Arizona law (as outlined in Arizona Revised Statutes, Title 33, Chapter 6.1) provides protection for borrowers against deficiency judgments where the loan is “purchase money” (it was used to pay the purchase price of the property). This only applies if the decrease in value is not due to the homeowner’s neglect (referred to as waste). Typically, loans used to refinance purchase money loans are also considered purchase money loans, although the use of some of the proceeds to pay other debts or obtain cash out may expose the borrower to recourse liability.
Significantly, even if the loan is not a purchase money loan, the lender’s decision to use non-judicial foreclosure on the deed of trust renders it non-recourse by law. The lender may instead seek a judicial foreclosure, which is more expensive and time-consuming, but preserves the ability of the lender to obtain a deficiency judgment. This Arizona anti-deficiency statute also allows a lender to seek a deficiency judgment against the borrower in the event of waste (when a homeowner does anything to devalue the property, including removal of fixtures).
The only exception to Arizona’s anti-deficiency statutes are VA loans. As decided by recent litigation, the VA is allowed to obtain a deficiency judgment despite current state laws that prohibit such actions. Interpretation of the Arizona anti-deficiency statutes and related real estate laws can be very complicated, so borrowers are advised to seek the assistance of an experienced Arizona real estate attorney.
What about a HELOC? (Home Equity Line of Credit) HELOC loans present a problem for homeowners facing Foreclosure because they remain the responsibility of the borrower after the First Lien Holder forecloses on the property. Because these types of loans become unsecured debt after a foreclosure, the lender can pursue a deficiency judgment against the borrower or simply sell the bad debt to a collection agency, which has 6 years to attempt to collect the debt. This is one of the most vital reasons to Short Sale your home instead of simply letting it go into foreclosure.
Because of the popularity of the 80/20 or 80/10/10 mortgage products many AZ homeowners have a HELOC and do not even know it. Most loans written between 2004 and 2007 where the borrower did not put at least 20% down on the property were written with a HELOC so the borrower would not have to pay PMI (Private Mortgage Insurance). Chances are that if you have a second “mortgage” it is actually a HELOC.
The RE/MAX Renaissance Realty office is proud to be aligned with Dax Watson, Esq. and his office. We highly recommend that all of our short sale clients as well as anyone facing a foreclosure or considering a short sale seek legal counsel from a qualified real estate attorney. Because of our ongoing relationship with Mr. Watson, Esq. our clients receive a deeply discounted rate for a consultation.