Refinancing, Construction and Arizona's Anti-Deficiency Laws
The Arizona Court of Appeals provides limited
clarification on anti-deficiency protection when the foreclosed loan has
replaced the purchase money loan
It is a sobering sign of the times that, in the past
several months, several rulings from Arizona’s appellate courts have involved
real estate foreclosure. When the property in these cases is a residence, there
is an almost inevitable discussion of the applicability of Arizona’s
anti-deficiency statutes (see A.R.S. §§
33-729(A) and
33-814(G)).
As many financially distressed Arizona homeowners have
learned in recent years, Arizona is an anti-deficiency state for loans on most
residential properties. This means that, if certain criteria are met, the lender
will be able to look only to the property to satisfy the loan, and will be
barred from taking further action against the borrower to collect on the unpaid loan
balance.
There can be many complexities involved in the analysis
of whether the anti-deficiency rules apply. One of the principal issues to
consider is whether the loan was a "purchase money loan," which Arizona statutes
treat differently from loans in which the proceeds were used for purposes other
than purchasing the property.
In Arizona, a lender may pursue its security by having a
non-judicial trustee’s sale or judicially foreclosing by going to court (i.e., a
“conventional” foreclosure). There are a number of factors for lenders to
consider in choosing between a judicial foreclosure and a trustee’s sale. One
odd quirk of the statutory framework is that, if a loan was not a purchase money
loan, the lender has a better chance of obtaining a deficiency judgment after
the foreclosure by proceeding with a judicial foreclosure instead of a trustee’s
sale. At the same time, it is in the interest of borrowers who are being
foreclosed upon judicially to have their loans characterized as purchase money
loans.
A March 2012 Arizona Court of Appeals case,
Helvetica Servicing v. Pasquan, involved the judicial foreclosure of a
Paradise Valley home. The case considered two important factors – refinancing
and construction – relating to whether loans may be considered purchase money
loans.
Impact of Refinancing
In the Helvetica case, a couple had refinanced
the purchase money loan that they used to buy a residence. When they defaulted
on the new loan, the lender foreclosed and attempted to collect for the resulting deficiency
from the homeowners. In the ensuing legal action, the lender argued
that refinancing a purchase money loan destroys the loan’s purchase money
status, thus exposing the borrower to deficiency liability. Predictably, the
borrowers argued that a loan that replaces a purchase money loan retains the
purchase money status and, thus, the anti-deficiency protection.
Clarifying the ruling in a prior case, the Court of
Appeals confirmed that a refinance of a purchase money loan retains its
characterization as a purchase money loan to the extent the new funding replaces
the earlier loan.
Impact of Construction
The case may be more notable for its handling of another
question: whether a construction loan can be considered purchase money. A common
scenario in Arizona involves the purchase of an empty lot, with the borrower
later obtaining a construction loan to finance construction of a new home. (A
similar scenario involves the purchase of a “tear-down” house, where the
borrower obtains a subsequent larger loan to finance demolition and construction
of a new residence).
The Helvetica court held that a construction loan
would qualify as a purchase money obligation (again, for purposes of protection
under the anti-deficiency statutes), if “(1) the deed of trust securing the loan
covers the land and the dwelling constructed thereon; and (2) the loan proceeds
were in fact used to construct the residence and meet the size and use
requirements set forth in the applicable statute.”
case by case
Reading through the opinion, it is obvious that on both
issues the Court of Appeals focused on the Arizona legislature’s intent to
protect homeowners from deficiencies where possible.
Again, every scenario
requires its own special analysis. Rarely does a contested case fit squarely
within the protections afforded by the statutes or prior cases ... or the parties
probably would not be in court in the first place.
■
Steve Benson is a Certified Specialist in Real Estate Law
(Arizona Board of Legal Specialization).
These materials
are designed to provide general information prepared by professionals in regard
to the subject matter covered. It is provided with the understanding that the
author is not engaged in rendering legal, accounting, or other professional
service. Although prepared by professionals, these materials should not be
utilized as a substitute for professional service in specific situations. If
legal advice or other expert assistance is required, the service of a
professional should be sought.
