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Arizona Mortgage
Deficiency Law
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Determine Whether the Mortgage Loan Is “Purchase Money”
vs. “Non-Purchase Money”
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Determine Whether the Real Property which Secures the
Loan Fits within the Statutory Definition of a “Qualified Property” Protected by
the Arizona “Anti-Deficiency” Statutes
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Determine Which of the Four General Rules Listed Below
Apply to the Mortgage Loan to Be Sued Upon by the Mortgage Lender
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Consider the “Fair Market Value” Limitation of Any
Deficiency Judgment Obtained by the Mortgage Lender
Folks & O’Connor, PLLC represents many
of the major banks located in the Southwest and other lenders concerning a broad
range of legal services concerning loan workout, bankruptcy, collection,
foreclosure, mortgage deficiency and other creditors’ rights litigation cases.
Arizona’s
mortgage deficiency statutes, located at A.R.S. §
33-729,
§ 33-814
and §
12-1566, and the case law interpreting them are complex. This memorandum
includes a checklist of items to be considered to determine whether, or not a
mortgage lender has the right to obtain a mortgage deficiency judgment against a
borrower, or guarantor, of a loan subsequent to a real property foreclosure in
Arizona. The content of this memorandum is not intended to address every
possible scenario and it should not be used as a substitute for conducting
current legal research concerning Arizona’s mortgage deficiency laws.
STEP ONE:
Determine Whether the Mortgage Loan Is “Purchase
Money” vs. “Non-Purchase Money”
A loan is purchase money even if less than 100% of the loan
proceeds are used to purchase the real property which secures the loan.
A mortgage loan secured by a borrower’s residence is not a
purchase money loan if the proceeds of the loan are used to purchase a different
residence such as a vacation home.
Home equity loans that are not 80/20 loans typically are
non-purchase money loans.
STEP TWO:
Determine Whether the Real Property which Secures the
Loan Fits within the Statutory Definition of a “Qualified Property” Protected by
the Arizona “Anti-Deficiency” Statutes
Evaluate the physical characteristics of the real property
to be foreclosed upon.
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.”
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Four single-family condo units are not a Qualified Property.
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A single-family residence under construction by a residential
developer, but not yet sold nor occupied is not a Qualified Property.
STEP
THREE: 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
Non-judicial 91-day administrative trustee’s sale of the real
property (“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.
Judicial foreclosure lawsuit and Sheriff’s execution sale of the
real property (“Judicial Foreclosure”):
NO DEFICIENCY JUDGMENT IS
ALLOWED AGAINST THE BORROWER.
Real Property is sold to a third-party buyer and mortgage lender
voluntarily releases its lien, but does not cancel the promissory note debt
(“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.
Mortgage lender may be able to obtain a deficiency judgment
against a guarantor of the loan based upon the independent guaranty contract,
but there is no reported AZ case on this issue.
An example of when Rule #1 applies is if a mortgage lender has
made a loan to a borrower that is used to purchase a single-family residence
located on 2.5 acres or less.
RULE #2:
PURCHASE MONEY LOAN + SECURED BY A NON-QUALIFIED PROPERTY
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.
Judicial Foreclosure:
DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.
Short Sale:
DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.
Mortgage lender can obtain a deficiency judgment against a
guarantor of the loan based upon the independent guaranty contract.
An example of when Rule #2 applies is if a mortgage lender has
made a loan to a borrower used to purchase a vacant lot or 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
Trustee’s Sale:
NO DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.
Judicial Foreclosure:
DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.
Short Sale:
DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.
Mortgage lender may be able to obtain a deficiency judgment
against a guarantor based upon the independent guaranty contract, but there is
no reported AZ case on this issue.
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 used as a single-one-family or a
single-two-family dwelling.
NOTE SPECIAL EXCEPTION:
If a mortgage lender holds a non-purchase money junior deed of
trust lien upon a Qualified Property and a senior lien holder (other than the
junior mortgage lender) completes a Trustee’s Sale of the property to extinguish
the mortgage lender’s junior lien, then the mortgage lender can sue the borrower
for a deficiency. In addition, the 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
Trustee’s Sale:
DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.
Judicial Foreclosure:
DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.
Short Sale:
DEFICIENCY JUDGMENT IS ALLOWED AGAINST THE BORROWER.
Mortgage lender can obtain a deficiency judgment against a
guarantor based upon the independent guaranty contract.
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 vacant lot or real property used for a non-residential purpose (such
as an office building, restaurant or other business purpose).
STEP FOUR:
Consider the “Fair Market Value” Limitation of Any Deficiency Judgment
Obtained by the Mortgage Lender
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”
limitation. In particular, the deficiency amount is calculated as, and limited
to, the difference between the loan balance due on the date of the foreclosure
sale less the greater of the foreclosure sale price or the “fair market value”
of the property on the date of the sale.
The vast majority of residential foreclosures currently pending
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, it may not obtain a deficiency
judgment against the borrower.
An additional common example of foreclosures currently pending in
Arizona are Trustee’s Sales related to loans secured by deeds of trust upon
vacant land. In such cases, if the mortgage lender completes the Trustee’s Sale,
it may sue the borrower for a deficiency judgment against the borrower as long
as the deficiency lawsuit is filed within 90 days after the date of the
foreclosure sale.
The two foregoing examples probably represent 90% or more of the
scenarios facing mortgage lenders in Arizona. The other scenarios will be
controlled by Rules #1-4 discussed above.
An excellent analysis of the Arizona mortgage deficiency statutes
is included in an article published in the April 1992 issue of the Arizona
Attorney, "Arizona’s Deficiency Laws: When Is a Deficiency Judgment
Available and How Is One Obtained?
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