New law triggers fear for housing
It holds some owners liable for debt, even in foreclosure
80 comments by Catherine Reagor - Jul. 26, 2009 12:00 AM
The Arizona Republic
A new law passed by the Arizona Legislature that makes homeowners liable for tens of thousands of dollars on homes lost to foreclosure is now the focus of an intense repeal battle.
An amendment to the state's foreclosure laws, passed in the recent legislative session, was designed to protect small community banks from people buying speculative new homes they can't sell for a profit.
But the impact of the change is much larger. It makes some homeowners in foreclosure liable for the difference between their mortgage and what their lender can recoup from reselling the house. In the current housing market, the difference is generally more than $100,000 on the typical Valley foreclosure. OAS_AD('ArticleFlex_1')
Real-estate lobbyists and attorneys for homeowners are working to have the law repealed before the Legislature adjourns after completing its work on the budget. Banks are pushing hard to keep the amendment in place. If the new rules stand, they go into effect Sept. 30.
The new law would affect any Arizona homeowner in foreclosure who has not lived in the home for six straight months. This might include landlords, second-home owners and investors who bought homes hoping for quick resales and big profits. Once the home is sold in foreclosure, the homeowner would have to pay back the remaining value of the loan, minus the proceeds from the foreclosure sale. Currently, Arizona homeowners, including investors, who lose a house to foreclosure take a big hit on their credit scores but aren't usually required to pay back lenders.
The new law isn't retroactive, but those facing foreclosure now could be affected if the lender doesn't foreclose and take back the home until after Sept. 30. Under the new law, lenders will be able to garnish wages and go after other assets to recover the money.
In metropolitan Phoenix, where home values have dropped 45 percent and foreclosures are at record highs, that amounts to millions of dollars.
"This won't just impact investors. This law will hurt retirees who live in Arizona less than half of the year, or people from the Valley who own second homes up north," said Tom Farley, chief executive of the Arizona Realtors Association. "Arizona is No. 2 for foreclosures now. If this law isn't changed, the state could lead the nation for bankruptcies next year."
Opponents of the new law say it will force homeowners to file for bankruptcy to protect their assets from lenders.
They also believe it will encourage more lenders to foreclose instead of trying to work out loan-modification deals with borrowers.
Some housing market watchers say the change could also deter investment in the state's housing market, which would be a blow to the economy.
State Sen. Steve Pierce, R-Prescott, backed the legislation, SB 1271. He said in June testimony that the changes to the anti-deficiency statute are to help community banks that lend to investors hiding behind the current laws.
Pierce described scenarios in which investors had speculative homes built but couldn't sell them and then camped out in them for a few days to claim them as primary residences so they wouldn't be liable for the lender's losses.
Under current Arizona foreclosure law, a homeowner doesn't have to live in a home for a certain amount of time to claim it as a primary residence. In most cases, if homeowners can prove they receive mail at a residence, it's enough proof of their residency.
Who is protected
The amendment was made to the state's anti-deficiency law, passed in the mid-1980s, which kept lenders from recovering anything more than the home on a typical residential foreclosure. About two dozen states have anti-deficiency laws. Some small speculators have been using the anti-deficiency law to protect their other assets.
Under the new law, a homeowner must live in a house for six consecutive months to establish residency and to be covered by the anti-deficiency law.
Homeowners who lose a home to foreclosure, and who fail to meet the six-month residency requirement, will be liable for the difference between the foreclosure sale price and the original loan.
For example, if a lender forecloses on a home with a $400,000 mortgage balance and can only resell the home for $200,000, then the borrower still will owe the lender $200,000.
Opponents argue that while the new law may have been aimed at people having speculative homes built in small communities, it will have many unintended victims. Among them: people who bought second or retirement homes in Arizona and are struggling now because of the recession. Most of those people will fall behind on second-home mortgages before losing their primary residence. But if they owe too much on their second homes, lenders could go after their primary homes and all other assets to recoup the loss.
"There won't be a lot of sympathy for the big investors, but the problem becomes legally working out who is an investor," said Jay Butler, director of Realty Studies at Arizona State University.
Butler said he was at a meeting last week with real-estate agents who were "shocked" the legislation passed. "Lenders that shouldn't have made the loans to investors in the first place," Butler said, "are trying to cover up their own mistakes with this new law."
Investors at risk
Many blame investors for the Valley's housing boom that led to the current crash.
During 2005, investors were behind almost 40 percent of all of metro Phoenix's home sales. Foreclosures started to climb in 2007 when investors couldn't sell the houses for a profit and let them go into foreclosure.
"There are investors and speculators taking advantage of the (anti-deficiency) statutes," said Tanya Wheeless, president of the Arizona Bankers Association. "When investors were making lots of money flipping houses, they never called up their lender and offered to split the profits. Now, investors are losing money and trying to hide from their responsibility of the losses."
Opponents say the new law won't affect the sophisticated investors who buy homes through limited liability partnerships that protect their personal assets.
Farley of the Arizona Realtors Association admits the broader impact of the legislation was a surprise. "If you have a second home in Flagstaff," he said, "and fall behind on payments because your spouse has lost their job, lenders can foreclose and garnish your wages and put liens on your bank accounts and your primary home.
"What about parents who buy homes for their children to live in while going to college? If something happens to them in this tough economy, they could lose both their homes. And really, how many second-home owners can show they have lived in their vacation home six months straight?"
Last-minute lobbying
Real-estate lobbyists are working overtime to have the law killed before the Sept. 30 deadline.
A new bill must be written that repeals or reverses SB 1271. However, the Legislature is in a special session, and Gov. Jan Brewer would have to amend the purpose of the special budget session to hear the new legislation. She has amended the session once so far to include renewable-energy credits.
The Realtors Association asked Brewer last week to amend the current session and is looking for a legislator to back a bill to kill the changes to the anti-deficiency law.
If that plan doesn't work, the new rules could not be changed until next year's session.
Wheeless said she's surprised so many groups are shocked by the new rules, because SB 1271 went through full hearings.
"The legislation was fully vetted and out in the open for those who opposed it to weigh in," she said. "Our intent is to protect homeowners who live in their residences."
Arizona attorneys are already receiving calls from lenders that want to know about the new law.
"I got a call from an out-of-state lender that is considering holding off on a foreclosure until after September 30," said Phoenix real-estate attorney Marc McCain. "The lender thinks this investor has the income to pay the mortgage but is walking away from a home because he can't sell it and just doesn't want to keep paying for it."
The new law could also lead to costly lawsuits.
"If the legislation isn't repealed, it will probably end up being hashed out in the courts between lenders and borrowers," Butler said. "The typical homeowner probably doesn't have the money to fight a big lender, particularly if they are already facing foreclosure."
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New law triggers fear for housing It holds some owners liable for debt, even in foreclosure80 comments by Catherine Reagor - Jul. 26, 2009 12:00 AM
The Arizona Republic
A new law passed by the Arizona Legislature that makes homeowners liable for tens of thousands of dollars on homes lost to foreclosure is now the focus of an intense repeal battle.
An amendment to the state's foreclosure laws, passed in the recent legislative session, was designed to protect small community banks from people buying speculative new homes they can't sell for a profit.
But the impact of the change is much larger. It makes some homeowners in foreclosure liable for the difference between their mortgage and what their lender can recoup from reselling the house. In the current housing market, the difference is generally more than $100,000 on the typical Valley foreclosure. OAS_AD('ArticleFlex_1')
Real-estate lobbyists and attorneys for homeowners are working to have the law repealed before the Legislature adjourns after completing its work on the budget. Banks are pushing hard to keep the amendment in place. If the new rules stand, they go into effect Sept. 30.
The new law would affect any Arizona homeowner in foreclosure who has not lived in the home for six straight months. This might include landlords, second-home owners and investors who bought homes hoping for quick resales and big profits. Once the home is sold in foreclosure, the homeowner would have to pay back the remaining value of the loan, minus the proceeds from the foreclosure sale. Currently, Arizona homeowners, including investors, who lose a house to foreclosure take a big hit on their credit scores but aren't usually required to pay back lenders.
The new law isn't retroactive, but those facing foreclosure now could be affected if the lender doesn't foreclose and take back the home until after Sept. 30. Under the new law, lenders will be able to garnish wages and go after other assets to recover the money.
In metropolitan Phoenix, where home values have dropped 45 percent and foreclosures are at record highs, that amounts to millions of dollars.
"This won't just impact investors. This law will hurt retirees who live in Arizona less than half of the year, or people from the Valley who own second homes up north," said Tom Farley, chief executive of the Arizona Realtors Association. "Arizona is No. 2 for foreclosures now. If this law isn't changed, the state could lead the nation for bankruptcies next year."
Opponents of the new law say it will force homeowners to file for bankruptcy to protect their assets from lenders.
They also believe it will encourage more lenders to foreclose instead of trying to work out loan-modification deals with borrowers.
Some housing market watchers say the change could also deter investment in the state's housing market, which would be a blow to the economy.
State Sen. Steve Pierce, R-Prescott, backed the legislation, SB 1271. He said in June testimony that the changes to the anti-deficiency statute are to help community banks that lend to investors hiding behind the current laws.
Pierce described scenarios in which investors had speculative homes built but couldn't sell them and then camped out in them for a few days to claim them as primary residences so they wouldn't be liable for the lender's losses.
Under current Arizona foreclosure law, a homeowner doesn't have to live in a home for a certain amount of time to claim it as a primary residence. In most cases, if homeowners can prove they receive mail at a residence, it's enough proof of their residency.
Who is protectedThe amendment was made to the state's anti-deficiency law, passed in the mid-1980s, which kept lenders from recovering anything more than the home on a typical residential foreclosure. About two dozen states have anti-deficiency laws. Some small speculators have been using the anti-deficiency law to protect their other assets.
Under the new law, a homeowner must live in a house for six consecutive months to establish residency and to be covered by the anti-deficiency law.
Homeowners who lose a home to foreclosure, and who fail to meet the six-month residency requirement, will be liable for the difference between the foreclosure sale price and the original loan.
For example, if a lender forecloses on a home with a $400,000 mortgage balance and can only resell the home for $200,000, then the borrower still will owe the lender $200,000.
Opponents argue that while the new law may have been aimed at people having speculative homes built in small communities, it will have many unintended victims. Among them: people who bought second or retirement homes in Arizona and are struggling now because of the recession. Most of those people will fall behind on second-home mortgages before losing their primary residence. But if they owe too much on their second homes, lenders could go after their primary homes and all other assets to recoup the loss.
"There won't be a lot of sympathy for the big investors, but the problem becomes legally working out who is an investor," said Jay Butler, director of Realty Studies at Arizona State University.
Butler said he was at a meeting last week with real-estate agents who were "shocked" the legislation passed. "Lenders that shouldn't have made the loans to investors in the first place," Butler said, "are trying to cover up their own mistakes with this new law."
Investors at riskMany blame investors for the Valley's housing boom that led to the current crash.
During 2005, investors were behind almost 40 percent of all of metro Phoenix's home sales. Foreclosures started to climb in 2007 when investors couldn't sell the houses for a profit and let them go into foreclosure.
"There are investors and speculators taking advantage of the (anti-deficiency) statutes," said Tanya Wheeless, president of the Arizona Bankers Association. "When investors were making lots of money flipping houses, they never called up their lender and offered to split the profits. Now, investors are losing money and trying to hide from their responsibility of the losses."
Opponents say the new law won't affect the sophisticated investors who buy homes through limited liability partnerships that protect their personal assets.
Farley of the Arizona Realtors Association admits the broader impact of the legislation was a surprise. "If you have a second home in Flagstaff," he said, "and fall behind on payments because your spouse has lost their job, lenders can foreclose and garnish your wages and put liens on your bank accounts and your primary home.
"What about parents who buy homes for their children to live in while going to college? If something happens to them in this tough economy, they could lose both their homes. And really, how many second-home owners can show they have lived in their vacation home six months straight?"
Last-minute lobbyingReal-estate lobbyists are working overtime to have the law killed before the Sept. 30 deadline.
A new bill must be written that repeals or reverses SB 1271. However, the Legislature is in a special session, and Gov. Jan Brewer would have to amend the purpose of the special budget session to hear the new legislation. She has amended the session once so far to include renewable-energy credits.
The Realtors Association asked Brewer last week to amend the current session and is looking for a legislator to back a bill to kill the changes to the anti-deficiency law.
If that plan doesn't work, the new rules could not be changed until next year's session.
Wheeless said she's surprised so many groups are shocked by the new rules, because SB 1271 went through full hearings.
"The legislation was fully vetted and out in the open for those who opposed it to weigh in," she said. "Our intent is to protect homeowners who live in their residences."
Arizona attorneys are already receiving calls from lenders that want to know about the new law.
"I got a call from an out-of-state lender that is considering holding off on a foreclosure until after September 30," said Phoenix real-estate attorney Marc McCain. "The lender thinks this investor has the income to pay the mortgage but is walking away from a home because he can't sell it and just doesn't want to keep paying for it."
The new law could also lead to costly lawsuits.
"If the legislation isn't repealed, it will probably end up being hashed out in the courts between lenders and borrowers," Butler said. "The typical homeowner probably doesn't have the money to fight a big lender, particularly if they are already facing foreclosure."
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