by Richard Keyt, Arizona Real Estate Lawyer

Because we are Arizona real estate lawyers, we are frequently asked by Arizona home owners if a lender who forecloses on a loan secured by a deed of trust or a lien on an Arizona home can sue the home owner for a deficiency. A “deficiency” is a legal term that means the difference between the total amount owed to the lender (principal + interest + foreclosure expenses + other amounts due under the loan documents) and the amount realized by the lender at a foreclosure sale. For example, if the total amount owed is $100,000 and the foreclosure sale produces $80,000, there is a deficiency of $20,000.

The answer to the question can my lender sue me for a deficiency is yes or no, depending on the facts and circumstances of each loan. Arizona law does provide in certain circumstances (but not all) that the lender may not seek a deficiency against a borrower following a foreclosure. A home owner facing a possible or an actual foreclosure of an Arizona home must know if the lender will be able to sue the home owner for a deficiency after the foreclosure. Sometimes Arizona law prevents the lender from suing the borrower for the deficiency following a foreclosure. Unfortunately for some home owners, Arizona law sometimes allows the lender to sue the homeowner for a deficiency.

If you are facing a possible loan default and foreclosure or if you have already defaulted and a foreclosure has started, you should consult with an experienced Arizona real estate attorney who can review your specific situation and tell you if you will be liable for a deficiency or if Arizona’s anti-deficiency laws protect you from being sued for a deficiency. You should consult with an experienced real estate attorney sooner, rather than later, because your options will be reduced and then eliminated the closer you get to the foreclosure date.

Arizona’s laws that prohibit deficiencies are found in Arizona Revised Statutes Sections 33-814.G and 33-729.A. These types of laws are also called “anti-deficiency legislation.”

ARS § 33-729.A states, “. . . if a mortgage is given to secure the payment of the balance of the purchase price, or to secure a loan to pay all or part of the purchase price, of a parcel of real property of two and one-half acres or less which is limited to and utilized for either a single one-family or single two-family dwelling, the lien of judgment in an action to foreclose such mortgage shall not extend to any other property of the judgment debtor, nor may general execution be issued against the judgment debtor to enforce such judgment, and if the proceeds of the mortgaged real property sold under special execution are insufficient to satisfy the judgment, the judgment may not otherwise be satisfied out of other property of the judgment debtor, notwithstanding any agreement to the contrary.

ARS § 33-814.G states, “If trust property of two and one-half acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling is sold pursuant to the trustee’s power of sale, no action may be maintained to recover any difference between the amount obtained by sale and the amount of the indebtedness and any interest, costs and expenses.”

Questions

Although the two statutes are fairly easy to read, applying them to a specific situation is not so easy unless you are an Arizona real estate attorney. Whether a lender can seek a deficiency depends not just on ARS § 33-814.G and ARS § 33-729.A, but also applying the statutes to the answers to the following questions:

  • Is the loan secured by a lien on Arizona residential property?
  • Is the loan secured by a deed of trust?
  • Is the loan secured by a mortgage?
  • Was the loan secured by the deed of trust or the mortgage acquired to purchase the property?
  • Was the loan secured by the deed of trust or the mortgage used to payoff another loan acquired to purchase the property?
  • Is the home on 2.5 acres or less?
  • Is the property limited to and used as either a single one-family or single two-family dwelling?
  • Is the lender foreclosing by selling the property under the trustee’s sale powers of a deed of trust?
  • Is the lender foreclosing by filing a lawsuit in Superior Court to foreclose the lien judicially rather than foreclosing by having a trustee’s sale?
  • Did the borrower (or somebody occupying the property with the borrower’s consent like a tenant) commit waste? Waste occurs when the value of the real property is reduced because of acts or omissions of the borrower or the borrower’s tenants or their invitees. For example, if you intentionally burn down your home and it reduces the value of the property by $150,000, Arizona’s anti-deficiency laws will not prevent the lender for suing you for the $150,000 of waste.