Horizon, Host: Ted Simons

July 30, 2009


Host: Ted Simons

Foreclosure Law Amendment


  • Recent changes to a state foreclosure law may have unintended consequences. The changes were an attempt to protect banks from financial losses when they foreclose on homes purchased by speculators. Critics say the changes go too far and may cause a new wave of bankruptcies. Tanya Wheeless of the Arizona Bankers Association and Scottsdale-based bankruptcy attorney, Randy Nussbaum discuss the law set to take effect September 30th.
Guests:
  • Tanya Wheeless - Arizona Bankers Association
  • Randy Nussbaum - Scottsdale-based bankruptcy attorney
Category: Business/Economy   |   Keywords: foreclosure, housing,

View Transcript
Ted Simons:
Earlier this month governor Jan Brewer sign add bill amending a decades-old Arizona foreclosure law. The sponsor says the new law is meant to protect community banks from huge financial losses when they foreclose on homes that belong to speculators, but critics say it goes too far and it may in fact lead to a massive wave of bankruptcies. Now the bill's sponsor wants to repeal the law before it goes into effect at the end of September. David Majure has more.

David Majure:
When selling a home in foreclosure, lenders try to recover the full amount of their loan. But in this economy, where home values are way down, they aren't having much luck. And in Arizona, the money lenders get from a foreclosure sale is typically all they're entitled to. Even if the borrower's debt is much more. Let's say a borrower owes $200,000 on his loan. But the house sells for only $150,000. Resulting in a $50,000 deficiency for the lender. In some states, the lender could sue the borrower to recover that amount. But not in Arizona. We have an anti-deficiency law that prohibits those lawsuits, thus protecting homeowners from further financial ruin.

Wendy Briggs:
One of the problems that has really come to light in our new economic scenario where there are a lot of investors out there, is people gaming that system.

David Majure:
In June, representatives of the banking industry told state lawmakers how investors were taking advantage of the law. Claiming to have lived in a foreclosed house to escape responsibility for their debts.

John Fahrendorf, Jr.:
Alleging to have lived in the home or in fact moving into the home for two, three days a week or two, therefore being able to claim it was their home, therefore exempting themselves from any liability other than the property itself.

David Majure:
John Fahrendorf is president of Phoenix-based desert hills bank.

Interviewer:
What has been the impact on your bank?

John Fahrendorf, Jr.:
This what I view as a terrible, terrible loophole has cost little desert hills bank millions of dollars. Millions of dollars. That millions of dollars in losses to us translates into less credit availability to other consumers in the marketplace.

David Majure:
He urged lawmakers to support senate bill 1271, which requires a borrower to live in a home for six consecutive months in order to be protected from foreclosure deficiency lawsuits. The legislature passed the bill, and the governor signed it before critics started making noise.

Tom Farley:
I think it was a mistake. It has many unintended consequences. Especially at a point in our economy where obviously we're suffering, the nation is suffering.

David Majure:
Tom Farley represents the Arizona association of realtors.

Tom Farley:
What I'm mostly concerned about is changing the rules after the fact and the only remedy that many people will be left with is to file bankruptcy. And so we're number two in the nation in foreclosures, and this bill really could make us number one in terms of bankruptcy filings. And that's not good for Arizona's economic recovery.

David Majure:
Farley says the requirement that a borrower live in the house for six straight months affects more than just investors.

Tom Farley:
This bill will draw in people that bought a second home, let's say Flagstaff or up in White Mountains, may have bought a rental property. May have bought a home for a family member.

David Majure:
And many of them would be on the hook for the total amount of debt remaining on their property should their homes go into foreclosure.

John Fahrendorf, Jr.:
The family that's lived in their house for six months, six years, they continue to be protected to the exact same extent they were prior to 1271. They don't have to worry about anything. The speculators, I believe, need to understand that if they sign a contract that says "I promise to pay" that in fact they do that.

Ted Simons:
Joining me now to talk about the new foreclosure antideficiency law is Tanya Wheeless, president and C.E.O. of the Arizona bankers association. And Randy Nussbaum, a Scottsdale-based attorney who specializes in bankruptcy with an emphasis on real estate and foreclosure. Thank you for joining us.

Tanya Wheeless:
Thank you.

Randy Nussbaum:
Thank you.

Ted Simons:
Again, targeting investors who don't live in the home and yet walk away. That was the target. Correct?

Tanya Wheeless:
That's right. We wanted to bring the statute back to what we thought the original intent was when it was passed, which was protecting people in the home in which they live. It's only been through a course of court cases that we've seen that expanded to investors, developers, etc.

Ted Simons:
The owner would pay the remaining value of the loan after the foreclosure sale, because that helps the bank get that money back.

Tanya Wheeless:
That's true. But the important thing is to remember that the impact that has not just on the bank but on the community. Many are in community banks where the investors are members of the community. They're impacted when the bank takes a loss. In addition, for every$100,000 that a bank loses, that's a million dollars in new capital -- excuse me, new credit that can't be extended. So these losses impact the bank but that has a greater impact on the community.

Ted Simons:
The idea of going after folks, speculators, especially, who just simply walk away from a gamble that they're not paying for why is that wrong?

Randy Nussbaum:
Ted, the problem is that the idea of addressing this issue is a good idea. We do have a statute that has flaws, but the approach used in senate bill 1271 just is not effective, and unfortunately it was put together by a number of individuals that I don't think fully appreciate the problem and therefore did not address the problem in a proper way. So in response to your comment, I do believe, many experts believe the law needs to be modified, but unfortunately the approach in this case does not accomplish that goal.

Ted Simons:
How would you modify -- in other words, how did you define what a speculator is?

Randy Nussbaum:
Well, first of all, if you're going to amend the law, it's only fundamentally fair that you amend the law so that only new loans are affected. There's an inherent unfairness of having a law in effect, having lenders lend under that law, individuals borrow under that law and be told after the fact, have you relied on the law that's been in effect for decade and decades, and I need to stress every time our courts have had to address this statute, they've consistently found that the statute was intended to protect the very investor that you're talking about. So if you're going to change law, do it prospectively, not retroactively at a fundamental fairness.

Ted Simons:
Does that make sense?

Tanya Wheeless:
Well, I think we change laws all the time. That's what happens at the capitol. And in this scenario I can give a good example, where they're changed on the lender's side. We're not changing anything that is in the contract that was signed. If there's something in the contract that says we promise you for all times we will not come after you for a deficiency, we don't think we've interviewed with that contract. If you were relying on the fact that for 30 years you might have this loan, that state law would never change, we think that was perhaps an unreasonable expectation. Let me put it in the bank perspective. One of the remedies we have is foreclosure. And those laws are routinely changed, most recently by the U.S. Congress who said, now if you foreclose you can do it, but you have to let a renter continue to live there for three months. That wasn't the rule when we made the loan. We didn't anticipate that, but that's a change in the game that we have to live with. So we don't think that there's -- we think it's consistent, and laws change.

Ted Simons:
I know there's a line of thought that says lenders are already protected as we refer to a little bit here. Regarding investors and speculators. Is that protection not enough?

Tanya Wheeless:
No, we don't believe it is. Right now -- and I can tell you it is happening every day in community banks across the state, where they are getting the keys returned with nice letters typed up from their counsel specifying the exact reasons why even though you bought this home and you never had the intent to live in it, and it was an investment, I've been current, I've lived in the home and here are the keys, and you can't make a deficiency judgment. So we think there is inadequate protection right now.

Randy Nussbaum:
Ted, what does -- the bank is suggesting that the problems caused by the investor or the consumer, but if you trace the lending practices in Arizona starting in 2004 and 2005, what are the three reasons the banks are in the condition they're in? Number one, instead of compelling owners to put down a down payment, banks started granting 100% loans, where you can buy a house, put no money down. That was the banks' decision to drum up business. Next, banks for competitive reasons started providing negative amortization loans, in which the borrower would only pay a small percentage of the interest, knowing full well the balance would be accruing every month at the bank's risk. Next, you have a situation where in 2004 and 2005, again, because of competitive pressures, banks start the doing what are known as stated income loans, where a person could borrow a large sum of money without having to prove their financial ability to pay the loan. Now after the fact the banks are coming in and complaining that the very practices that caused this problem should be the responsibility of the consumer.

Ted Simons:
The concept of covering for bad loans is out there. That's a criticism. How do you respond?

Tanya Wheeless:
I think two points in response to Randy. First, you would be hard pressed to find a community bank that made those types of loans, number one. Number two, we still think that the person who is in the best control of what can I afford, what can I do as a borrower going forward? Is the borrower. So I don't know that because you had a product out there that had a negative amortization, unless someone didn't understand that, we still think that there's a good old thing as, I'll do what I say I'm going to do, I'll pay my debt. And it's important to remember that most Arizonans right now are doing that. They're working hard and they're struggling to pay their debt.

Ted Simons:
At the bottom line, again, over here we're seeing maybe covering for bad loans, but over here we're saying, what about responsibility? What about living up to the agreement?

Randy Nussbaum:
My response is two responses. First of all, if you're going to now change the law -- and this law is not just a statute, the courts have consistently upheld it, you tell the investors and the banks from this day forward the rules are different. Second of all, what you need to do is drop the statute that addresses the problem in a coherent and comprehensive way. I believe Tanya will agree that senate bill 1271 does not serve that purpose.

Ted Simons:
Where was all this criticism when this senate bill was being vetted? Why did this thing get through?

Randy Nussbaum:
Well, the research I've done has led me to believe that the timing was such and the way it was presented was that it wasn't publicized. Actually, most members of the public didn't even know this issue was before the senate at the time until after the fact. The moment this bill got publicized and it was going to become effective in September, there was an uproar. What's interesting, it's not just from consumers or investors, it's across the board. When you have a statute that creates this type of uproar, you know there's a fundamental problem with it. For example, you've got the verbiage saying you've got to have a certificate of okay pansy. The criticism is well found because a lot of cities don't grant that, it noose bearing on whether the loan should be recoursed or not. More importantly, you've got the six-month residency requirement and that's not defined as to when you have to live there for six months.

Ted Simons:
I want to give you the last word. Go ahead.

Tanya Wheeless:
The bill was vetted, it was vetted properly. It was done in a one-month period because every senate bill that was passed into law was done in that period. We want to take this back to the original intent and nothing more, Ted. We believe that 1271 protects homeowners in their home, Randy is correct, I think there are unintended consequences, but I want to make clear, it was absolutely intended to remove investors and speculators from this statute.

Ted Simons:
We'll stop it there. Good discussion. Thanks for joining us.

Tanya Wheeless:
Thank you.

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