When Arizona residents purchase homes, they typically borrow money from a lender and the lender requires that the home secure the loan via a Deed of Trust.  Historically, the lender would secure the loan by the use of a Mortgage, but since the state legislature’s adoption of the Deed of Trust framework in 1971, most homes secured by residential real property in Arizona are secured by Deeds of Trust.  A default on the payment of loans secured by residential real property allows the lender to foreclose the residential real property in satisfaction of the debt/loan.  Under the Deed of Trust statutes, foreclosure occurs extra-judicially, through the trustee’s contractual and statutory power of sale.  (Mortgages must be foreclosed judicially, i.e. via lawsuit filed in Superior Court seeking the orders of foreclosure by a judge).

Arizona has two anti-deficiency statutes, each of which applies to the different types of foreclosure.  A.R.S. § 33-814 applies to foreclosures by trustee’s sale.   A.R.S. § 33-729 applies to judicial foreclosures of mortgages.  Once the residential property is sold, the anti-deficiency statutes limit the lender’s ability to recover a deficiency judgment (where the foreclosure sales prices is less than the amount owed under the loan) against the borrower.  The anti-deficiency statutes serve to prevent artificial deficiencies resulting from forced foreclosures sales and to protect borrowers from losing other assets to lenders following foreclosure.  Both statutes identify the property that qualifies for anti-deficiency protection as residential property, two and one-half acres or less which is limited to and utilized for either a single one-family or single two-family dwellings.

Over the years there have been significant legal disputes between lenders and borrowers over the applicability of our anti-deficiency statutes to a variety of situations,  including the following questions: 1) What is a dwelling that qualifies?  2) Does a home under construction qualify?   4) Does a cabin or vacation home qualify?  5)  Does rental or investment property qualify?  6) What type of loan qualifies?  7) Does a construction loan qualify?   8) Does a Home Equity Loan secured by a second deed of trust or second mortgage qualify?   Some of these questions have recently been definitively answered by legislation enacted by the state legislature and by a decision of the Arizona Supreme Court.

  1. The Arizona Legislature’s Amendments to the Anti-Deficiency Statutes Applicable to Deeds of Trusts (and Mortgages) Originating After December 31, 2014.

The state legislature recently amended both A.R.S. § 33-814 and A.R.S. § 33-729 to clarify that the anti-deficiency statutes do not apply to residential real property that was: (1) developed or constructed by a builder for commercial resale to a third party; (i.e. construction loans made to builders in the business of building residential homes for resale to home buyers, do not qualify); (2) never substantially completed; or (3) never used as a dwelling. (A.R.S. § 33-814(H); A.R.S. § 33-729(C)).

This legislation applies only to Deeds of Trust (and Mortgages) originating after December 31, 2014.   Thus, while some issues are resolved for new and future loans, those same questions remain for the literally tens of thousands of Deeds of Trust (and Mortgages) presently recorded against most of the residential real property located in the state.

  1. The Arizona Supreme Court Recently Ruled That the Anti-Deficiency Statutes Do Not Apply to a Partially Completed House.

On January 23, 2015, the Arizona Supreme Court ruled that Arizona’s anti-deficiency statute applies only to property actually utilized as a dwelling, specifically a home that is completed and occupied.   BMO Harris Bank, N.A. v. Wildwood Creek Ranch, LLC, CV-14-0101-PR.  In that case the borrower obtained a $260,200 loan secured by a deed of trust against a vacant 2.26 acre lot for the purpose of eventually building a home on the lot.  Construction never began however, and the lot was vacant and unoccupied at the time of default and non-judicial foreclosure, i.e. a trustee’s sale.  At the trustee’s sale the property sold for $31,100.  Thereafter the lender sued the borrower and guarantors for a deficiency of almost $230,000.  The borrower and guarantors claimed that since property was a residential lot, and since they intended to build a home on the lot, that they were entitled to deficiency protection under the anti-deficiency statute.

The trial court agreed with the borrowers and guarantor, granting deficiency protection since the borrower intended to eventually build a residence on the residential lot.  The Court of Appeals agreed with the lender, overturning the trial court’s decision, concluding that the anti-deficiency statute did not apply  because, irrespective of the borrowers intent, the lot was vacant and thus was not being “utilized as a dwelling,” within the language of the statute.  The Court of Appeals also found that the borrowers’ intent to eventually occupy a dwelling to be built on the property, was irrelevant.

The Arizona Supreme Court essentially agreed with the Court of Appeals, sided with the lender bank and found that the borrower and guarantors were not entitled to protection under the anti-deficiency statute.  The Supreme Court reviewed some of its prior decisions and definitions of statutory language and ultimately concluded and held that only residential homes which are actually completed and ready to be occupied qualify for the deficiency protection of the Anti-Deficiency Statutes.   (The Court expressly overruled a 2011 decision of the Court of Appeals in M&I Marshall & Ilsley Bank v. Mueller, which held that anti-deficiency protection could apply to borrowers following the foreclosure of a partially completed residence).


This blog should be used for informational purposes only. It does not create an attorney-client relationship with any reader and should not be construed as legal advice. If you need legal advice, I would be happy to answer any questions you might have about the anti-deficiency statutes, or any other Arizona real estate dispute please feel free to contact me at  480.461.5343, log on to udallshumway.com, or contact an attorney in your area. Roger Decker is a Shareholder at Udall Shumway PLC and has practiced law in the state for over three decades working in areas of commercial litigation (much of which has been involved real estate issues) and other problems solving for small businesses and individuals.