On July 1, 2009, Governor Brewer signed into law an important change to Arizona's anti-deficiency statute. Previously, a lender foreclosing a deed of trust on qualified real estate (i.e., residential property of two and one-half acres or less and utilized for either a single one-family or single two-family dwelling) could not bring an action to recover any difference between the amount of its claim and the amount obtained by the foreclosure sale. As a result of the change, the protection now only applies to a foreclosure sale of such residential property that is used by the borrower as a dwelling for at least six consecutive months. The borrower has the burden of proving that.
This change in the law was sought by the lending industry. It was intended to take away the protection previously afforded to those who purchased residential real estate as rental and investment property.
A number of questions already have arisen regarding this change in the law. A few of them and the possible answers are set forth below:
- Question: To receive protection, must the borrower have used the property for the six consecutive months immediately preceding the foreclosure sale?
Answer: No. The change appears intended to take away protection from borrowers who purchased residential property for speculation and investment. Accordingly, it should not apply to a borrower who, for example, initially lived in the property (for at least six months) but later turned it into a rental or for other reasons moved out. That also is consistent with a plain reading of the statute, which does not specify that the usage must occur immediately prior to the sale.
- Question: Are the owners of second (i.e., vacation) homes protected?
Answer: Given the intent behind the change -- to take away protection previously afforded to speculators and investors -- vacation home owners ought to be protected if they can demonstrate that they used the property for six consecutive months. Arguably, usage need not be as a primary residence; it also can be the more sporadic kind associated with a second home. It could be argued that if the legislature wanted to limit protection to one's primary residence, it could have said that or used the term "resided" instead of "used."
- Question: Does the change apply to owners who purchased and borrowed against property in reliance upon the protection afforded under the old law?
Answer: Yes. The change applies to all foreclosure sales that occur after September 30, 2009 - regardless of when the property was purchased or the loan was made - and, therefore, to sales of property owned by investors who purchased and borrowed in reliance upon the protection afforded under the old law. It remains to be seen whether such owners can successfully challenge the applicability of the change to transactions made in reliance upon the prior law.
According to recent newspaper reports, the Arizona Realtors Association and real estate industry lobbyists currently are working to get this change in the law repealed. Time will tell whether those efforts will be successful and/or whether the new law will be clarified to address the above questions.