SOMETHING NEW ON THE ARIZONA ANTI-DEFICIENCY
FRONT FOR CONSTRUCTION LOAN FORECLOSURES
By: Valerie
Marciano
A recent Arizona Court of Appeals case has clarified residential
construction loan deficiencies by including certain residential
construction loans under the Arizona anti-deficiency statute
protection. Arizona homeowners, for the most part, are
protected from their home mortgage lenders attaching other assets
such as the cash in the bank, vehicles and jewelry following a
foreclosure or trustee sale of their home. The lender is left to
recover the residence and that is all. Aside from very certain
circumstances such as when the homeowner damages the residence, the
"anti-deficiency protections" have safeguarded Arizona homeowners
for more than 25 years. One of the key requirements of
Arizona's law is that the residence must be located on 2 1/2 acres
or less and be limited to and utilized for a single one-family or
two-family dwelling.
From 2004 to 2006, lenient lending requirements made it possible
for many people to purchase a residence or to obtain funding for
the construction of a residence. Some of those loans were
obtained under false pretenses for the purpose of using the
residence as an investment to rent to a third-party or to resell
the residence to an end-user, commonly known as flipping.
Such loans were not obtained for the purpose of buying or building
the residence for the borrower to actually live in as the
borrower's primary residence.
However, many borrowers obtained a loan to build a residence with
the intended purpose of using the to-be-constructed residence as
the borrower's primary residence. Frequently, the homeowner
would continue living in their existing residence while the new
residence was under construction. With the housing crash at
the end of 2006, many of those borrowers were either unable or
chose not to continue paying the construction loan for the
residence that was still being built. Many of the
construction projects stalled, uncompleted. Lawsuits most
certainly followed. These borrowers faced the possibility
that they would be found liable for the balance of the construction
loan as the loans did not clearly fall under Arizona's
anti-deficiency protection.
A recent Arizona Court of Appeals case, M&I Marshall &
Ilsley Bank v. Mueller, has changed the landscape for both
home construction lenders and their borrowers, at least when it
comes to partially constructed residences in which the
borrowers had the intent to live. The Arizona Court
of Appeals agreed with the lower trial court and found that the
borrowers, the Muellers, are protected by the "anti-deficiency
laws" even though the residence was only partially constructed and
had never been lived in by the Muellers. The Muellers had
purchased the property with the intent of occupying the dwelling
upon completion. It is unknown whether the bank will appeal
the decision to the Arizona Supreme Court. If an appeal is
taken, then the Arizona Supreme Court will have the final say on
the issue.
If you are facing foreclosure on a construction loan, we recommend
that you seek legal counsel as you may have protection under
Arizona's anti-deficiency statutes.
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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