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Bankers sue to save new law that protects them

By Howard Fischer / Arizona Daily Star

PHOENIX — Arizona bankers have filed suit to block the state from repealing a new law designed to protect them from some investors who walk away from their mortgages.

In legal papers filed at the state Supreme Court, the Arizona Bankers Association claims the repeal was illegal because it was done during a special legislative session called by Gov. Jan Brewer solely to deal with the budget. That, according to association president Tanya Wheeless, made the move to alter mortgage laws unconstitutional.

But the fight is about more than procedure. The bankers lobbied hard for the change in law enacted earlier this year. And they don't want it rescinded.

Arizona has long been considered a "non-recourse" state when home mortgages are involved. Put simply, 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.

That difference becomes important when home values slide — as they have in Arizona now for years — and homeowners find themselves "upside down" on their mortgages, owing more than the property is worth.

After lobbying from the banks, lawmakers agreed earlier this year to some new restriction.

First, there would have to have been a certificate of occupancy issued. That means the home was completed.

More significant, it limited the non-recourse provisions to single- and two-family homes and required the borrower to actually have lived there for at least six months.

A month after the end of the session, Sen. Steve Pierce, R-Prescott, who sponsored the original law, announced he would push for its repeal. Pierce said it appeared to him the law had "unintended consequences."

That repeal push came from the Arizona Association of Realtors, which had its own interest in the issue. Organization lobbyists complained that the non-recourse protection would not be available to those who buy a home for a relative, as the property would not be occupied by the borrower.

Wheeless said her organization was willing to alter the law to accommodate that.

But she balked at the Realtors' second big issue: restoring anti-deficiency protection for the second homes that some people have, even as vacation properties. She said those homes generally are investments and should be viewed as such.

Wheeless said the non-recourse provision her organization wants gone has had an especially big effect on smaller community banks. She said banks lose $1 million in available credit for every $100,000 in home loans that are left behind by a speculator.

Gubernatorial press aide Paul Senseman said late Tuesday that Brewer believes the repeal of the law during the special session was a legal action.