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Deficiencies on Residential Foreclosures

By: Peter Moolenaar on January 26, 2010

Given the unprecedented rise in residential foreclosures, many have been forced to determine whether they may be liable for the deficiency between the balance owed on the note for the property minus the amount collected by the lender at a trustee or foreclosure sale. Although this is a very popular issue, there is unfortunately a mass of misinformation and dangerous sweeping conclusions which are all too available for distressed borrowers.

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.

Tags: Economy, Peter Moolenaar, Real Estate

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