While Arizona does have an anti-deficiency statute which prohibits lenders from pursuing some borrowers personally for the balance due on a note after a foreclosure sale, its protection is generally limited to purchase money mortgages on residential property of two and one-half acres or less. Purchase money mortgages are those given to secure the payment of the balance of the purchase price or to secure a loan to pay all or part of the purchase price.

Although the anti-deficiency statute may at first appear fairly mundane, for many homeowners, investors or trusts, its application is anything but. Common issues that require careful consideration and analysis include: (1) the impact of equity lines of credit; (2) personal guarantees; (3) the potential for cross-defaults under other loans; (4) whether the property is a “dwelling” under the statute; (5) whether the lender has waived any right to a deficiency; and (6) the amount of the deficiency. The analysis of whether a borrower has potential liability for a deficiency (and to what extent) often requires careful review of the loan and security documents, as well as the borrower’s actions following the execution of the note and security instrument. Although there are many sources that purport to provide this information, a comprehensive analysis should be conducted by an attorney experienced with these matters.

MERS was created in 1997 to obviate the need to record changes to mortgages stemming from the subsequent transfers of their corresponding Notes. Although MERS does not own or service the mortgages it registers, it is typically listed in the mortgage as a nominee for the actual owner.

Although the majority of the challenges to MERS (which have been largely unsuccessful) involve the proprietary of its role vis-a-vis the borrower or homeowner, there may be some question as to the legitimacy of its registration vis-a-vis a subsequent bona fide purchaser or encumbrance holder for value.

All states have recording acts governing the recordation of documents concerning the title to real estate. These acts are designed to protect subsequent bona fide purchases of an interest in land from unrecorded claims. They generally have no application to the validity of a deed between the grantor and grantee.

There are three types of recording acts: Race, Notice and Race-Notice. In a Race statute, whoever wins the race to record first prevails over anyone who has not recorded or subsequently records. In a Notice statute, a subsequent purchaser wins if he or she has no notice of a prior claim when he or she acquires the interest in the property. Race-Notice statutes protect subsequent purchasers who take their interest without notice of the prior claim and win the race to record.

Given that the vast majority of states have either a Notice or Race-Notice statute, the question is whether security instruments listing MERS as a nominee provide sufficient “notice” to subsequent purchasers. The recorded mortgage typically will not identify the current owner of the mortgage, nor will there be subsequent recorded documents identifying the owner. Therefore, it is not possible for a subsequent purchaser to discern from the records whom is asserting a prior claim to the property. Further, should the subsequent purchaser contact MERS, he or she will typically only be informed of the entity that is servicing the mortgage. This may not necessarily be the same entity that owns the mortgage.

Should subsequent purchasers or encumbrance holders for value begin to challenge MERS, Courts will likely be asked to determine the level of “notice” required. Is notice of an asserted interest in property, without notice of the person or entity asserting the claim, sufficient?