When borrowers cannot make payments on their deed of trust or mortgage and the property is sold, generally the lender is limited in recovery to the sale of the property when the property is a one-family or two-family dwelling on land of 2 ½ acres or less. However, on other circumstances, including vacant land, dwellings for more than two families and commercial properties, lenders are entitled to judgments beyond the trustee sale price or forced sale price up to the outstanding loan balance, called a deficiency judgment. Arizona statutes provide that, in circumstances where deficiency judgments are permitted, the borrowers receive a credit against the loan balance not only for the amount of the sale, but also for the fair market value of the property if it is greater than the sales price. This protects the borrower “against artificially inflated deficiencies by preventing windfalls resulting from below-market credit bids” or from forced sales. The fair market value provision protects borrowers or their guarantors.
In CSA 13-101 Loop, LLC v. Loop 101, LLC, decided December 31, 2014, the Arizona Supreme Court ruled that lenders cannot require borrowers to waive the fair market value provision before the sale, finding the borrower protections from artificial deficiencies to be in the public interest. Thus any such waivers in the loan documents or otherwise prior to the sale are unenforceable.