The Arizona Court of Appeals handed down a new decision this week, providing guidance on two more issues previously unresolved with regard to what qualifies as a purchase money obligation under the anti-deficiency statutes in Arizona. Anti-deficiency protection only applies to loans given to pay all or part of the purchase price of a residence and the real property upon which it is located—these loans are referred to as “purchase money” obligations. In Helvetica Servicing, Inc., v. Pasquan, 1 CA-CV 10-0418, the court addressed two important issues: 1) whether construction loans qualify as purchase money obligations, and 2) whether non-purchase money funds received during a refinance can be segregated from a purchase money transaction for purposes of anti-deficiency protection.
With respect to the construction loan issue, the court held that construction loans qualify as purchase money obligations and are therefore within the protection of the anti-deficiency statutes. However, two conditions must be satisfied for a loan to be protected. First, the deed of trust securing the loan must cover both the land and the residence constructed. Second, the remaining requirements of the anti-deficiency statutes must be met, i.e., the property must be two and one-half acres or smaller, and the residence must be utilized as a one-family or two-family dwelling.
Interestingly, Arizona courts have previously held that “property improvement loans” do not qualify as purchase money obligations, and the court in Pasquan drew a distinction between property improvement loans and construction loans. The court stated that significant differences exist between a construction loan used to build a residence and a loan used to improve an existing residence, and it will be a question of fact for the trial courts to determine what type of transaction exists in each case. The courts have not yet provided any guidance to make these determinations in cases that fall into the gray area, such as when a new structure is built on an existing residence.
With respect to the refinance issue, the court held that when a homeowner receives a loan for a purchase money obligation but receives additional funds for some other purpose, the purchase money and non-purchase money amounts can be segregated. The result is that the purchase money amount is protected under the anti-deficiency statutes but the non-purchase money amount is not. This situation typically arises when a homeowner refinances her loan but takes cash out from the equity in the property to use for some other purpose, such as to pay off credit card debt. In this situation, the original amount refinanced would be protected, but the bank would be able to pursue the homeowner for the additional cash out amount. The court’s decision on this issue has been long-awaited, as it had never been squarely addressed in Arizona but it appeared that courts would take an all-or-nothing approach to whether funds qualified as purchase money. Instead, the court opted to segregate the funds in an effort to “harmoniz[e] the competing interests of borrowers and lenders and [give] effect to legislative intent.”
While Pasquan answers two important questions for lenders and homeowners, many questions remain under the anti-deficiency statutes and this body of law is ever-changing in Arizona. For assistance with all of your anti-deficiency and other real estate needs, contact Titus Brueckner & Levine PLC at 480-483-9600.
For an overview of the anti-deficiency laws prior to the Pasquan decision, click here.