Arizona provides protection to homeowners who lose their homes through foreclosure, A. R. S. Section 33-729(A), or trustee’s sale, A. R. S. Section 33-814(G). These protections are known as anti-deficiency statutes and limit the homeowner’s loss to the property. When the sale of the property produces less revenue than the outstanding balance of the loan, the lender cannot seek to recover the balance – deficiency – against other assets of the homeowner. These statutes apply only to a one-family or two-family dwelling on property of 2 ½ acres or less. Further, the statute relating to judicial foreclosures apply only to “purchase money loans,” meaning loans used only to purchase the property, excluding loans or refinances involving pulling out funds for other purposes. The statute precluding deficiencies from trustee sale proceedings is not restricted to purchase money mortgages.
This year the Arizona Legislature amended the anti-deficiency statutes in a compromise between lenders and home builders. Effective beginning with loans originating in 2015, the anti-deficiency statutes no longer apply to commercial developers and spec home builders except for their personal homes. In addition, the protections only apply if the dwelling is “substantially completed” and actually used as a dwelling; intended use as a dwelling will be insufficient for anti-deficiency protection.
Most importantly, the changes do not reduce the protections to the majority of Arizona homeowners, including second homes, investments homes and vacation properties. Through the worst of the housing crisis, Arizona homeowner’s do not risk more than their homes, while others in neighboring states, such as New Mexico, risked deficiency judgments as well.