Arizona Anti-Deficiency Saga Plays Out Like Primetime Drama – Existing Statute Changed, Then Change Repealed, Future Uncertain

September 22, 2009 By Christopher M. McNichol In Legal Alerts

This summer, the state legislature grappled with changing Arizona’s anti-deficiency law, which protects homeowners who lose their homes in foreclosure from paying a “deficiency” on the property. A “deficiency” is the difference between the secured debt and the greater of the sale price or the home’s fair market value.

Within a 3-month span, this issue unfolded like a primetime drama. Read more about each episode below.

Episode 1: Status Quo
Arizona law has long protected a homeowner from liability for a foreclosure deficiency if the home is 1) a residential property of 2-1/2 acres or less and 2) limited to and utilized as a single one-family or a single two-family dwelling.

Interpretive court opinions suggest that while the home must be used as a dwelling, it does not necessarily need to be utilized by the owner as a dwelling. A renter, vacationer, or part-time occupant will do.

Episode 2: The Change
In July, the legislature passed a bill narrowing this anti-deficiency protection by making it applicable only to residential property occupied by the borrower for at least six consecutive months and for which a certificate of occupancy had been issued.

Under this amendment, many rental or investment homes, Arizona homes occupied only part-time by out-of-state owners, or completed houses without a certificate of occupancy no longer qualified for anti-deficiency protection.

Slated to go into effect September 30, the new law left many questions unanswered: Would it apply to all existing loans? Or would it apply only to new loans made on and after September 30? Would it apply only to foreclosure sales conducted on and after September 30? And would it apply in cities or towns that don’t issue formal certificates of occupancy?

Episode 3: The Reckoning
The amendment generated heated reactions, particularly from the real estate, investment and development broker community. After strong lobbying, the amendment was repealed on September 4, 2009, before it even went into effect.

Potential Episode 4: Here We Go Again?
And so, for now, nothing has changed; the existing anti-deficiency protections remain. But the legislature will meet again next year. Stay tuned to see if this saga continues.

For More Information
For more information, please contact Chris McNichol and Kent Cammack using the contact information below.

Christopher M.
Chris practices in the area of real estate and is co-author of Ins and Outs of Foreclosure.

Kent E.
Kent practices in the area of real estate and is co-author of Ins and Outs of Foreclosure.

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