Arizona's Anti-Deficiency Statutes
**We are not Attorneys and recommend that all homeowners consult with a lawyer before doing a short sale.
Attitudes have changed on this issue since short sales became so prevalent 4 years ago. The trend that we have experienced is that banks do not pursue deficiency debt judgements on sellers. Because Arizona has a protection law that banks cannot pursue an owner after default so most banks will not touch the issue here although they still often put it in the approval letter at close of escrow. The law is listed below. It is very vague so it does not distinguish between a primary residence, second home of an investment/rental property. Most loans (but not all) are guaranteed by the two federal government entities, Fannie Mae or Freddie Mac. Those 2 investors will not issue any deficiency on a primary, second or investment home unless there is fraud. Often the agent just has to request that the lender not include the clause in the final letter regarding a possible future deficiency option. Sometimes it will be removed with a small cash contribution like $300. This is our experience and not a guarantee that this will be the case for everyone.
Arizona law as outlined in Arizona Revised Statutes, Title 33, Chapter 6.1 provides protection for borrowers against deficiency judgments involving single or dual-family dwellings on 2 1/2 acres or less where the loan is "purchase money," meaning it was used to pay the purchase price of the property. This only applies if the decrease in value is not due to the homeowner's neglect.
Typically, loans used to refinance purchase money loans are also considered purchase money loans, although the use of some of the proceeds to pay other debts, obtain cash out, or for other uses may expose the borrower to recourse liability. Significantly, even if the loan is not a purchase money loan, the lender's election to utilize non-judicial foreclosure on the deed of trust renders it non-recourse by operation of law. The lender may, however, instead seek judicial foreclosure, which is more expensive and time-consuming, but preserves the ability of the lender to obtain a deficiency judgment. This anti-deficiency statute also allows a lender to seek a deficiency judgment against the borrower in the event of waste (when a homeowner does anything to devalue the property including removal of fixtures).
The only exception to Arizona's anti-deficiency statutes are VA loans. As decided by recent litigation, VA is allowed to obtain a deficiency judgment despite current state laws that prohibit such actions.
What about a HELOC (Home Equity Line of Credit)? HELOC loans present a problem for homeowners facing Foreclosure because they remain the responsibility of the borrower after the First Lien Holder forecloses on the property. Because these types of loans become unsecured debt after a foreclosure, the lender can pursue a deficiency judgment against the borrower or simply sell the bad debt to a collection agency, which has 6 years to attempt to collect the debt. This is one of the most vital reasons to Short Sale your home instead of simply letting it go into foreclosure.
** Please consult with a CPA and an Attorney before you pursue a short sale.