Arizona Deficiency Statutes on Foreclosures

Here we are again. Unfortunately, a lot of questions have arisen lately about Arizona’s Deficiency Statutes regarding foreclosure. I say “unfortunately” because I feel somewhat less than qualified to definitively answer these questions. Greater legal minds than mine (and mine is decidedly NOT legal) will be required to put the issue to rest. I will, in spite of the danger of blatantly misrepresenting the facts, case law, and statutes, attempt to answer one (NON-) simple question:

“If I do a short sale, or my property is taken from me by foreclosure, can the bank ‘come after me’ for the difference between what the property eventually sells for, and what I owe them, including sale costs, legal fees, etc?”

First, let me point the reader in the general direction of actual legal minds on this issue. Here is a rather esoteric treatise on the subject of getting sued for a deficiency judgement. Very good read, and fairly definitive on the issue.

Here is another article, that is more user-friendly on the same subject.

Now, because I have a public education, and am somewhat literate, I will attempt to provide a synopsis of the above:

In Arizona, there are two types of “notes” given for real property: a “Deed of Trust” or a “Mortgage”.  Despite the common parlance of the term “mortgage,” most people in most states do not actually have Mortgages. They have Deeds of Trust. I won’t go into the differences here, but suffice to say that a Deed of Trust has three parties to the agreement, and an actual Mortgage has only two. Actual mortgages are very uncommon in most states.

Now, the remedy of a lender for a home in default depends on what type of note was used to secure the property. If there is a true mortgage in place, the lender must sue in civil court in a process known as “judicial foreclosure.” The particulars of a judicial foreclosure are not completely relevent to our discussion here, but here are a few key points.

1.) The legal fees associated with a judicial foreclosure action are substantial.

2.) A jucial foreclosure takes more time than “the other method” (hold on there. . .).

3.) A lender may sue for a deficiency judgement with a judicial foreclosure, but only in the case of non-purchase money loans. (A “purchase money loan” is one that is applied to the purchase of real property.  A “non-purchase money” loan is money you pulled out of your home to buy “stuff”.

Herein lies a very poignant distinction. If you got a line of credit, and spent all the money on a new boat, fancy clothes, and a new haircut, the lender can indeed sue you for that money. HOWEVER, they will have to use the process of judicial foreclosure to do it, which I have already explained is a lengthy and costly process. In real life: probably too expensive for the lender, with very little likelihood of getting money back from someone who is “insolvent” to begin with.

 If the note used to secure the property is the much more common Deed of Trust, the property will most likely be subject to a “Trustees Sale,” in which a notice is posted that the property will be sold to the highest bidder on the courthouse steps. If this happens, there is no recourse for a lender to “come after” the homeowner for money.  Now, a lender, who is party to a Deed of Trust, may also use the process of judicial foreclosure to take your house away. Any yes, this does give them the right to attempt to get a deficiency judgement against the borrower. Does this happen often? No. Why? For the reasons mentioned above: it’s expensive, and time consuming.

Another option for a lender is to “forego” their interest in the home, and sue the borrower directly for the money owed to them. All of it. Lenders very rarely do this however, for the reasons stated above: it is expensive and time consuming; more importantly, if a borrower is going into foreclosure, there is a pretty good likelihood that the borrower has no money to “go after.” Also, in the landmark case of Baker v Gardner heard before the Arizona Supreme Court in 1988, the justices hold forth in the Holding & Conclusion that “. . .the legislature’s objective in enacting [its anti-deficiency statutes] was to abolish the personal liability of those who give trust deeds encumbering properties of two and one-half acres or less and used for single-family or two-family dwellings. . . The holder of the note and security device may not, by waiving the security and bringing an action on the note, hold the maker liable for the entire unpaid balance.”

So, can you be sued for a deficiency on your mortgage? Who knows! Go ask your attorney.

Disclosure: I am not an attorney, and I do not play one on TV or on the internet. I am simply an inquisitive idiot with a penchant for holding forth opinions.  Have specific legal questions regarding your specific circumstances? Contact competent (how do you test for that?) legal counsel.