Scottsdale and Phoenix, Arizona Foreclosure & Loan Modification Attorney

Phoenix, Arizona Foreclosure Law- Are Deficiency Judgments Coming Back

Law Office Of

Joseph A. Velez


Real Estate & Business Law Attorney

The Law Office of Joseph Velez

Commercial Real Estate & Business Law Attorney

Scottsdale Financial Center

7272 E. Indian School Rd., Suite 111

Scottsdale, Arizona 85251


The law calls it a “deficiency.”  In more common parlance, it’s said that the property is “under water.”  Whatever its label, it is the difference between the fair market value of (or, to be technical, the foreclosure sale price if it’s higher) of a property sold at a foreclosure auction and the unpaid loan balance of the mortgage debt.

The word has not been often heard over the last few years.  Obviously enough, foreclosures are fewer when property values are on the increase and when lenders employ more conservative loan-to-value financing rations.  The ones that do occur rarely create a deficiency because the property value exceeds the secured debt.

The current headlines reflect what happens in a flat or failing market, coupled with more aggressive lending.  They underscore the need to understand the Arizona laws governing deficiencies because, in general, under Arizona law a borrower is liable to the lender for the full balance of the loan, and that means being liable personally for the deficiency after foreclosure.  Certain key provisions however -  commonly referred to as the anti-deficiency statutes - protect borrowers from liability after a foreclosure in certain cases.  

These anti-deficiency statutes combine a few intertwined elements to determine whether the borrower is protected.  In general, a borrower will not be subject to personal liability for a deficiency following a foreclosure by way of non-judicial trustee’s sale if the property is (i) 2-1/2 acres or less, and (ii) limited to and utilized for either a single one-family or single two-family dwelling.

This means owners of that specified type of residential property (and most homes would fall within that ambit) are protected from personal liability for any shortfall in the loan because foreclosure by trustee’s sale is the predominant method used by lenders in Arizona.

The means by which the lender forecloses is key.  To set this stage, a deed of trust can be foreclosed by trustee’s sale or by judicial action; the less commonly used (in Arizona) mortgage security instrument can only be foreclosure judicially.

With that in mind, if the lender elects to pursue the more complicated and time consuming foreclosure by judicial action (a lawsuit rather than a trustee sale), a third element of the anti-deficiency statutes must be satisfied in order to avoid deficiency liability to the borrower: the debt must be a so-called “purchase money” loan.  That is, the deed of trust or mortgage was given to secure payment of all or part of the purchase price of the property.

Thus, under certain circumstances, the lender can affect whether or not the borrower may be liable for a deficiency by selecting judicial foreclosure instead of a trustee’s sale.  For example, on a property otherwise qualifying for insulation from liability in terms of being the specified small dwelling, if the loan was not used to purchase the property (e.g., a home equity loan or a swimming pool construction loan), the borrower could be exposed to a deficiency if the lender chooses judicial foreclosure because the purchase money prong of the anti-deficiency statutes will not have been satisfied.

One may well ask about refinanced loans, given that so many original purchase money residential loans have been replaced with new loans, often with different lenders even, that were not directly associated with that acquisition of the property from years previous.  The scant relevant Arizona case law suggests that the anti-deficiency protections would extend to a loan that refinanced an earlier purchase money loan.  The policy and practical implications of a contrary standard would obviously be significant.

The deficiency statutes, of course, aren’t the only concerns for the borrower.  It is important to remember and evaluate the other negative consequences of foreclosure, such as credit reporting and the tax ramifications such as forgiveness of indebtedness.

Our law office represents clients throughout the Phoenix, Arizona area including the cities of Scottsdale, Maricopa, Mesa, Surprise, Paradise Valley, Avondale, Gilbert, Chandler, Glendale, Florence, New River, Fountain Hills, Peoria, Surprise, Queen Creek, Tempe, Sun City, Apache Junction, and Casa Grande. We serve the counties of Maricopa, Yavapai, Gila, Pinal, La Paz, Yuma, and Pima County.

DISCLAIMER: This site and any information contained herein are intended for informational purposes only and should not be construed as legal advice. Seek competent legal counsel for advice on any legal matter.

One hour initial office consultation fee is $295 for the matters discussed above.