Articles

Protection Afforded to the Refinanced Loan


By: Valerie Marciano

Many borrowers are walking away from their homes and mortgages for one of two reasons - Either they cannot afford the mortgage payment or, even though they can afford the payment, their home is "underwater" and is not worth what is owed on the mortgage. No matter what the reason, if it is a foreclosure of an Arizona residence, the defaulting homeowner most likely will be safe from further collection efforts of the lender. This means that the borrowers will still be able keep their other assets, including cars, boats, jewelry, and cash.

The Arizona protection comes from what is known as the "Anti-Deficiency Statute". Simply stated, when the residence sits on 2 1/2 acres or less and is utilized as a single one-family or two-family dwelling, the lender who supplied the financing for the purchase of that residence is prohibited, in most instances, from looking beyond the residence for repayment of the loan. If a borrower stops making payments on the mortgage, the lender's choice for repayment is to foreclose the mortgage and take the residence back. None of the other assets - including other real property - owned by the borrower can be seized by the lender.

A key factor that affords such protection to the borrower is whether the loan is a "purchase money" loan. In other words, the lender made the loan for the specific purpose of providing the funds to the borrower to purchase the residence. The "Anti-Deficiency Statute" protection becomes less clear and more uncertain, when the borrower refinances the original "purchase money" loan. There is law in Arizona based on the court case Bank of Arizona, N.A. v. Beauvais, 188 Ariz. 245, 934 P.2d 809 (App.1997), that gives the borrower basis for seeking protection under the "Anti-Deficiency Statute" for the refinanced loan. Under this case law, when the refinanced loan is secured to pay off a "purchase money" loan in full, the Arizona court said that the refinanced loan was subject to the "Anti-Deficiency Statute". The lender in that case could not pursue the borrower beyond foreclosing on the home.

Early in the 2000's, it was not uncommon for borrowers to refinance the original "purchase money" loans on their residences by paying off the "purchase money" loan with the refinanced loan, and using some of the refinanced loan proceeds for other things. This became known as "pulling equity" out. For example, borrowers used the refinanced funds to also install a pool or new roof. Refinanced proceeds were used to pay for their children's college education or to buy a second home. In those instances, where the borrower used the refinanced funds for other purposes and not just to pay off the "purchase money" loan on their residences, the borrower may have changed the character of the loan, such that the lender may be able to look beyond the proceeds for the foreclosed residence for collection of the loan.

Homeowners who have refinanced their original purchase loan, whether it is a primary residence, rental or a second home, and are deciding to walk away from the residence and their refinanced loan should review their financial exposure. They may have other assets that are subject to seizure by the lender if they refinanced more than their original purchase price was. On the other hand, the lender should be reviewing the payments on the refinanced loan to see whether there is a demarcation between the money used to pay off the "purchase money" loan and the money used to pay for other things, such as the new pool or new roof. Careful consideration should give to the lender's option if the borrower does walk away from that refinanced loan.

Valerie Marciano is a partner at Jaburg Wilk. She assists clients with business issues, creditor's rights issues and anti-deficiency issues. Val can be reached at vlm@jaburgwilk.com or 602.248.1025.

 

 

 

 

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