The Arizona Banker - Issue 1 2018

18 D URING THE GREAT RECESSION, AN UNPRECEDENTED WAVE OF MORTGAGE FORECLOSURES ENGULFED MANY AMERICAN HOMEOWNERS, REAL ESTATE INVESTORS AND COMMERCIAL DEVELOPERS, FORCING THEM TO FACE THE UNTHINKABLE OF BOTH LOSING THEIR HOME, OR INVESTMENT PROPERTY, TO FORECLOSURE AND STILL HAVING TO PAY THEIR LENDER FOR THE REMAINING LOAN BALANCE DUE. Fortunately, for many Arizona homeowner borrowers, the State’s broad anti-deficiency statutes protected them from a lender suing them for the shortfall between the mortgage loan balance and the price that their foreclosed upon home brought at the trustee’s foreclosure sale. At the same time, many other borrowers, found themselves ineligible for the statutory protection, due to any of several exceptions in the law that exposed them to liability for the post-foreclosure deficiency balance. With the exception of Arizona based mortgage lenders, their attor- neys, and others involved in the local real estate industry, few indi- viduals appreciate the complexity of Arizona’s mortgage deficiency statutes and the case law interpreting them. This article, written largely for a lender audience, but meant to be helpful to anyone analyzing the risk of being obligated to a lender for a mortgage deficiency, includes a checklist of items to be considered in determining whether a mortgage lender has the right, pursuant to Arizona law, to obtain a mortgage deficiency judgment against a bor- rower, or guarantor, of a loan secured by real property subsequent to: • an administrative non-judicial trustee’s foreclosure sale of the subject property (trustee’s sale); • a judicial foreclosure lawsuit upon the subject property (judi- cial foreclosure); or • a lawsuit upon the remaining unsecured promissory note and/ or guaranty obligation following the closing of a short-sale pursuant to which the mortgage lender: ◦ ◦ releases its mortgage lien on the subject property in exchange for receipt of funds in an amount less than the loan balance, and ◦ ◦ obtains a written acknowledgement from the loan obli- gors that the lender is not waiving its deficiency rights (short sale). The content of this article is not intended to address every possible scenario of Arizona mortgage deficiency law. Also, the term “mort- gage” is used herein with the understanding that the vast majority of mortgage liens in Arizona are evidenced by recorded deeds of trust. Furthermore, this article should not be used as a substitute for conducting current legal research. STEP ONE Determine whether the mortgage loan is “purchase money” vs. “non-purchase money.” Arizona Mortgage Deficiency By Larry O. Folks, Folks Hess Kass PLLC