Questions & Answers / "Fixing" a Problem and The Law of Unintended Consequences: The Arizona Legislature Creates a Whole Slew of Issues Regarding The Anti-Deficiency Law

"Fixing" a Problem and The Law of Unintended Consequences: The Arizona Legislature Creates a Whole Slew of Issues Regarding The Anti-Deficiency Law


By Shawn Nelson and Rebecca Porter



UPDATE: Governor Brewer signed HB 2008, removing the changes to the anti-deficiency statute and returning the law to its original form. Please contact us for the latest information and updates on the anti-deficiency law in Arizona.
              Currently, Arizona law protects homeowners who lose their home in foreclosure from being sued for additional money by the lender. It’s commonly called the anti-deficiency statute and works like this: If a homeowner owes $500,000 on real property and that property is worth $300,000 when the lender forecloses, the lender has a “deficiency” of $200,000, or, the difference between the amount owing under the loan and the value of the home at foreclosure.  If the homeowner is protected by an anti-deficiency statute, the lender will not be able to sue for the deficiency. Clearly, this type of deficiency protection is vitally important to a homeowner who stands to lose a property in foreclosure.


In my opinion, the Arizonalegislature perceived two supposed “loopholes” in the laws as they stand now. I offer this opinion with the caveat that no one is sure what the legislature was trying to accomplish with the changes made. Further, as this article will discuss, the changes to the anti-deficiency laws are anything but clear. The first loophole is that investors are protected.  In other words, the property does not have to be your personal residence, just residential property. The second loophole being targeted deals with the length of time that a homeowner lives in the property. Currently, there is a requirement that someone live in the property, but no requirement regarding the length of time that someone must reside in the property. Thus, a builder could conceivably construct a home, stay there overnight in a sleeping bag and claim protection under the anti-deficiency statutes.


In a somewhat confusing attempt to fix these supposed loopholes, the legislature adopted and the governor signed SB 1271 amending the anti-deficiency statutes. The bill amends ARS § 33-814 (G) as follows (the language added to the law is in bold):


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 by the trustor under the deed of trust for at least six consecutive months and for which a certificate of occupancy has been issued 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.  The trustor is responsible for demonstrating that the trust property was used by the trustor as a one-family or a single two-family dwelling for at least six consecutive months. END_STATUTE


The particular procedure used by the legislature to pass the bill, a “strike everything amendment,” provided for virtually no public comment. Perhaps as a result of the lack of public input, this bill that will become Arizona law on September 30, 2009, raises many more questions than it answers. Here are some examples:  What if no certificate of occupancy is available where the new home was built? Does the new law apply to mortgages that were obtained prior to the effective date of September 30, 2009? Can the six-month period begin before September 30, 2009? If the owner lives in the property for only one day per month for six months, is that sufficient under the new law?  What if the owner goes on vacation or is hospitalized during the six month period, does that time count? If the owner is an entity such as an LLC or a trust, how does it “live” in the home? What evidence of living in the property is required? Is testimony of the owner or of neighbors sufficient?


Further, it is not at all clear that the law addresses the loopholes that the legislature apparently intended. While the argument could be made that the legislature wanted the borrower to be the one living in the property, the law as amended only states that the “trustor” (borrower) must “utilize” the property as a residence. Could the borrower “utilize” the property as a residential rental and still receive the protection of the statute? Another unintended consequence may be that this new law causes lenders to file multiple lawsuits against borrowers leading to an increase in litigation against struggling homeowners. 


Certainly, a law like this one has received many complaints from many interested parties. The CEO of the Arizona Association of Realtors has written a letter to the governor asking that it be repealed. News organizations from the Phoenix New Times to the New York Times have run stories pointing out various problems with the law. Even Senator Steve Pearce, one of the sponsors of the bill has called for its repeal, stating a need “to fix this bill.”


However, as it currently stands, the law will go into effect and will have far-reaching impacts on borrowers, including investors and homeowners. My recommendation to anyone facing the possibility of foreclosure is to talk to an experienced attorney who understands the anti-deficiency statutes.  That attorney can help guide a property owner through the flood of misinformation about this law and can assist you in creating a strategy that can hopefully minimize its impact.