Two recent Arizona court opinions have provided both good news and bad news for homeowners.
In M&I Marshall & Ilsley Bank v. Mueller, 1 CA-CV 10-0804, the Arizona Court of Appeals delivered some good news for homeowners. In that case, the Muellers purchased a vacant lot in 2005. In 2006, they borrowed $444,000 from M&I to construct a single family home on the property for their own use. Several months into construction, the Muellers discovered that the contractor was behind schedule, and much of the work was defective. The Muellers notified M&I that they would need advances on loan disbursements to remedy these defects, but M&I refused to disburse additional funds. As a result, the Muellers abandoned the property and defaulted on the note.
M&I held a trustee’s sale on the property and then filed an action against the Muellers seeking to recover a deficiency of some $68,000. The Muellers invoked Arizona’s anti-deficiency statute, A.R.S. § 33-814(G). Under that statute, if trust property of 2 ½ acres or less is utilized for either a single one-family or a single two-family dwelling and is sold under a trustee’s sale, no action can be maintained to recover any difference between the amount obtained by the sale and the amount of indebtedness and any interest, costs and expenses. M&I claimed that the Muellers were not entitled to the anti-deficiency protection because the home was never constructed and because the property was never utilized for a single-family home.
The appellate court rebuffed those arguments, finding that the Muellers intended to live in a single-family home upon its completion. The court noted that the primary purpose of Arizona’s anti-deficiency statutes was to protect homeowners from deficiency judgments and since the Muellers had purchased the property with the purpose of occupying the dwelling upon completion, it found that the anti-deficiency statute protected the Muellers from a deficiency judgment.
In contrast, the Arizona Supreme Court’s recent decision in Vasquez v. Saxon Mortgage, Inc., CV11-0091-CQ, sided with the lender in upholding a foreclosure.
In 2005, Vasquez refinanced her home by executing a promissory note in favor of Saxon Mortgage, secured by a deed of trust. Within several weeks, Saxon assigned the note to Deutsche Bank as trustee for Saxon Asset Securities Trust 2005-3. The assignment was not recorded. Vasquez defaulted under the note, and in September 2008 the substitute trustee on the deed of trust recorded a Notice of Trustee’s Sale. In October 2008, an agent of Saxon finally executed an assignment of the deed of trust to Deutsche Bank. That assignment was recorded on November 7, 2008.
In reviewing the situation, the Arizona Supreme Court held that the assignment of the note in September 2005, even though not recorded, was effective. The court also held as a matter of law that the assignment of the note operated as a transfer of the security for the note. Thus, when Saxon assigned the note to Deutsche Bank in 2005, the deed of trust was also transferred by operation of law. The court ruled that the assignment of a deed of trust need not be recorded as a prerequisite to a trustee’s sale.
Both of these rulings are significant for Arizona homeowners. The Mueller case provides protection for homeowners who intend to occupy their residences but are unable to do so when circumstances change. It also signals that Arizona courts are shifting toward greater anti-deficiency protection for homeowners with construction loans.
On the other hand, the Vasquez decision cuts against homeowners. With the “securitization” of mortgages and the numerous transfers of those obligations that took place in recent years, the court made it clear that those transfers need not be recorded before a trustee’s sale can occur. Significantly, other states have held that the entity attempting to foreclose on a mortgage or hold a trustee’s sale must be able to produce the original note, a task which is increasingly difficult for lenders because of their past practices. That protection will no longer be available for Arizona homeowners as a result of the Vasquez decision.
If you have further questions or need assistance in dealing with real estate lending issues, please contact Titus Brueckner & Levine PLC at 480-483-9600.