State foreclosure rule repealed

PHOENIX — State lawmakers voted Wednesday to restore financial protections to real estate speculators, allowing them to walk away from their bad home investments.

On a 20-4 vote, the Senate gave preliminary approval to repealing a measure passed earlier this year at the behest of bankers to limit who can take advantage of Arizona's anti-deficiency laws. Those laws preclude banks from financially pursuing borrowers if they default on their home mortgages owing more than the property is worth.

Wednesday's move is a defeat for the Arizona Bankers Association, which has tried for years to curb the ability of borrowers to walk away from their mortgages.

"There is a lack of confidence in people doing what they say they're going to do and sticking with their loans,'' said Tanya Wheeless, president of the Arizona Bankers Association. Returning to the original law, she said, leaves banks with repossessed home they can't sell for enough to recoup their money.

"One of the consequences is with every loss,, there's less money to be put back into the community,'' Wheeless said.

And it means other problems going forward, she said, with banks being less willing to provide loans to some and being willing to lend less, forcing buyers to come up with larger cash down payments.

At the heart of the fight is what happens when a homeowner stops making mortgage payments.

When borrowers default, the lender takes possession of the property and sells it, recovering the balance owed from the buyer. But the collapse of the housing market has left many homeowners "upside down'' on their mortgages, owing more than the house now will bring.

In 38 states, Wheeless said, homeowners remain on the financial hook for the "deficiency,'' the amount between what the home brings at auction and the balance. But Arizona has long had an "anti-deficiency'' law, barring lenders from pursuing the homeowners.

Wheeless said bankers here don't like the law. "There is no good policy reason for people to be able to walk away from their home."

But lawmakers have been unwilling to repeal it.

The problem became particularly acute when speculators started taking advantage of it, borrowing money to by or build homes for the sole purpose of reselling them but then walking away when the bottom fell out of the market.

Wheeless crafted — and lawmakers adopted — a law that said borrowers had to live in their homes for six months to get the legal protections.

That brought objections from the Arizona Association of Realtors, which said that didn't protect second homes and those who buy property for relatives. So lawmakers repealed the law with the promise to fix it.

The compromise worked out between the two sides — the one the Senate was supposed to vote on Wednesday during the special session on the budget — kept the anti-deficiency protection for homeowners, no matter how many they had. But it said those who built homes solely for resale would be responsible for the full amount.

By the time the bill reached the Senate floor, though, further changes sought by home builders left lawmakers confused. So they decided to return the law to its original form, the one that protects all homeowners.

Senate President Bob Burns, R-Peoria, said lawmakers remain committed to putting some curbs on speculators. He promised to resurrect the issue in a special session tentatively set for next month.