Earlier this year, the Arizona Court of Appeals reversed a lower court's decision against a homeowner in an anti-deficiency, judicial foreclosure case. I've attached the case for your review.
The court ruled as follows:
Refinancing - Different Lender / Different Deed of Trust:
Anti-deficiency protection exits regardless if a purchase money mortgage is refinanced by a different lender, using a different deed of trust. Attorneys have been trying to argue that by refinancing a purchase money loan with a different lender, where the deed of trust in removed and replaced by a different deed of trust, removes anti-deficiency protection. It is now law that anti-deficiency protection exists regardless of the lender or a renewal or replacement of the deed of trust, so long as that deed of trust remains on the same property.
Construction loans: Are construction loans protected by the anti-deficiency statutes?
Answer: Yes. A construction loan used to build a home now qualifies. There has never been an appellate case in Arizona specifically dealing with this exact issue. So long as: (1) the deed of trust securing the loan covers the land and the dwelling constructed thereon; and (2) the loan proceeds were in fact used to construct a residence that meets the size and use requirements (under 2.5 acres and a single family or two family dwelling), there's anti-deficiency protection.
Bifurcation: A purchase money loan combined with a cash-out refinance:
The cash-out portion of a purchase money loan (that was not used to buy or construct the home) does not convert the "entire loan" into a non-purchase money loan. However, the cash-out portion not used to purchase or construct the home is subject to a deficiency. In other words, if you bought a home for $200,000 and financed 100%, you have 100% protection. However, if you subsequently refinance your loan and obtain a cash-out refinance for an additional $200,000 to pay for your kid's education, payoff credit card debt, or to buy an investment property, the cash-out portion is now recourse to the borrower(s) and is not subject to anti-deficiency protection.
"It appears unnecessarily punitive and contrary to theconsumer-protection goals of Arizona’s legislation to convert an entireobligation into a recourse loan simply because it happens to includenon-purchase money sums. On the other hand, it seems similarly inappropriate toshield borrowers from deficiencies for loan disbursements unrelated to theacquisition or construction of a qualifying residence. Extendinganti-deficiency protection in such a manner could encourage irresponsibleborrowing and abdication of personal responsibility for repaying legitimatedebt. It would also appear to stretch our anti-deficiency laws beyond the scopeintended by the legislature.
We therefore hold that, to the extent a judiciallyforeclosed mortgage includes both purchase money and non-purchase money sums, alender may pursue a deficiency judgment for the latter amounts."