Anti-Deficiency Statute Changes Speculative Homebuilder Shield
The Southwest real estate and home construction industries continue to undergo fundamental changes.
Some observers of the past several years may perceive the altered landscape (no pun intended) as being more reactionary and overly cautious than necessary with normal market fluctuation. Other observers may take a more critical view, suggesting that the changes since 2008 amount to equalizing abnormal market imbalances.
In Arizona, that arguable imbalance can look like buyers getting stuck with underwater mortgages and deeds of trust on what was originally overvalued property, and sellers keeping a windfall from the original sale. But, Arizona’s anti-deficiency statutes have shielded many borrowers, including speculative home builders, from being sued after a foreclosure when there is a gap between what is owed and the foreclosure price or value of the property.
Not so as of April 2014. Some new changes shift the risk that the value of the property is less than the loan balance as of the time of foreclosure. The new law also clarifies the rules to resolve real estate disputes when the bank backing the mortgage and the borrower/seller lock horns over a deal gone sour.
For loans originated after December 31, 2014, commercial home builders will no longer be shielded from liability during a foreclosure where the value of the property covered by the deed of trust is less than the loan balance. This gap or difference is known as a deficiency.
Speculative home builders have enjoyed the shield under Arizona’s “anti-deficiency” statute, which otherwise provides legal recourse for banks recouping a loss during foreclosure. Before this year’s change in statutory protection, (via HB 2018 signed into law by Governor Brewer) speculative home builders were not liable for the deficiency between value at time of purchase and value at time of sale, so long as they met the other requirements for protection.
Now, according to its legislative authors, “HB 2018 exempts mortgages and deeds of trust on defined types of property from ‘anti-deficiency’ protection.” Specifically, under the new law there is no deficiency protection for loans made after December 31, 2014 where
- The property is owned by a person who is in the business of building and selling homes that were purchased by that person as part of the business and that is covered by a mortgage or deed of trust provided to assure payment of a loan obtained to construct a dwelling on the property for sale to a third-person;
- The home was never “substantially completed;” or
- The property has a home that was never actually occupied as a dwelling.
The new statute also includes standards to determine when a home is “substantially completed.” A dwelling is deemed substantially completed when either the required final inspection has been completed or, if a final inspection is not required by the governmental entity that issued the construction permit, the construction has been completed in all material respects as required by the ordinances and regulations of the governmental body.
The bill’s passage was met with approval by banks, and perhaps surprisingly, by real estate professionals who represent (and benefit from) the speculative and custom home building business. Historically, industry groups have not agreed on changes to the law.
Paul Hickman, president and CEO of the Arizona Bankers Association, stated that the banks and realtor groups compromised in order to draft HB 2018. Hickman also said that speculative and custom builders were “targeted because they have and can ‘cause irreparable harm’ to the small-and medium-sized banks they have often turned to for financing.”
If you have questions about a real estate dispute involving a loan or Arizona’s anti-deficiency statutes, please do not hesitate to reach out and speak with an experienced attorney.
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