UPDATE: A REPEAL OF THE FORECLOSURE BILL WAS WRITTEN INTO THE BUDGET RECONCILIATION BILLS.

Prescott Republican Sen. Steve Pierce has endorsed the repeal of S1271, a measure he shepherded through the Legislature in what he describes as an effort to provide some shelter to community banks that have been pummeled by waves of foreclosures.

But the bill also removed traditional protections for people who lose their homes to foreclosure by holding them responsible for the losses incurred by their lenders when the homes are resold for less than the value of their mortgage.

“Very simply, a bill that was intended to protect community banks has some serious flaws in it and it should be repealed before it takes effect,” Pierce said July 29.

Pierce said the bill was meant to hold real estate investors responsible for reckless decisions. It required homeowners to prove they have lived for at least six months in the home facing foreclosure to qualify for traditional protections from lending institutions.

On many occasions, according to banking representatives, speculative buyers were simply cutting their financial losses by foregoing negotiations with lenders and allowing their homes to go into foreclosure.

During committee hearings, bankers and industry officials told lawmakers that many investors were avoiding the reach of banks by moving into a home for several weeks, or even several days, in a false display that the home is a primary residence. Typically, owners who occupy their own homes are protected from creditors when their homes fall into foreclosure.

Tanya Wheeless, president of the Arizona Bankers Association, said she was disappointed with Pierce’s decision to reverse course. She said the legislation was intended to target risk-taking investors who have bought multiple homes. But she said her organization would not oppose the repeal.

“If it is not your home and it is an investment, then it is not that dissimilar from going to Vegas and taking a gamble,” she said. “You made a gamble, and you don’t like the results.”

But speculators aren’t the only ones who would be impacted if the law is allowed to take effect, said Arizona Association of Realtors CEO Tom Farley, who has spent the past week lobbying for repeal.

“How do you protect homes that parents bought for their kids?” he said. “How do you deal with a second home, and how do you deal with the issue of investment? Everybody looks at their home as an investment.”

Farley’s organization did not lobby against the legislation when it was heard initially in the Legislature because his group failed to recognize its full impact. He said the banking industry left out some key details when it lobbied for the bill.

On one hand, the law would effectively rewrite existing contracts between lenders and buyers, because buyers did not agree to cover a bank’s losses in the event of a foreclosure, said Farley.

The legislation also eliminates incentives for lenders to work with borrowers in hopes of avoiding foreclosures. And more homeowners in financial trouble are likely to file bankruptcy, he said.

The Realtors group has asked Brewer to amend her call for a special legislative session to allow lawmakers to consider the repeal of S1271. So far, that request has not been answered.

Pierce said he had concerns that banks will simply wait until the bill’s enactment date of Sept. 30 to begin a new round of foreclosure processing. And he said it was not his intent to provide extra protections for large banks that received aid from the federal government.

“The feds told all the small banks in Arizona that they were irrelevant, that the only ones that really counted were the major banks like B of A (Bank of America) and Wells Fargo,” he said.

The lawmaker said he would like to rework the bill to limit its scope to small community banks that have faced disproportional financial damages from the struggling economy and resulting rise in foreclosures.

Wheeless disputed concerns that banks that received federal funds through the Troubled Asset Relief Program (TARP) are lying in wait to cash in again on foreclosures. She said the TARP-funding issue dividing smaller and larger banks is irrelevant to the issue at hand, as larger banks received money as an investment and are currently paying interest, which to date has reached $6 billion.

Sen. Rebecca Rios, a Democrat from Apache Junction, said she viewed the disagreement between the Realtors and bankers as proof that the hurried timeframe to pass legislation at the end of the regular session contributed to unintended consequences.

“We’re looking at a Legislature that did literally nothing for six months, and during the last three weeks of the session fast-tracked through some 400 bills,” she said. “Inevitably you will have unintended consequences and that is what occurred with this legislation.”

Senate President Bob Burns said some sort of a solution must be sought, although he said there might be ways to address the problem other than amending the special session agenda.

“We realize there is a problem and we have to do something to solve it,” he said.
Lawmakers could wait until next session to pass a repeal, but that would allow banks a three-month window to operate under the new law.