Arizona's Anit-Deficiency Statute

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With the growing number of foreclosures and trustee sales occuring in Arizona many people have questions regarding their personal exposure to lenders.  Most people in Arizona have a deed of trust that secures their note obligation to their property rather than a mortgage.  Most lenders, therefore, prefer to conduct a trustee sale of the property in order to recoup the money owed to them.  The trustee sale process and the lender's and debtor's rights are extremely complicated and complex and can be intemidating to a homeowner threatend with a trustee sale of their property. 

There are many protections, however, that a homeowner has against a lender.  One such protection is provided by the Anti-Deficiency Statute ARS 33-814.  This statute explains how a lender can recoup any money not recovered by it in a trustee sale of the property; meaning that the homeowner may, under certain circumstances, still be liable to the lender even after their property has been sold. 

Section (G) of ARS 33-814 provides, however, that if the property is on 2.5 acres or less and is used either as a single family or a single two- family dwelling, no action may be maintained against the homeowner to recover any difference between the amount obtained by the sale and the amount of the indebtedness.

Although, this statute provides substantial protection to homeowners, recent legislation has changed this statute and has created more exposure to the homeowner for a possible deficiency judgment against him or her.

SB 1271 amended A.R.S. § 33-814 (G)  and goes into effect September 30, 2009, and now requires that the homeowner must have "utilized" the property for six consecutive months and "a certificate of occupancy must have been issued".  What does this mean?  Many attorneys are giving their own differing opinions.  What it does appear to do is to prohibit a deficiency judgment against a homeowner pursuant to a trustee's sale of a trust property that is 2.5 acres or less and is used as a single one-family or single two-family dwelling if:

1) the homeowner has lived in the trust property for at least six consecutive months. AND
2) a certificate of occupancy has issued on the property.

This appears to place the burden of proof on the homeowner to demonstrate that the statutory requirements to prohibit a deficiency judgment are met.

The purpose of this legislation was to provide small community banks protection from investors.  The drafter of the legislation has recognized that there are some likely unintended consequenses of this new law.  One such example is that of a family member who purchases a home for another family memeber (a parent for a child, or child for a parent).  In such an instance the homeowner will not be protected by the ARS 33-814, because the homeowner has not occupied the property, rather their family member occupied it.   The drafter of this legislation states that he will attempt to correct these issues before the new law goes into effect and, has in fact, requested that the Governor's office repeal the bill so it can be corrected.  Wether this will happen is not known.