[author: Valerie Marciano, Esq]
Many of you are familiar with Arizona’s anti-deficiency statutes. In simple terms, when a residence is located on 2 1/2 acres or less and is utilized as a single one-family or two-family dwelling, the lender who financed the purchase of the residence is precluded, for the most part, from attaching the borrower's other assets (i.e., cash, boats, jewelry) beyond the residence itself. So, if the borrower stops making the payments to the lender, the lender can only recover the residence. The key to the protection is that the loan was "purchase money". In other words, the lender made the loan to enable the borrower to purchase the residence. However, many borrowers refinanced their "purchase money" loan. The crucial question is whether or not the borrower will receive the Arizona "anti-deficiency" protection.
Arizona's law has been less than clear regarding refinanced loans under the anti-deficiency statute. A 1997 case, Bank of Arizona v. Beauvais, was the primary guidance. A refinanced loan was used to pay off the "purchase money" loan; the refinanced loan received the protection benefits of anti-deficiency laws. However, all of the refinanced funds needed to be used to pay off of the existing purchase money mortgage, including closing costs. Then the lender could not pursue the borrower's other assets beyond foreclosing on the residence.
In the early 2000's, borrowers began refinancing their original purchase money loans due to both lower interest rates and the increase in property values. Many of those borrowers used some of the refinanced loan to not only pay off the existing purchase money mortgage but also for other purposes. The common term used was "pulling equity out" of the residence. Borrowers may have used a portion of the refinanced loan proceeds to pay off credit card debt, reduce student loan debt, purchase a new vehicle or buy another property. Many borrowers may have used some of the refinanced proceeds to improve the residence, such as constructing a pool or a block wall; however, such a distinction may not be an important distinction. With many borrowers defaulting on their refinanced loans, the question of whether those borrowers remained liable for that portion of the refinanced loans used for purposes other than to pay off their purchase money loans has come to the forefront of Arizona’s legal system.
In March of 2012, the Arizona Court of Appeals clarified the ambiguous application of the anti-deficiency statute to refinanced loans in the case of Helvetica Servicing, Inc., v. Pasquan. The Arizona Court of Appeals found that, to the extent the refinanced loan includes non-purchase money sums, (i.e., that portion of the refinanced loan that was used for other things and not used to pay off the existing purchase money loan), the lender may pursue a deficiency judgment for the non-purchase money portion, assuming the lender judicially forecloses the lien. The lender will want to trace and segregate the non-purchase money portion of the refinanced loan and consider using judicial and not a non-judicial foreclosure to take possession of the property. While the court in the Helvetica case did not elaborate, it appears that the Arizona courts will be parsing out home loans to determine whether such loans were used for the actual construction of the residence – receiving the anti-deficiency protection – or whether the loan was a home improvement loan, i.e., for building a swimming pool or a block wall, for which the homeowner may not be protected.
The lesson that this new ruling brings to borrowers is: “pulling equity out” of your residence may expose you to personal liability beyond the loss of your residence and the statute of limitations could be as long as six years. The lesson to the lender: define the amount and segregate the portion of the refinanced loan that was used for non-purchase money purposes, and trace the loan proceeds so that a clear record exists from which the lender may demonstrate the non-purchase money nature of the loan.
About the author: Valerie L. Marciano is an attorney at the Phoenix law firm of Jaburg Wilk. She assists clients with real estate, foreclosure, bankruptcyand litigationissues. Val frequently writes on Arizona's foreclosure and anti-deficiency statues and is a board member of AZCREW - Arizona's premier commercial real estate professional association for women. Val can be reached at 602-248-1025 or vlm@jaburgwilk.com.
This article is not intended to provide legal advice and only relates to Arizona law. It does not consider the scope of laws in states other than Arizona. Always consult an attorney for legal advice for your particular situation.
