Arizona State University College of Law is previewing its upcoming articles for publication. The first article featured is written by third-year student, Emily Gildar.
According to the National Bureau of Economic Research, the recession began in December of 2007 and ended in June of 2009. However, ask the average Arizona homeowner about the recession, and he will tell you that the government’s official figures do not reflect the reality of the housing market plight. Currently, Arizona home values are at an all time low, homeowners continue to lose their homes to foreclosure, and the majority of homeowners remain upside down on their mortgages. Yet, luckily for Arizona homeowners, Arizona provides some relief to homeowners who are facing the loss of their homes. Under Arizona law, qualifying homeowners cannot be sued for any deficiency owing following foreclosure.
For example, suppose a homeowner purchased a home for $500,000 when the housing market was at its peak in 2005. The homeowner made a down payment of $100,000 and received a loan from the bank for the remaining $400,000. Three years later in 2008, the house has dropped in value and is only worth $250,000, but the homeowner still owes the bank $350,000 (assume the homeowner paid back $50,000 in principal over the past three years). Further suppose the homeowner loses his job and can no longer make his mortgage payments. If the bank forecloses on the home, can the bank pursue the homeowner for the deficiency? The house is only worth $250,000, but the bank is still owed $350,000 for the loan. In Arizona, a qualifying homeowner is protected from personal liability for the deficiency. In other words, the bank cannot pursue the homeowner for the remaining $100,000 still owing to it after foreclosure. This protection is provided under Arizona’s anti-deficiency statutes.
However, not all parties are happy with Arizona’s anti-deficiency statutes. In 2009, lenders pushed to pass a bill that would have sharply limited the protection. The bill would have made it harder for homeowners to qualify for anti-deficiency protection, thus allowing more lenders to pursue homeowners for the any deficiency still owing to the lender following foreclosure. At a time when Arizona’s budget crisis was at the forefront of political discourse, the bill slipped through the Arizona Legislature virtually unnoticed. It was not until after passage that homeowners and lawyers began to comprehend the serious implications of the measure. Soon after being presented with a proper analysis of the measure’s flaws and deficiencies, the Arizona Legislature repealed the bill before it could go into effect. However, the issue still remains ripe for new legislation.
While the bill was flawed and injurious to homeowners, underlying it was a meritorious purpose. The anti-deficiency statutes as they currently stand do not differentiate between an individual homeowner, who purchases a home in order to live in and raise a family, and a commercial investor, who purchases several homes with the intent of reselling to turn a profit. The Arizona Legislature most likely intended to protect the former and not the latter from deficiency judgment when they enacted the protection, yet the anti-deficiency statutes do not distinguish between different types of home purchasers. Therefore, in my article, Arizona’s Anti-Deficiency Statutes: Ensuring Consumer Protection in a Foreclosure Crisis, I propose a new bill that will allow lenders to pursue deficiency judgments against speculative builders and commercial investors, while simultaneously ensuring that individual homeowners retain relief from deficiency liability. To learn more about Arizona’s anti-deficiency statues, the status of anti-deficiency protection in others states, and to read my bill proposal, please see my article in the Arizona State Law Journal Fall Issue.