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

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.”

New Arizona Case Says Homeowners Cannot Prospectively Waive Anti-Deficiency Protections

In yet another case favorable to homeowners, the Arizona Court of Appeals (Division One) determined that borrowers cannot contractually waive the anti-deficiency protections afforded by Arizona statutory law. The Arizona anti-deficiency statute protects most homeowners (exceptions do apply – see an attorney for help with this) from paying for the difference owed on their homes if they are foreclosed upon and their homes are sold for less than what is owing.

In Parkway Bank and Trust Co. v. Zivkovic, a borrower contractually agreed to waive all rights or defenses he might have under anti-deficiency law. The borrower eventually defaulted and the lender foreclosed. The house sold at foreclosure for less than what was owed, and the lender proceeded to sue the borrower for the difference. The borrower argued he could not be sued for the difference because of Arizona’s anti-deficiency statute but lost. He then appealed.

The Appellate Court concluded that the Legislature in creating the anti-deficiency statute (see A.R.S. 33-814) intended to protect consumers from the risks associated with borrowing to purchase homes by eliminating the hardships consumers would suffer for failing to fully appreciate the extent to which they were subjecting their personal assets to legal process. Instead, the legislature allocated to the lenders the “risk of inadequate security” in hopes that this would deter unbridled lending and overvaluation of collateral, and would also protect consumers against general downturns in the real estate market.


In Arizona, many homeowners who lose their home to foreclosure are not required to pay their lender for any deficiency between what they owed on the home and the price that the home is sold for at a trustee’s sale. This protection from liability is found in Arizona’s “anti-deficiency” laws.

However, Arizona’s anti-deficiency statutes do not protect all property owners from liability for a deficiency in the event of a foreclosure. In these instances, in order to determine the correct amount of the deficiency, the fair market value of the property must first be established. In MidFirst Bank v. Chase, 1 CA-CV 11-0013, the Arizona Court of Appeals found that a bank’s bid price for a property sold in a Trustee Sale is not evidence of the property’s fair market value for purposes of calculating a deficiency judgment.

In MidFirst Bank v. Chase, the lender, MidFirst Bank (“MidFirst”) loaned $1,620,000 to a borrower. The loan was secured by a deed of trust recorded against real property, and was guaranteed by two individuals, Mike and Linda Chase (the “Chases”). The Chases defaulted and MidFirst purchased the property at the trustee’s sale for a credit bid of $486,000.

MidFirst then moved for summary judgment against the Chases seeking a deficiency judgment of $1,325,044.09. The Chases argued that there was no deficiency because the “value of the Property far exceeds anything that could be owed on the Loan.” The trial court granted MidFirst’s motion for summary judgment. The trial court reasoned that, “No reasonable juror could find for [the Chases] on the issue of fair market value based upon the record presented.” The Chases appealed and the Court of Appeals reversed the trial court’s decision.

Another Favorable Anti-deficiency Ruling For Arizona Real Estate Owners

The Arizona Court of Appeals recently ruled in Independent Mortgage Co. v. Alaburda, that Arizona’s anti-deficiency law (A.R.S. § 33-814(G)) protects a borrower who has a fractional interest in a vacation home.

The Alaburdas purchased a 1/10 fractional interest in a single-family residential condominium in Sedona. Independent Mortgage financed the purchase with a loan in the amount of $321,750, which was secured by a deed of trust on the 1/10 interest in the property. The Alaburdas could vacation at the property for up to twenty-eight days each year.

The Alaburdas defaulted on the promissory note, and Independent Mortgage foreclosed on the property via a trustee’s sale. The property sold for $285,000, which was less than the amount owed on the promissory note. Independent Mortgage filed a lawsuit against the Alaburdas as a result of the deficiency balance.

Good News For Homeowners Regarding Arizona’s Anti-deficiency Laws

On August 28, 2012, the Arizona Supreme Court denied the request of more than a dozen banks to overturn the Arizona Court of Appeals decision in the 2011 case of M&I Marshall & Ilsley Bank v. Mueller, 1 CA-CV 10-804.

In the Mueller case, the Arizona Court of Appeals expanded Arizona’s anti-deficiency protection (under A.R.S. § 33-814(G)) to protect borrowers whose property is foreclosed upon even while it is under construction, so long as they intend to occupy the home upon completion. A.R.S. § 33-814(G), protects certain borrowers from liability for a deficiency in the event of a foreclosure.

According to A.R.S. § 33-814(G), 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. (Emphasis added) The court in Mueller analyzed whether the Mueller’s property qualified as a property that was being utilized as a dwelling under the statute.

Arizona Anti-Deficiency Protection For Construction Loans

In a previous blog titled “New Case Clarifies Lender Rights Under Arizona Anti-Deficiency Statutes” we discussed the implications of a recent appellate decision in regards to tracing taking cash out of a refinance to use for any number of purposes, but which were not used to purchase the home securing the loan.

However, Pasquan v. Helvetica also clarified another outstanding issue: Are construction loans taken out to pay for construction of a residence covered by the anti-deficiency provisions of A.R.S. 33-729(A)?

In Helvetica, the owners originally purchased a 4000 square foot home, and then refinanced the original purchase money loan. Later, they took out a construction loan to demolish the 4000 square foot home in favor of a new 11,500 square foot home. The proceeds from the last loan were used to pay off the prior existing refinanced purchase money loan, financed the construction of the new home, and then provided funds to the owner at closing which were used for things other than refinancing or construction of the home.

The court concluded that a construction loan does qualify as a purchase money obligation entitled to anti-deficiency protection if two conditions are met. First the deed of trust securing the loan must cover both the land and the dwelling being constructed thereon.


As a result of the declining real estate market, many homeowners are faced with the prospect of losing their home to foreclosure. If the proceeds of the foreclosure sale of the property secured by a mortgage or by a deed of trust are insufficient to pay the full loan balance, the mortgagee or the beneficiary may be entitled to a judgment against the homeowner known as a “deficiency”. The question then becomes when can a lender pursue a homeowner in the event of a deficiency?

The Arizona Legislature enacted two anti-deficiency statutes barring the right of certain beneficiaries and certain “purchase money” mortgagees from seeking a deficiency judgment for certain types of residential loans. The Arizona statutes that prohibit deficiencies are found in A.R.S. §§ 33-729(A) and 33-814(G).

Purchase Money vs. Non-Purchase Money Loans

The Arizona anti-deficiency statutes protect borrowers against deficiency judgments involving single or two-family dwellings on 2 ½ acres or less where the loan is “purchase money”, meaning it was used to pay the purchase price of the property. In this instance, the homeowner has no personal liability for the loan, unless the lender has committed waste to the home. Therefore, the lender’s only recourse after loan default is to foreclose on the home, and the lender cannot waive foreclosure and sue to collect the balance owed on the loan. If, however, the loan was not used to purchase the home, i.e. a home equity line of credit, the lender can waive foreclosure and sue to collect the remaining balance on the loan.

Even if the loan is a non-purchase money loan, the lender will be barred from seeking a deficiency judgment if the lender chooses to foreclose by a trustee sale rather than a judicial foreclosure. Trustee sales are an option for the lender when the loan is secured by a deed of trust. Trustee sales are quicker and less expensive than judicial foreclosures.

New Case Clarifies Lender Rights Under Arizona’s Anti-Deficiency Statutes

Although Arizona’s anti-deficiency statutes have been on the books for over 40 years, the application of these laws has undergone a continual evolution as circumstances in the real estate market have changed. That evolution continued earlier this year when the Arizona Court of Appeals finally clarified a glaring ambiguity that had existed since 1997.

Arizona’s anti-deficiency statutes, codified as Arizona Revised Statutes §§33-729(A) (mortgages) and 33-814(G) (deeds of trust), were implemented to protect consumers from the financial ruin of not only losing their home to foreclosure but also losing all of their nonexempt personal property on the execution of a deficiency judgment by the lender.

Further, the statutes shifted the risk of inadequate security to the lender who is assumed to be in a better position to evaluate the proper value of the collateral used to secure a loan. However, these rules were limited to specific types of loans, foreclosures, borrowers, and properties. Regardless of these attempts to narrowly define the purpose of these statutes, questions as to how they were to be applied began to arise.

In 1997, the Arizona Court of Appeals faced such a question in the case of Bank One, Arizona, N.A. v. Beauvais, 934 P.2d 809, 188 Ariz. 245 (Ariz. App Div. 1, 1997). Previous interpretations of the statutes and Arizona case law had established that lenders could not obtain deficiency judgments against borrowers in the case of a non-judicial foreclosure or in the case of a “purchase money” mortgage (when a loan was procured to purchase the property that secured the loan). But in a market when loans are constantly assigned, restructured, extended, renewed, and refinanced, under what circumstances would the character of a “purchase money” loan change?