Pub. 5 2015 Issue 1

n Anti-Deficiency Reform — continued from page 11 Since the Arizona Supreme Court’s decision in Mid Kansas, attorneys widely understood that if a home is “unfinished” and “has never been lived in,” it does not qualify for anti- deficiency protection, regardless of whether the homeowner eventually intended to reside in it. impact investors. This law will hurt retirees who live in Ari- zona less than half of the year, or people from the Valley who own second homes up north … If this law isn't changed, the state could lead the nation for bankruptcies next year.” 19 Others denounced the amendments as ambiguous and impractical. 20 First, the amendments required only that the borrower “utilize” the property as a dwelling, rather than requiring the borrower to “live” or “reside” in the dwelling. 21 Because judicial precedent, such as the opinion in Pinetop, 22 holds that a home is utilized as a dwelling as long as someone has lived in it, the language of the amendments did not clearly affect the intention of requiring the borrower himself to live in the property. 23 Second, they did not define the term “six consecutive months.” 24 Thus, any absence from the property during a particular six month period, no matter how brief (e.g., a week, or even a day) could potentially destroy anti- deficiency protection. 25 Third, the certificate of occupancy requirement would have been impossible for many homeowners to satisfy, because some Arizona cities do not issue such certificates or only recently began doing so for new homes. 26 Finally, the amend- ments may have implicated the constitutional prohibition against impairment of contracts by failing to specify whether they would apply prospectively only to new loans or retroac- tively to existing ones. 27 Opposition to the amendments was so fierce that in No- vember 2009, Governor Brewer signed a bill repealing them retroactive to the date they would otherwise have taken ef- fect 28 – meaning the amendments never took effect at all. The challengers of the amendments had prevailed for the moment, but the battle lines were drawn. Lenders contin- ued to push for reform legislation. In a 2011 article in the Phoenix Business Journal, Arizona Bankers Association CEO Paul Hickman was quoted as saying that “One of our main goals is to reform this statute and bring it in line with the rest of the country.” 29 A year later, BBVA Compass city president Lynne Herndon criticized Arizona’s liberal anti-deficiency laws as adding to the housing market decline, saying that they “absolutely contributed to the housing bubble.” 30 That same year, Arizona Association of Realtors Vice-President Nicole LaSlavic warned her members of “the severe negative impacts that modifying or repealing deficiency protections would have on homeowners.” 31 The Arizona Court of Appeals added fuel to the fire with its 2011 decision in Mueller. Since the Arizona Supreme Court’s decision in Mid Kansas, attorneys widely understood that if a home is “unfinished” and “has never been lived in,” it does not qualify for anti-deficiency protection, regardless of whether the homeowner eventually intended to reside in it. 32 As Mid Kansas held, “There is a difference between property intended for eventual use as a dwelling and property utilized as a dwelling.” 33 The court in Mueller, however, held that requiring a borrower “to physically inhabit the dwelling would create a blurry and artificial line.” 34 By holding that a borrower’s subjective intent to reside in the home would suf- fice, the court turned a bright line into the blurry one it hoped to eviscerate. Lenders now faced an additional hurdle. They could be prohibited from seeking a deficiency judgment on a construction loan even if construction was never completed. There also existed the possibility that someone ostensibly ap- plying for a loan to build an investment property could later claim that he intended to reside in the property himself, and 12 www.azbankers.org