Arizona Appeals Court: Refinance Not Fatal To Homeowner Protection From Personal Liability On Debt; Nature Of Purchase Money Loan Remains Unaltered

The Arizona Business Gazette reports:

• Homeowners do not lose their legal protections against being sued for debt after foreclosure just because they have refinanced a mortgage, the state Court of Appeals has ruled.



• In a unanimous decision, the judges overturned a lower- court ruling that said Michael and Kelly Pasquan are liable for more than $1.9 million. That is the difference between what they owed on their mortgage and the value of the home when sold.



• Appellate Judge Margaret Downie, writing for the court, said that's not the way the law works, and not what legislators had in mind when they agreed to give certain protections to homeowners.



• Court records show the couple bought a 4,000-square-foot home in Paradise Valley in 2003 for $935,000. They paid $335,000 in cash and got a $600,000 loan. The following year, they obtained a $1.6 million loan from a different lender. Those funds paid off their earlier loan, funded demolition of most of the existing home and construction of an 11,500-square-foot home in its place.



• The couple subsequently borrowed an additional $500,000 from the same lender, with Michael Pasquin saying all those funds were for construction expenses. Then, in 2006, the couple got a $3.4 million loan serviced by Helvetica Servicing Inc. It was secured by a new deed of trust against the company, allowing it to repossess the property in the event of default.



• Pasquan said most of that went to repay the earlier mortgage, with other funds used to repay a construction loan from Pasquan's father, with other funds for closing costs, interest and reserves, with some cash for the couple.



• When the couple defaulted, Helvetica said it was owed more than $3.6 million. Helvetica purchased the property with a $400,000 credit bid at a sheriff's sale. A trial judge, after hearing arguments, eventually concluded the couple owed $1.9 million. Pasquan, now divorced, appealed.



• Downie pointed out the Legislature enacted an "anti-deficiency" statute in 1971 to protect certain borrowers from remaining on the financial hook if the foreclosure value of their home was not enough to cover what was owed. "Anti-deficiency protection reflects a legislative policy decision to place the risk of inadequate security on lenders rather than borrowers," she wrote.



• Downie said the idea is to discourage lenders from over-valuing real property "by requiring them to look solely to the collateral for recovery in the event of foreclosure."



• Not everyone is eligible. Anti-deficiency protection is available only when the funds are used to buy either a single one-family or two-family dwelling. And the property cannot be larger than 2 1/2 acres.



• The protection is available only when the mortgage proceeds are used to buy or build a home, making it what the law calls a "purchase money" loan.



• Attorneys for Helvetica argued that once the couple refinanced the original purchase money loan, the new loan did not fit that definition. And that meant it was no longer subject to the anti-deficiency protections, they said.



• Downie said that's not the case. "A change in the lender's identity does not, standing alone, alter the nature of the underlying purchase money debt," she wrote. Downie added that lawmakers clearly wanted to abolish the personal liability of those who provide a deed of trust allowing repossession.



• The judge said the reason for disallowing deficiency judgments goes beyond keeping lenders from overvaluing the property in deciding how much to lend. She said the law is also designed to prevent financial ruin of homeowners who already have lost their homes. And that is all the more important in distressed economic climates when people frequently refinance their homes, Downie added.

Source: Court of Appeals backs sued homeowners (Decision: Foreclosure didn't sever protections despite refinancing).

For the court ruling, see Helvetica Servicing, Inc. vs. Pasquan, 1 CA-CV 0418 (Ariz. App. Div. One, Dept. C, March 20, 2012).

See also, Lexology: Arizona Court of Appeals holds that refinancing a purchase money loan does not eliminate anti-deficiency protection (may require subscription; if no subscription, GO HERE; or TRY HERE - then click the appropriate link).