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New law would allow post-foreclosure suits

Arizona real-estate agents are sounding the alarm over recently enacted state legislation that sets new limits on longstanding protections for some owners of foreclosed homes, saying the law will weaken protection for borrowers and damage the struggling housing market.

The Arizona Association of Realtors wants Gov. Jan Brewer to add the subject of changing or repealing the new law to an ongoing special legislative session on the state budget.

At issue are changes to a state law that now generally does not allow a lender that forecloses on an home mortgage to recover the balance of what is owed the lender if the foreclosure sale doesn’t produce the full amount.

While some states have laws against so-called “deficiency judgments” dating back to the Great Depression, Arizona’s law was enacted in 1971. It is intended to protect consumers from financial ruin.

The changes, which haven’t yet taken effect, impose new eligibility requirements to qualify for protection against a deficiency judgment. One is that the borrower must have lived in the property for six consecutive months.

The Arizona legislation was approved by the Legislature at the urging of the state’s banking industry, which said the anti-deficiency law has been abused by investors and builders, including some who try to limit lenders’ recoveries by living temporarily in homes being foreclosed.

Investors should be held accountable for their obligations, and forcing lenders to swallow the investors’ losses hurts both the lenders and the communities they serve, said Tanya Wheeless, the bankers association’s president.

“It was just too easy for them to turn in the keys and walk away,” Wheeless said. “If you bought the home and live in the home, this is not aimed at you.”

However, the state Realtors group said the legislation goes further than targeting “spec builders.” For example, the changes would roll back protections for foreclosures involving second homes and homes which owners who let relatives live in them, the group said.

The result could be more people filing for bankruptcy protection to shed their debts if banks won’t work with them to avoid foreclosures, said Tom Farley, head of the Realtors group.

That spells trouble for a housing industry that is trying to recover in a market burdened by already high foreclosure rates, Farley said. “It doesn’t bode well for our economic recovery.”

Arizona’s changes appears to be a departure from most other states’ consideration of legislation on foreclosure issues. Most legislation deals with such topics as notice requirements, mediation processes and aid for borrowers.

Representatives of the American Bankers Association spokesman, a National Conference of State Legislatures analyst and an attorney for the National Consumer Law Center said they hadn’t heard of other states moving to scale back anti-deficiency judgment laws.

“Times are hard enough as is. It may help your friendly banker but it’s not in the interest of your state’s economy … to go ahead,” said Charles Delbaum, a lawyer for National Consumer Law Center in Boston.

The Arizona bankers are urging Brewer not to add the deficiency law to the special session on grounds that fixing any flaws with the new law can wait until the 2010 regular session, Wheeless said.

A Brewer spokesman said it’s “too early” to determine whether the issue needs to be added to the special session.

“We are certainly aware of the concerns recently raised, that were not raised in the session, and we are told that preliminary stakeholder meetings will begin next week at the Legislature,” spokesman Paul Senseman said.

Brewer signed the new legislation into law on July 10. It is set to take effect Sept. 30.

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