Are Refinanced Loans Covered under
Arizona's Anti-Deficiency Laws?
By: 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
, bankruptcy
and litigation
issues. 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.
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