Arizona Republic readers on Sunday were made aware of something the Arizona Association of REALTORS® has been extremely upset about: State Bill 1271. Many Arizona homeowners are aware of the non-recourse language in state law that states something to the effect that in a purchase money mortgage with a residential property on 2.5 acres or less, the lender can’t come after the homeowner once the foreclosure is completed. For instance, if the homeowner owed $350,000 on a house that is now worth $250,000, after the foreclosure took place, the bank generally hasn’t been able to get a judgement on the former homeowner for the $100,000 loss (there are exceptions such as if the homeowner intentionally vandalized or stripped the property).
The new law which has ALREADY passed and will be effective on September 1, 2009, limits the provision to primary residences. Investment properties and 2nd homes won’t qualify because the law states the homeowner must prove they have lived in the house for 6 months. This law is great for banks but a potential disaster for those that have already purchased an investment property or 2nd home because instead of being on the hook for nothing by walking away, they could be on the hook for hundreds of thousands. The problem I have with this bill is that people bought a property knowing the recourse provision was in effect as a way of limiting their downside and the interest rate on their loan reflected Arizona’s consumer-friendly recourse law (so it was effectively higher than it would have been if the statute were more bank-friendly). As is common in a government response to a “crisis”, a law is being passed that will effectively make the situation worse.
AAR missed this law being passed and is now trying to get another law passed in the emergency session to undue this law. How the AAR did not catch this law until after it was passed is unclear and frankly, AAR members should be outraged and demand a full accounting of the fiasco and demand major personnel changes or other steps to prevent it from happening again. The CEO of AAR, Tom Farley, also calls himself the Chief Lobbyist, so it is not clear whether monies raised from members has actually been spent on a professional lobbying firm.
Read the AAR’s letter to Gov. Brewer here.