How Do the Recent Changes in the Real Estate Loan Anti-Deficiency Laws Apply to You?

Anti-Deficiency laws have been updated, learn how they affect you and your loan.

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On January 1, 2015, Arizona’s amended anti-deficiency laws became effective. The previous law contained in Arizona Revised Statute §33-814 (G) held that “If trust property of two and one-half acres or less which is limited to and utilized for either a single one-family or a single two-family dwelling is sold pursuant to the trustee’s power of sale, no action may be maintained to recover any difference between the amount obtained by sale and the amount of the indebtedness and any interest, costs and expenses.” Basically, this breaks down to be, as long as a loan is secured by property of 2.5 acres or less, and used for a one or two family residence, the owner is not responsible for the difference if the fair market value of the property is less than the outstanding balance of the loan when the house is foreclosed and sold at auction.

The changes to the law, which took place January 1, 2015, apply to all loans, secured by deed of trust, after December 31, 2014. So if a loan occurred before that, the amended law is not applicable. The amended law is now contained in Arizona Revised Statute §33-814 (H) which states that the amended law applies if any of the following are true; “(1) Trust property owned by a person who is engaged in the business of constructing and selling dwellings that was acquired by the person in the course of that business and that is subject to a deed of trust given to secure payment of a loan for construction of a dwelling on the property for sale to another person. (2) Trust property that contains a dwelling that was never substantially completed. (3) Trust property that contains a dwelling that is intended to be utilized as a dwelling but that is never actually utilized as a dwelling.”

The amended law largely stems from an Arizona court of Appeals decision in M & I Marshall & Ilsley Bank v. Mueller, (App. Div.1 2011) 228 Ariz. 478, 268 P.3d 1135. Prior to Mueller, to qualify under the old law, the property must have had a livable structure and someone must have lived in the structure.  However, in Mueller the Court ruled that mere intent to inhabit the home was sufficient for protection under that statute.  In Mueller, the property in question was a partially constructed house that was uninhabitable.

Largely as a result of Mueller, the Arizona legislature, amended A.R.S. § 33-814.  As stated above, the amendment will not protect property when a person is engaged in constructing homes for resale and the loan was obtained to facilitate construction financing, when the property intended to be utilized as a dwelling is never substantially completed, nor inhabited as a dwelling, or when the property contains a dwelling, but is never actually utilized as such.

Presumably in anticipation of future litigation, the legislature also added A.R.S. § 33-814(I) to clarify what is was intended by the term “substantially completed” in section (H). Pursuant to A.R.S. § 33-814(I) A structure is not substantially completed if: “(1) A final inspection is not completed, and building permit issued, in the event that such government body requires such; or (2) If a final inspection is not required, the dwelling has been completed in all material respects as prescribed in the applicable ordinances and regulations of the governmental body that issued the building permit for the dwelling.
Making sense of this new law and predicting future applications will be difficult for attorneys and courts alike, let alone an average homebuyer.

Platt & Westby has offices in Phoenix, Arrowhead, Avondale, Scottsdale and Gilbert Arizona.  If you are facing foreclosure, contact our office by calling 602-277-4441 or for a free consultation with one of our experienced attorney’s to find if this amended law applies to you.

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