Lawmakers to debate removing certain homeowner protections

PHOENIX - State lawmakers are once again trying to remove some legal protections homeowners now have from being pursued by banks if they walk away from their mortgages.

Legislation set for debate today would allow lenders to go after those who borrow money to build homes they intend to sell off after construction but then default on the mortgage. That currently is not allowed.

But the measure would keep bankers from trying to collect more money from others who buy a house but find they just can't afford to keep up the payments.

SB 1004 is one of four measures lawmakers will consider this week in the fourth special session of the year.

The main purpose of the session is to try to chip away at the state's $2 billion deficit for the current fiscal year.

Plans are to cut about $300 million in spending, half from state aid to education and half from the Department of Economic Security. And lawmakers believe they can save another $160 million with other technical changes to the budget.

The session has also picked up other issues, including paying off an $18.5 million debt owed to Science Foundation Arizona and providing more state oversight of the board that governs the Rio Nuevo improvement project in Tucson.

The mortgage measure is the latest effort by the bankers to keep from being stuck with properties that are worth less than they loaned to homeowners.

Arizona is an "anti-deficiency'' state. Homeowners who end up owing more than the property is worth are free to walk away without fear that the lender will come after them for the difference.

That has became a particularly serious problem with the sharp decline in housing values, with many who bought homes at the peak of the market finding themselves "upside down'' on their mortgages.

To solve that problem, the Arizona Bankers Association persuaded lawmakers earlier this year to narrow the protections of the law to those who actually lived in their homes for at least six months.

After the bill was signed into law, but before it took effect, the Arizona Association of Realtors convinced lawmakers they had made a mistake and got them to repeal it in a previous special session.

Tom Fairly, the Realtors chief executive officer, said the original change didn't protect people with a second or third home. And he said it also undermined legal protections for those who buy a house for a relative.

SB 1004 is designed to help the banks in some - but not all - of those situations.

As crafted, homeowners would continue to be protected from deficiency judgments for their vacation homes and those bought for relatives.

But it says that protection does not exist for "speculative construction projects,'' defined as any home built with the specific intent of selling it to someone else when complete.

Fairly acknowledged that proving what someone "intended'' when they borrowed money to build a new home could prove difficult. But the legislation presumes that a home is built for resale if it is not occupied for at least four consecutive months by the borrower immediately following construction.

Tanya Wheelers, Fairly counterpart with the Arizona Bankers Association, said her lenders can live with the compromise.