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Repeal of mortgage bill signed into law

The Arizona Bankers Association’s goal of clamping down on speculative investors who fueled the state’s foreclosure crisis will have to wait, now that state lawmakers and Gov. Jan Brewer repealed contested foreclosure legislation passed earlier this year.

The Nov. 23 repeal marks the second time lawmakers and Brewer struck down broadly written legislation that sought to give banks greater flexibility to collect financial damages caused by investment buyers whose homes fell into foreclosure.

The first repeal was passed in a special session three months ago, but the Arizona Bankers Association promptly filed a lawsuit contending the repeal took place outside the scope of the special session.

With a lawsuit looming, Brewer and the Legislature attempted to provide a fix that would both undercut the litigation and provide a solution acceptable to the Bankers Association and the Arizona Association of Realtors After the original legislation (S1271) was passed in July, the Association of Realtors fought hard for its repeal.

That original bill required homeowners to live for at least six months in the home facing foreclosure to qualify for traditional protections from lending institutions that incur financial losses on the sales of foreclosed homes.

Under that bill’s provisions, lenders could force homeowners who had not occupied a home for at least six months to cover losses when the house is resold for less than the full value of their mortgage.

The bill was sought by the Bankers Association, which complained that the plummeting real estate market left banks struggling to absorb losses that resulted when investment buyers began to find it was cheaper to allow their homes to be foreclosed upon than it was to offer the homes for resale.

Tanya Wheeless, president of the Bankers Association, admitted that the original bill would have been applied too broadly and would have allowed banks to claim losses from owners of second homes and rental properties.

“Our intent was to limit the protection to homes where the buyer actually lives in the home,” she said. “There may have been some unintended consequences.”

Lawmakers, the Bankers Association and the Realtors have pledged to launch an effort to rework the state’s anti-deficiency laws. Still, any change is certain to be far less encompassing than what S1271 sought to achieve.

The goal of reining in irresponsible home buyers is dead. In its place is a more limited objective that would allow banks to collect from speculative homebuilders whose homes fall into foreclosure.

“I don’t want to oversell it. It is a minor step forward,” said Wheeless. “Under Arizona law, you’ll still be able to have five, ten, twenty homes. And if you want to walk away, the lender will not be able to come after you for the deficiency. It’s not good policy.”

Under case law, speculative homebuilders are not covered by anti-deficiency laws that protect buyers from banks seeking to reclaim losses. The Bankers Association’s new goal would codify in statute what already exists in case law.

Still, said Wheeless, achieving that objective can be used as a stepping stone to help further the banking industry’s goal to collect losses from investment buyers of foreclosed homes.

And that goal appears within reach despite of the recent implosion of a similarly-minded deal included in S1004 that was brokered between the Bankers Association and the Arizona Association of Realtors.
The bill originally sought to target speculative homebuilders, but last-minute objections from the Home Builders Association postponed the goal. Ultimately, S1004 was amended to simply repeal the effects of S1271 and nullify the existing lawsuit.

The Home Builders Association of Central Arizona contested provisions of S1004 that HBACA lobbyist Spencer Kamps said would ensnare the state’s entire home building industry.

The problematic language for the association defined “speculative construction project” to include any home built with the intention of selling the property to a third-party buyer. The homes also must remain vacant for at least four consecutive months after being built to meet the definition.

Representatives of the Bankers Association, the Realtors Association, and the Home Builders Association of Central Arizona said they agree on the provisions of new anti-deficiency legislation. The bill is expected to be introduced in an upcoming special or regular session.

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