The head of a key House committee wants to scrap state laws that now allow homeowners who are "under water" on their homes to simply walk away.
Rep. Jack Harper, R-Surprise, says Arizona's status as one of a handful of "non-recourse" states is keeping the real estate market from recovering here. He contends that having people abandon their homes further depresses the value of nearby homes.
"The idea is to keep people from being encouraged to just walk away from their house any time they're a little bit upside-down" on their mortgage, he said.
But the move is getting a fight from the Arizona Association of Realtors. Tom Farley, the group's chief executive officer, vowed to "utilize every resource that we have here in protecting consumers."
The law is simple: If a home buyer walks away from a house and the amount still owed is more than the value of the property, the lender is precluded from trying to recover the difference from the homeowner. By contrast, owners of commercial property who stop making mortgage payments can be sued for the balance.
None of this was an issue during the red hot days of the real estate market, when home values continued to skyrocket above what buyers paid.
But that all changed when the bottom dropped out and many homeowners found their houses were worth far less than not only what they paid but far less than the balance still owed on the mortgage. For many, the solution was to simply walk away and hand the keys to the bank.
The Arizona Bankers Association has fought for years to repeal or scale back the law, saying when borrowers default, that means less money available for new loans and lenders stuck with repossessed homes they cannot sell for enough at auction to recoup their losses. They want to be able to go after the borrowers for the difference.
Farley, however, said that does not tell the whole story.
He said Arizona's anti-deficiency laws were part of a deal in 1971.
Up until then, a bank that wanted to foreclose on a home due to nonpayment on a mortgage had to go to court. Farley said that was a lengthy and cumbersome process.
That year, Arizona became a "deed of trust" state. The function change was that lenders could foreclose on a property simply by giving notice and then taking possession 91 days later.
Farley said what the lenders gave up in exchange is the ability to go after the borrowers.
But Farley said there's an even more important public policy reason to retain the law. He said it makes lenders more responsible.
At one time, banks and thrifts would make mortgages and then keep those in their own portfolios. Now the lenders simply write the notes and then sell them off, many of those to Fannie Mae and Freddie Mac, the federally backed agencies.
When the homeowners began to default, questions were raised about whether the original lenders had properly vetted the borrowers or simply wrote as many loans as they could to generate origination fees. And the banks balked at taking back those nonperforming loans.
"Deficiency protection provides that pressure on the lenders to actually underwrite those loans," Farley said.
Harper, who chairs the House Ways and Means Committee, acknowledged that lenders may have ignored normal underwriting standards. But he said that's not their fault.
"The federal government uses the Community Reinvestment Act to intimidate the federally chartered banks," he said.
"They give them goals about how many loans you have to make in underserved, low-income areas," Harper continued. "And the banks then start making risky loans to meet the goal."
Harper said he has seen this as a mortgage banker, when some banks get behind in those goals "and they're out shopping for somebody to bring them loans in these underserved areas."
He also said he does not believe that the banks bear some responsibility for the bad loans - and should have to absorb some of the losses when borrowers default.
"The banks are taking all the risk and the buyer is taking none, other than what their down payment is," he said.
Farley, however, said borrowers do lose more, ranging from what they've paid against the mortgage and the value of any improvement on the property to their credit rating. And he said that, in a state where consumer spending drives much of the economy, lawmakers should be concerned about that last factor.
He figures that anyone who has lost a home to foreclosure probably cannot get credit again for three to five years. If the only way out of a deficiency is to declare bankruptcy, that likely upsets an individual's credit rating for seven years.
Farley also said any move to scrap the anti-deficiency law actually is going against trends. He pointed out that the Nevada Legislature actually adopted such a law two years ago, though it applies only to loans made after July 1, 2009.
Harper said he recognizes that there are situations where the value of the home is so far below what remains owed on the mortgage that there is no real chance of an owner ever catching up. So he is willing to offer a compromise of sorts: Allow the lenders to go after the homeowner, but only up to the actual fair market value of the property.
So, in the case of a home now worth $210,000, where the remaining unpaid balance on the mortgage is $300,000, an owner would be liable only for that lower amount. The lender would have to absorb the rest.
This isn't the first legislative squabble over the issue between lenders and Realtors.
In 2009, at the behest of the Arizona Bankers Association, lawmakers curbed who can take advantage of the state's anti-deficiency laws.
One key provision required that owners live in the property for at least six months. That was designed to cut back on what some saw as an abuse of the protections by speculators who borrowed money to buy or building homes for the sole purpose of reselling them but then walked away when the bottom fell out of the market.
But it took less than a year for legislators to repeal that provision after the Realtors pointed out flaws, including that the requirement provided no relief for people who buy property for their relatives.
An effort to recraft a compromise fell apart, leaving the law the way it is now.