Arizona Revokes Some Homeowners’ Foreclosure Protection

One of the reasons it’s so easy to walk away from the debt you owe on a home is that the lenders in many states are precluded from coming after you for any loss that they suffer when they foreclose and resell the home. It’s called anti-deficiency protection and to a lot of peoples’ surprise the Arizona legislature revoked the protection for certain buyers.

The new law stipulates that anyone that doesn’t occupy a property for a continuous period of six months will not be eligible for protection under the anti-deficiency statute. The lender will have the right to pursue the borrower for any shortfall between the price it receives when it sells the foreclosed property and the amount owed on the mortgage. The law affects foreclosures started after September 30, 2009.

The purpose is to curb speculators who buy properties in the hope of flipping them at a higher sales price. In the past, if the market didn’t cooperate and bring a higher price these flippers had a propensity to just mail in the keys and move on. The reality is that while it might curb some of this type of speculation, it also puts owners at jeopardy. Specifically, second home owners would fall under the statute since almost by definition they wouldn’t live in the house for the required period of time.

The law took a lot of people by surprise even though it was advertised and debated. The realtor community is trying desperately to either amend or repeal the law but that might probe difficult. The legislature is currently meeting but in a special session which limits its permissible activities to only those that were cited for calling the special session. Additionally, there doesn’t appear to be among the legislators any particular concern about the bill nor has any one of them stepped forward to carry the banner for repeal.

The banking lobby, particularly the community banking lobby, is the group that pushed hardest for the legislation. Given their clout and a general antipathy towards single family home investors, it might be difficult to rally much support for repeal. Eventually, I suspect there would be some modification to more precisely limit the laws application to investors but that might take some time.

It’s hard for me to argue that an investor should receive protection under the anti-deficiency statutes. They were designed long ago to prevent owners from being completely ruined by the event of foreclosure and have certainly been taken advantage of over the past few years by unscrupulous investors. It seems, though, that the statute might be poorly drafted and could use some tweaking.

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