The current difficult economic times, spurred in large part by a declining Arizona real estate market, have led speculative residential investors to walk away from the formerly popular renovate-and-flip and buy-to-lease homes that peppered the housing market in previous years. These abandoned homes have resulted in rising foreclosures across the valley, in both old and new subdivisions alike, causing housing values to further plummet. Lenders providing financing for these abandoned homes face record numbers of bad loans supported by inadequate collateral. Declining real property values, together with statutes that protect borrowers from personal liability, have left lenders with limited recourse to recoup large losses.
Earlier this year, this turmoil led to a push for quick change, and, in response, the Arizona legislature moved to make changes to existing anti-deficiency protections, in hopes of shielding lenders from mounting losses. The “fix” came in the form of Senate Bill 1271, which contained a last-minute amendment to A.R.S. §33-814, the statute that governs the availability of a deficiency action following a trustee sale. A.R.S. §33-814(G) shields borrowers from personal liability on loans secured by residential property by prohibiting deficiency actions where loan collateral consists of “two and one-half acres or less . . . utilized for either a single one-family or a single two-family dwelling . . . .” The amendment to the statute, which was set to take effect on September 30, 2009, was intended to limit this protection to individual borrowers who borrowed money to finance a home purchase for their own use. To make this change, the legislature inserted language into A.R.S. §33-814(G) that required, among other things, that the borrower have itself utilized the property as a dwelling “for at least six consecutive months”. The legislation placed the burden of proof upon the trustor/borrower.
Almost immediately critics, such as the Arizona Association of Realtors, voiced concern that the modification to A.R.S. §33-814 passed in SB 1271 would have unintended and dire consequences that could further dampen an already distressed housing market. Borrowers obtaining loans for personal vacation homes could be placed at risk, as such homes are frequently used for less than half the year. In addition, hasty drafting made the effect of the bill unclear, as the public raised obvious questions regarding the definition of “consecutive” (i.e., would a lengthy business trip or overseas vacation render the protection unavailable), the ability of the borrower to satisfy the burden of proof (utility bills and other common evidence would do little to show consecutive use), and, indeed, whether and to what extent the amended statute might affect loans already in place.
Amidst a swirling tide of concern, the Arizona legislature again moved quickly to reverse its original action. Tucked inside of a portion of the 2009-2010 budget measure enacted during the Third Special Session of the Arizona Legislature, House Bill 2008, titled “general government; budget reconciliation,” contains a revision to A.R.S. §33-814, which removes the controversial language set to take effect on September 30. Governor Brewer signed HB 2008 on September 4, 2009. The retroactive measure strips language from A.R.S. §33-814(G) that would require six consecutive months of use (and other controversial language), essentially restoring the anti-deficiency protection to its original state, and allowing critics to breathe a collective sigh of relief. However, this “fix to the fix” is not without concern.
New questions loom with respect to the procedures followed by the legislature in reversing its earlier action. The reversal, and HB 2008, was part of a larger budget measure passed during the special session of the legislature. Governor Brewer called this special session pursuant to a proclamation that limited the subject matter to be considered to two items: (1) “[t]he adjustments necessary to address the state budget for the entire fiscal year 2009-2010[;]” and (2) “[i]mposition of a temporary tax for the purpose of raising state revenues for primary and secondary education, health and human services and public safety expenditures.” Absent from this proclamation was any authority to allow the legislature to consider the fix to the anti-deficiency statute, or much of the remaining content of HB 2008. Rather, the special session was called solely to address the budget and appropriation measures, leaving the legislature without authority to deal with pressing matters outside of budget measures. This fact leaves non-appropriation measures, such as the portion of HB 2008 addressing the anti-deficiency “fix,” vulnerable to challenge.
Article 4, part 2, Section 13 of the Arizona Constitution provides that “[e]very act shall embrace but one subject and matters properly connected therewith. . .which subject shall be expressed in the title,” and matters falling outside the single subject limitation “shall be void” to the extent not “embraced in the title.” In addition, Article 4, part 2, Section 20 of the Arizona Constitution provides that “[t]he general appropriation bill shall embrace nothing but appropriations of the
state, for state institutions, for public schools, and for interest on the public debt.” While these limitations may, arguably, not have been established with the present circumstances in mind, they nevertheless suggest that the legislature acted outside its constitutional authority when it included the modifications to A.R.S. §33-814(G) (and other provisions) in HB 2008. Absent such authority, the reversal of the problematic limitation to the anti-deficiency protection in A.R.S. §33-814(G) is ripe for challenge.
Where do we stand on September 30th, when the original changes to the anti-deficiency protection were to take effect? It’s hard to say. Perhaps the quick-fix of the special session will put the matter to rest for good. Or, lenders wishing to seek recourse against problematic investors may challenge the validity of the modification to A.R.S. §33-814 contained within HB 2008, and pursue actions to recover deficiency judgments following trustee sales where investor property is involved, as would have been permitted under SB 1271. Certainly, a deficiency action against a residential borrower, even an investor that walked away from its investment without remorse, may be an uphill battle in light of recent events. Such battles may, perhaps, expose lenders and borrowers alike to costly litigation and leave the courts to sort out the mess and resolve the controversy. However, continuing controversy may spur the legislature to enact a measure that is better suited to deal with the concerns of embattled lenders dealing with culpable investors, while still protecting more innocent individuals borrowing for vacation homes and personal residences. Ideally, lenders, legislators, and local homeowners must recognize the delicate balance in the housing market, and work together to find a solution that bolsters the position of all parties. Nevertheless, at this juncture, the only certain conclusion is that the status of the anti-deficiency measure is still in question, and may remain so for some time.
This Client Alert has been prepared by the Real Estate Industry Team at Lewis and Roca LLP, in concert with our Government Relations Team, for informational purposes only and is not legal advice. Readers should seek professional legal advice on matters involving these issues.
View the entire client alert in PDF format here.