SB 1271 - Anti-Deficiency Law Change

The current law - Arizona Revised Statutes (A.R.S.) § 33-814 currently states that within 90 days after the date of sale of a trust property under a trust deed, a legal action may be brought to recover a deficiency judgment against the borrower (trustor) who has now had their property foreclosed. The deficiency judgment must be for an amount equal to the sum of the total amount owed as of the date of the sale either by the fair market value of the trust property as determined by the court or the sale price at the trustee's sale, whichever is higher. The current law prohibits a lender from seeking a deficiency judgment against the trustor (foreclosed property owner) if the trust property is 2.5 acres or less and is used as a single one-family or single two-family dwelling.

The law effective September 30, 2009 - SB 1271 amended A.R.S. § 33-814 (G) to require that the trustor must have "utilized" the property for six consecutive months and a certificate of occupancy must have been issued.

What does this likely mean? Various attorneys are opining different theories. The main interpretation of the statute is that after September 30, 2009, properties sold at trustee's sale (foreclosure sale) likely will not qualify for the anti-deficiency exemption unless the trustor lived in the single one-family or single two-family dwelling for at least six consecutive months.

The legislative Fact Sheet, as transmitted to the Governor, states that SB 1271: Prohibits a deficiency judgment against a trustor pursuant to a trustee's sale of a trust property that is 2.5 acres or less and is used as a single one-family or single two-family dwelling if both of the following apply:

* The trustor has lived in the trust property for at least six consecutive months.

* A certificate of occupancy has been issued for the property.

This clause places the burden of proof on the trustor to demonstrate that the statutory requirements to prohibit a deficiency judgment are met. Meaning the owner has to prove that they actually lived there for the last six consecutive months. How will the occupancy exactly be determined is in question, will utility bills be sufficient?  Hopefully the forth coming attorny opinions will provide some answers.

This is a big change to the existing law that provided protection to borrowers in some cases against a deficiency judgment when their property went through foreclosure. The legislation certainly has the lending and real estate industries a buzz with its intended and unintended consequences. The current law protected investors and this new law now strips that away.  Possibly one of the unintended consequenses will punish owners that have tried to do the right thing.  The owners that could not sell due to the drastic depreciation, rented the homes in the hopes that the market would get better so they could sell in the future.  This may mean that one of the few options to avoid foreclosure with a deficiency judgement is to a short sale of the home.  Investors and certain owners will need to be aware of this new law to try to protect themselves from deficency judgments and the long term financial consequenses.

For information on short sales, please visit me at www.az-short-sales.com