The Arizona Court of Appeals has been busy: after extending the protections of Arizona’s anti-deficiency statutes to vacant lots in December 2011, the Court of Appeals handed down a new decision today that answers previously unanswered questions regarding construction loans and “cash-out” refinances.
According to the new decision, Helvetica Servicing, Inc. v. Pasquan, 1 CA-CV 10-0418 (App. 2012), the anti-deficiency statute now applies to construction loans in certain situations. The Court of Appeals reasoned that “construing the anti-deficiency protection to apply to construction loans furthers [the] legislative policies [behind the anti-deficiency statutes]” (the anti-deficiency statute allocates the risk of inadequate security to lenders, thereby discouraging overvaluation of the collateral). Id. at ¶ 31. The Court of Appeals further commented that the application of the anti-deficiency statutes to construction loans will “tend to discourage construction [lending] which is ‘unsound’ because the [construction project] is overvalued.” Id.
Perhaps more important, the new Pasquan decision addresses the issue of a “cash-out” refinance. Everyone agrees that a purchase money mortgage used to purchase a single or two family residence, situated on 2.5 acres or less, that has been “utilized as a dwelling,” is non-recourse under Arizona’s anti-deficiency laws. And following the Bank One v. Beauvais, 188 Ariz. 245, 945 P.2d 809 (App. 1977) decision, everyone agrees that even the refinance of a purchase money loan is protected. But great debate has ensued over whether a “cash-out refinance” is protected. For example, borrower purchases a single-family home in 2003 with a purchase money loan for $100,000. Two years later, the home appreciates in value and the borrower refinances the original purchase money loan for $150,000. Borrower subsequently defaults. Is the $50,000 “cash-out” portion of the refinance protected by the anti-deficiency statute?
According to the new Pasqual decision, the answer is “no.” It is “inappropriate to shield borrowers from deficiencies for loan disbursements unrelated to the acquisition or construction of a qualifying residence.” Id. at ¶ 37. Thus, “to the extent a judicially foreclosed mortgage includes both purchase-money and non-purchase money sums, a lender may pursue a deficiency judgment for the latter amounts.” Id. at ¶ 37.
Real estate attorney Christopher J. Charles is staying up to the minute on changes in Arizona law in all facets of Real Estate. Please call today to schedule an appointment with Mr. Charles or any of our experienced attorneys.