and fraught with risks. The good news is that there
are steps that many distressed homeowners can take to avoid the
above-mentioned pitfalls and benefit from the protections of
A.R.S. § 33-814 – as long as they are aware of those steps.
Thus, before even considering
foreclosure, it is imperative that homeowners become
intimately familiar with the foreclosure process and fully
understand how the laws will apply to their specific situation.
Alex Baker represents
clients throughout the Phoenix area, including north Scottsdale, Cave Creek and
1See Cely v.
DeConcini, McDonald, Brammer, Yetwin & Lacy, P.C., 166
Ariz. 500, 505, 803 P.2d 911, 916 (App. 1991)