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Liability for Borrowers Who Participated in “Cash Out” Refinancing

During the real estate boom in Arizona, many borrowers tapped into their home equity by refinancing their loans and taking “cash out”. In many instances, rather than taking out a 2nd loan or a home equity line of credit (“HELOC”), borrowers would simply refinance their original loan for a much higher amount and toke cash out of the deal, thereby increasing their loan balance significantly.

For example, in 2005, a homeowner may have owed $80,000 on his existing home loan though the home may have been valued at $200,000. In many instances, these homeowners would refinance the $80,000 loan and take out an additional $100,000 or so making the new single-loan balance $180,000 or even more. The money from the cash out was often used to pay off consumer debt, make home improvements, or maybe even buy a boat or other toys.


Up until recently, it was unclear whether or not a borrower could be pursued personally for the “cash out” portion of the new loan. In a typical situation, if the borrower fell behind in his payments, the lender would almost always pursue a trustee’s sale a non-judicial foreclosure), whereby the borrower would be protected under Arizona’s anti-deficiency statute as long as certain criteria were satisfied (see this article for a description of Arizona’s anti-deficiency statute and the applicable criteria or what is considered a “qualifying property”).

If the lender pursued a trustee’s sale (a non-judicial foreclosure) in these situations and the property foreclosed was a “qualifying property”, the anti-deficiency statute clearly applied to protect the borrower from personal liability. However, what most borrowers do not understand is that lenders have had another remedy or avenue to pursue a foreclosure and even potentially pursue the borrower personally for the deficiency amount. This other remedy available to lenders was a judicial foreclosure. With the remedy of a judicial foreclosure, the lender files a lawsuit against the borrower in Superior Court and seek a judgment foreclosing the loan and also a money judgment against the borrower for the deficiency amount (this remedy is termed a judicial foreclosure because it is handled through the courts). Up until recently, the judicial foreclosure process was rarely used by lenders because it is a much more expensive remedy and it is more time consuming. Most importantly though, up until recently, it was unclear whether or not the lender could obtain a money judgment against a borrower for the deficiency amount via a judicial foreclosure when non-purchase “cash out” money was involved.

All of this appears to have changed however.


On March 20, 2012, the Arizona Court of Appeals issued its ruling in Helvetica Servicing, Inc. v. Pasquan, 1 CA-CV 10-0418. In the Helvetica case, the borrower obtained a purchase money loan to buy a home in Paradise Valley. Sometime later, the borrower refinanced the original purchase money loan and took cash out of a couple of hundred thousand dollars. Finally, after refinancing and taking cash out, the borrower defaulted on the loan payments and the lender pursued a judicial foreclosure against the borrower and sought a money judgment against the borrower for a portion of the deficiency amount or the amount of the cash out to the borrower when he refinanced.

The Court in Helvetica agreed with the lender and stated that a borrower is subject to a deficiency judgment and personal liability for the cash out amount even when the refinanced loan took the place of an original purchase money loan.

This holding by the Arizona Court of Appeals should cause concern to borrowers who refinanced purchase money loans and took cash out upon refinancing. Undoubtedly, the Arizona Supreme Court will have an opportunity to weigh in on the Helvetica opinion rendered by the Arizona Court of Appeals. However, assuming the Arizona Supreme Court agrees with the Court of Appeals, borrowers who took cash out upon refinancing are facing significant liability should borrowers default on their loan payments. Because of the Helvetica case, we anticipate lenders to begin pursuing judicial foreclosures against borrowers who refinanced and took cash out.

If you find your self in this situation and you are having a difficult time paying your loan or you simply want to know exactly what are your options, please call us to schedule a consultation. For a low consultation fee, we will answer all of your questions and point you in the right direction to accomplish your goals with absolute peace of mind.


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