I received the following legislative update in an email from Tom Farley, CEO of the Arizona Association of Realtors. He gave me permission to share it with you in its entirety.
SB 1271 – Anti-Deficiency Law
Change
One of over 200 bills pushed through the legislature in less than a month was a big change to an existing law that provided protection to borrowers in some cases against a deficiency judgment when their property went through foreclosure. Below is some background information on the legislation that has the lending and real estate industries a buzz with its intended and unintended consequences.SB 1271 – Serious Changes to Arizona’s Anti-Deficiency Statute
SB 1271 was sponsored by Senator Sylvia Allen, a REALTOR® from the White Mountains area of our state. The legislation started out in January as a bill dealing with jail districts and property tax limits. In June a strike-everything amendment gutted the original bill and changed its direction entirely. The Arizona Bankers Association argued successfully that the changes provided in the legislation were necessary because abuses in the current law were costing Arizona-based banks millions in losses. There was significant sympathy for the Arizona community banks in making the changes provided by this legislation. In other words, the legislators found it very easy to hold property investors liable for their debts while arguing that homeowners would still retain their deficiency protection if they lived in the home for six consecutive months. The legislation sailed out of the Senate by a unanimous vote but just barely received enough votes to pass the Arizona House of Representatives. The Governor signed the bill on the last day to sign or veto the legislation.The current law – Arizona Revised Statutes (A.R.S.) § 33-814 currently states that within 90 days after the date of sale of a trust property under a trust deed, a legal action may be brought to recover a deficiency judgment against the borrower (trustor) who has now had their property foreclosed. The deficiency judgment must be for an amount equal to the sum of the total amount owed as of the date of the sale either by the fair market value of the trust property as determined by the court or the sale price at the trustee’s sale, whichever is higher. The current law prohibits a lender from seeking a deficiency judgment against the trustor (foreclosed property owner) if the trust property is 2.5 acres or less and is used as a single one-family or single two-family dwelling.
The law effective September 30, 2009 – SB 1271 amended A.R.S. § 33-814 (G) to require that the trustor must have “utilized” the property for six consecutive months and a certificate of occupancy must have been issued. What does this likely mean? Various attorneys are opining different theories. My interpretation of the statute is that after September 30, 2009, properties sold at trustee’s sale likely will not qualify for the anti-deficiency exemption unless the trustor lived in the single one-family or single two-family dwelling for at least six consecutive months. The legislative Fact Sheet, as transmitted to the Governor, states that SB 1271:
- The trustor has lived in the trust property for at least six consecutive months.
- A certificate of occupancy has been issued for the property.
Places the burden of proof on the trustor to demonstrate that the statutory requirements to prohibit a deficiency judgment are met.Prohibits a deficiency judgment against a trustor pursuant to a trustee’s sale of a trust property that is 2.5 acres or less and is used as a single one-family or single two-family dwelling if both of the following apply:
As before this law was passed, REALTORS® should advise their clients to consult legal counsel regarding the application of the anti-deficiency statute.
Big change. Consequences undetermined. Lots of questions on this one.
UPDATE 7/23/09 from Tom Farley at AAR:
“The passage of SB 1271 dramatically alters the existing anti-deficiency statute and well settled case law in Arizona. The bill has far reaching effects considerably beyond those that were initially intended. AAR has completed its legal and practical analysis of the bill and has found that there are significant issues associated with the changes it makes that need immediate attention. AAR has sent an appeal to Governor Brewer respectfully requesting that she amend her Call to Special Session to include SB 1271 in order to try to address the serious issues and unintended consequences resulting from its passage before it is enacted as law.”
AAR UPDATE 7/29/09:
Sen. Steve Pierce, sponsor of SB 1271, feels the bill needs to be fixed due to the unforeseen and unintended consequences of the legislation. He has asked the Legislature and the Governor’s office to repeal the bill so that legislators and industry stakeholder groups can work on a new bill to accomplish the original objective of 1271- to help small community banks in Arizona.
Pierce met with AAR and other stakeholders yesterday to discuss changes to the legislation. The consensus was that there is a more direct way to assist local Arizona banks, who were not eligible to receive any TARP funds, on the ever-growing foreclosure issue.
AAR UPDATE 8/7/09:
SB 1271 has been getting a lot of press lately as it will have serious and unintended consequences for many real estate owners facing foreclosure in Arizona. In light of this the original sponsor of the bill, Senator Steve Pierce, has asked the legislature and the Governor for an immediate repeal of the law which is slated to go into effect at the end of September. The state’s original anti-deficiency language has been inserted into two budget bills (HB 2008 and SB 1024) currently being debated by the legislature which would have the effect on nullifying the passage of SB 1271. HB 2008 has quickly passed the Arizona House of Representatives. SB 1024 is awaiting final vote which could happen August 8th or on the 10th. If for some reason, the Senate Bill fails on final vote, we will immediately focus on our next effort to repeal the law. The banking lobby and at least one member of the legislature are pushing for an amendment to SB 1271, instead of repeal, that would allow it to still apply retroactively to loans already in existence. We have been advised that this action would ultimately be unconstitutional if not unjust. Stay tuned for more updates on our efforts to repeal SB 1271 through the bills cited above.
AAR UPDATE 8/24/09:
The good news is the Senate has transmitted HB 2008 to the governor’s office. Depending on the circumstances, Governor Brewer could have up to 10 days to sign, veto or allow the bill to go into law without her signature. As a reminder, there are a couple of other provisions that affect the industry that also are contained in HB 2008, including partial language from HB 2269 that effects the notification of tenants in foreclosed properties. The language requires the trustee to notify the tenant that the property is in foreclosure by mailing a copy of the Notice of Foreclosure to the property. Another provision of HB 2008 allows the Arizona Secretary of State to provide the Arizona Landlord Tenant Act on its website instead of providing printed copies. Stay tuned for more information regarding HB 2008.
AAR UPDATE 9/4/09:
Governor Jan Brewer signed HB 2008, which repeals SB 1271 and its change to the anti-deficiency statute.
AAR UPDATE 11/23/09:
The House of Representatives passed SB 1004, the anti-deficiency fix, early this afternoon with a vote of 53-0. SB 1004 included the repeal and replacement of ARS§ 33-814 essentially returning the statute to its original status prior to the passage of SB 1271. With this fix, Arizona will continue to operate as a deed of trust state with the protections that have been in existence since 1971.
SB 1004 did pass both the Arizona State Senate and House of Representatives with an emergency clause, and it will go into effect upon Governor Brewer’s signature. We will continue to work with the Arizona Bankers Association on language to address “speculative builders” in the upcoming session in order to resolve this issue entirely.
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Anyone have any opinion of insight on how this will affect investors who have to foreclose on rental properties?
Curious to learn about how this will impact the market
I heard that the banks could make investors that are doing the short sales liable for the deficiency. This can’t be right!!
Twitter: drubloomfield
07.18.09 at 3:28 pm
Chris, The first two thought I had when I read this info were that it would impact investors, and also homeowners who’ve moved out of their homes due to other extenuating circumstances.
Kim, I think banks can go after any property owner to attempt to make up the deficiency. That is why it’s so important for someone doing a short sale to have an attorney review any bank addendum that is added to the purchase contract.
There are many questions to be answered still. I find it curiously interesting to begin with that the sponsor of the bill lives outside Maricopa county, which is where the vast majority of foreclosures are. Sounds like the lobbyists got to her. If that is the case, then she may have just committed political suicide, as did the co-sponsors, as none of them reside in Maricopa county either. Second, I don’t know how they can penalize people who acted completely lawfully when they decided to let their house(s) go to foreclosure, no matter the circumstances. Whoever walked away from their house, knowing what the law was, did it lawfully and fully within their right. The real estate debacle is not the law’s fault, you idiots. The real estate debacle is the fault of the banks, and if this law is causing many local banks to lose millions of dollars, then it’s their own fault for making bad real estate loans, to bad borrowers. If they never came up with so many bad, creative loans products (interest only, negative amortization, no-doc) that put people into the market that had no business being there (credit scores too low), we wouldn’t be in this spot. The banks did this to themselves…period, the end. Then they got bailed out, or re-paid for all the bad loans. Now they get to also seek a deficiency? Are you kidding? Like it or not, agree with it or not, investors make the AZ real estate market go round. It’s because of them that real estate has been a good investment for so long. If it wasn’t for investors, the AZ real estate market would be about as active as the one where the sponsor of the bill lives (white mountains). And then everyone who thinks that their house just magically appreciates over time would understand it doesn’t. Joe-Q public should understand that their house appreciating is not a right or something they are entitled to…it takes investors. I could see this new law applying to loans that originate after Sept. 30th, or to any loans that foreclosure proceedings start on after Sept. 30th. Making a blatant expos-facto law is generally not looked at favorably by the courts as it may violate a person’s constituitional rights. There is a tsunami of law suits potentially waiting to happen…and if the courts side with the lenders…the AZ real estate market will, overnight, become much like that of Benson.
Twitter: drubloomfield
07.20.09 at 8:42 pm
Marc,
You know more about the background of this legislation that I do. My impression is that there are a lot of people asking questions.
Dru Bloomfield´s last blog ..What does Twitter have to do with real estate?
As I read this, I wonder…is this Governor purposely trying to keep this economy from EVER recovering? She wants to raise the sales tax, so it penalizes business, then she signs this bill that penalizes Real Estate investment. Gosh, why don’t we simply slap a massive tax on stock and bond sales as well, then we can completely remove the business community from AZ, and move closer to becoming Kentucky. This Governor is a DISASTER. This is simply going to force people in an already bad situation, to get more despondent and then just file BK for protection. This will ruin any hopes of a short sale or an amicable agreement between the bank and the debtor. The battle lines will be drawn, and everyone loses. How is it that just when I thought that AZ Government could not get any worse (allowing guns in to bars, photo radar) they keep one upping themselves in stupidity.
Twitter: drubloomfield
07.23.09 at 4:40 pm
I received the following email update from Tom Farley from the Arizona Association of Realtors — “the passage of SB 1271 dramatically alters the existing anti-deficiency statute and well settled case law in Arizona. The bill has far reaching effects considerably beyond those that were initially intended. AAR has completed its legal and practical analysis of the bill and has found that there are significant issues associated with the changes it makes that need immediate attention. AAR has sent an appeal to Governor Brewer respectfully requesting that she amend her Call to Special Session to include SB 1271 in order to try to address the serious issues and unintended consequences resulting from its passage before it is enacted as law.”
Dru Bloomfield´s last blog ..Scottsdale Home Sales are Up, but….
Who gets hurt here? Large investers are protected by their LLC. There is no way a bank can go after them for any deficiency, there assests are protected.. It’s going to be the small guy again, the working man, and woman trying to make a living for their family who are going to pay the price. You know most of us one time or another bought a home with ever intention to live out our lives in, raising a family, then finally selling it to injoy our retirement down the road. That’s not reality though. Most of us change job, and have to move on. We have to make a decision to either sell or rent our existing home, and with the market the way it is now we most likely rented our existing home, and purchased a new one. Were not investers, were surviving the best way we know how. Then here comes this idiot who decides to listen to some lobbiest and past this obsurd law that only hurts us, the little guys. You see the banks know that they can’t get any money from the large LLC investors so they go after the only one’s they can, the jobless, the homeless, the ones who make it all happen. Were suckers and we will continue to be such until we decided to say enough is enough. Throw the bums out next election, and support those who want to protect the little guy. Big business has had it to good for to long. They can afford the lobbyist, because they have the money not us. Remember the golden rule??? “Those who have the gold, rule…..
Unfortunately, it is clearly a case of unaccountable Government. The legislator, senator Sylvia (forgot her last name) is accountable to small banks in the White mountains, of course she makes laws that effect EVERYONE, but who cares, she can appease HER constituants. The glaring case of Government lack of accountability here is the Governor who signed it in to law. The governors role here was to vet this bill, and understand that while it may help the small banks in the White Mountains (whom this senator is accountable to) , and may punish some spec investors who abused the system, it also will have the unintended purpose of seriously undermining an economic recovery, and causing massive BK’s in Maricopa, Pinal and other much larger population centers for the rest of the state she Governs. But what does she care, she is not an elected official – she was appointed to that position, and she has already made reference that she may not seek re-election (she has almost guaranteed that with this bill). So we currently have a Governor making decisions during a fragile time in Arizona, that is literally accountable to no one.
Don’t try negotiating with your lender now, they will balk and simply wait. If you were in the process of a workout, expect them to now say they have changed course. They now have EVERY INCENTIVE to Foreclose. They can sell it back to themselves at auction for pennies on the dollar, then collect from you, and also resell the property to someone else for a higher price – essentially double dipping on your back. Normally this could not be accomplished except through judicial foreclosure, now they can use Arizona’s quick Deed of Trust based non-judicial foreclosure laws, usually 90 days, to quickly auction the property – to themselves of course. The level of abuse possible here by TARP banks is staggering. What is really sad is that most folks in foreclosure, are in foreclosure because they have no money and could hardly defend themselves adequately against a vague law like this.
Just picture the retired couple that bought a second home in Flag or Prescott, or even Maricopa County, when they had a good retirement. Now the stock market crashes, they lost their money in their 401K and can’t pay for the second home. It goes to foreclosure because they can’t sell it. They can hardly pay it off, as they have lost 50% in their retirement account. It goes to foreclosure, bank “says” they were “investors” because they did not live in it for 6 months, and get a judgement for $100,000 (typical upside down mortgage right now if sold at auction). They don’t have a $5000 retainer and $150 to $300 an hour to litigate the laws vagueness, and now the bank takes their primary home in Minnesota that is paid for to satisfy the judgement. Now we have two homeless old people – possibly your father and mother, made that way because some Legislator and un-accountable Governor can’t take more than a month to consider something this far reaching and could impact so many in one of the worse times since the Great Depression. I don’t know about other people, but this gets my blood boiling, especially since my taxes are going to rise to funnel billions to the same banks that will no doubt use these laws against us. I also am funding a budget shortfall (with higher taxes) to support a Government that can’t even be bothered to do enough due diligence to consider the consequences I just outlined. Disgusting. Rant over, but please, anyone that is as angry as I am – contact your representative and put a stop to this. Our economy will thank you, and quite possibly your own parents may thank you.
I would like to present and actual situation and ask for advice for this young couple. They purchased a home through Country Wide, after being turned down by BofA. Their freind said he could get them a loan. The got an 80% then a 20% second. The payment is over $1700.00. The friend said it would be no problem to refinance, as the wife would be have been teaching for 3 years by then, and the husband would probably have a raise.
2 years go by, they try to refinace, low and behold their modist home is only worth under $160,000, Ttheir mortgage is over $200,000. They try loan modification, the loan has been sold many times over by now. They contact their lender, and was told they were not participating in the modification program. finallyl after 6 months of sending info, lender changing mind, back and forth, enough to drive you nutts, they offer them $200.00 off the payment, tempoarily. In the meantime, they are expecting another baby and the Mother to be, is in a distressed situation. They talk to the mortgage company, they ask about shotsale, someone tells them there is not enough time to shortsale. Finally the mortgage company says if you go ahead and move, and we will do a deed in lieu of forecloure. ( of course it is not on tape, and you talk to a different person everytime you get a call, or call them). They move, now the mortage company calls and wants money. They say they did not say to move, and they told them to try to sell, all in a very harassing manor. Mother to be is now in more distress. We could not figure out why the mortgage company changed it’s tune. Then we realized the legislature passed this new bill, ummm could that be the reason? Any ideas?
Brenda,
My first knee jerk reaction would be to send a copy of that story to Senater Sylvia Allens office. She is the one that gave birth to this nightnmare to appease her banking lobby. Understand though, she is the same one that was nationally televised telling her peers that it is a fact that the Earth has existed for 6000 years, and has been just fine, so it would not be a problem to allow Uranium from other states to be shipped here so Arizona can make some money storing it for nuclear power companies and the DOD. This kind of ignorance and indifference is almost impossible to understand. I also would send a copy to the Governors office. This change to the law has made national headlines already; http://www.nytimes.com/aponline/2009/07/24/business/AP-AZ-XGR-Foreclosure-Rights.html?_r=2
So the whole country knows now, and maybe more backlash will come. Unfortunately, this also means that the executives of the big TARP banks are aware, and they will steer their ships accordingly. However, keep in mind that the greatest sterilizer to a desease like this change, is sunlight. Why do you think it was rushed through without much fanfare? So do what you can, email your representative, send stories like this – not only to those that support it, but also to those that “represent you”. Eventually someone will need to be held accountable. Either in public, or at the voting booth.
For your, as well as others reference, here is a link to the yea and nay vote roster for SB-1271, so YOU can hold YOUR representative accountable for this:
http://www.azleg.gov/FormatDocument.asp?inDoc=/legtext/49leg/1r/bills/sb1271.hthird.1.asp
Take care
Twitter: drubloomfield
07.29.09 at 1:25 pm
I just got the email update from Michelle Lind, AAR General Counsel / Assistant CEO:
Sen. Steve Pierce, sponsor of SB 1271, feels the bill needs to be fixed due to the unforeseen and unintended consequences of the legislation. He has asked the Legislature and the Governor’s office to repeal the bill so that legislators and industry stakeholder groups can work on a new bill to accomplish the original objective of 1271- to help small community banks in Arizona.
Pierce met with AAR and other stakeholders yesterday to discuss changes to the legislation. The consensus was that there is a more direct way to assist local Arizona banks, who were not eligible to receive any TARP funds, on the ever-growing foreclosure issue.
Dru Bloomfield´s last blog ..Scottsdale Summers are Hot – Be Smart About It
Twitter: drubloomfield
07.29.09 at 1:28 pm
Brenda,
Check out this Arizona Attorney General link for some additional help: http://www.azag.gov/consumer/foreclosure/
Dru Bloomfield´s last blog ..Scottsdale Summers are Hot – Be Smart About It
Twitter: buytucsonlots
07.31.09 at 8:40 pm
I believe that a lot of us who are paying our bills on time and struggling to keep our homes, should definitely be protected. For all of those who wanted to make a quick buck, I don’t feel sorry for them. They are not better then us, they enjoyed their profits when they were good, but when it comes to take their losses , they are all for easy way out. I don’t want to sound mean or anything like that, but to keep our values at least close to what we owe, legislature has to do something about it. There are many things that I disagree with today’s politics, but i think that this was necessary to protect us home owners and financial institutions to some extent.
If, and that’s a huge IF…If there is not some sort of temporary stay or moratorium, before the statute’s effective date, a mortgagee lien interest in an investment or rental property and even a second home, based on the six-month occupancy requirement, any deficiency balance appears to be able to be pursued.
Twitter: buytucsonlots
08.05.09 at 6:50 am
Unknown –
I am curious how you think this change to the law will help control property values? It was not just investors that pushed up values. By and large it was folks armed with ARMS and no doc loans that required no down payment. Investor loans were tougher to get, even in the boom and required more cash down. About all this will due is assure mutual destruction. Both of the banks and of the homeowners. The banks can’t squeeze blood from a turnip. If the person is in foreclosure, they probably don’t have any money to go after anyway. They will just go BK, and the bank STILL won’t get anything. I also would be very suprised if Judges will look at “utilizing” a dwelling as just living in it. If you are a trustor, unless you just left the home vacant for the whole time (flippers) I don’t see a strong case that could be made that a landlord was not “utilizing” the home as a single family or dual family residence. Even Pierce himself said that it’s intent was against builder / speculators, that would imply a vacant home or home to flip. Since the definition of utilizing is not clearly defined, the big issue I see is with the language that you have to provide a certificate of occupancy. THAT is the 100 pound gorilla that will hurt owner occupants, vacation home owners and investors. Unless you have a custom home built, you probably did not get a C of O from your builder. This will make it necessary for homeowners to go to the building department and have an inspection of their home and get the C of O to cover their rear ends. I am sure the local building code enforcers are going to love that…..or at the very least, it will require the homeowner going to the building department and requesting a copy of the existing C of O issued to the original builder. More enjoyment for the building dept.
Frankly, I think it will be reversed – either that or Steve Pierce is going to be a one term senator, and next to Brewer, one of the most hated politicians in the state. Why do you think he has done such an about face, he knows that if we become number 1 in the nation for bankruptcy from home deficiency judgements, it will fall squarely on his shoulders. And if that contributes to the further decline of our local economy, he may not even make it to election time. Those second home owners in Prescott may have him removed prior to that.
Twitter: drubloomfield
08.07.09 at 5:59 am
Got this update from Tom Farley at AAR yesterday:
SB 1271 has been getting a lot of press lately as it will have serious and unintended consequences for many real estate owners facing foreclosure in Arizona. In light of this the original sponsor of the bill, Senator Steve Pierce, has asked the legislature and the Governor for an immediate repeal of the law which is slated to go into effect at the end of September. The state’s original anti-deficiency language has been inserted into two budget bills (HB 2008 and SB 1024) currently being debated by the legislature which would have the effect on nullifying the passage of SB 1271. HB 2008 has quickly passed the Arizona House of Representatives. SB 1024 is awaiting final vote which could happen August 8th or on the 10th. If for some reason, the Senate Bill fails on final vote, we will immediately focus on our next effort to repeal the law. The banking lobby and at least one member of the legislature are pushing for an amendment to SB 1271, instead of repeal, that would allow it to still apply retroactively to loans already in existence. We have been advised that this action would ultimately be unconstitutional if not unjust. Stay tuned for more updates on our efforts to repeal SB 1271 through the bills cited above.
does this law apply to condos as well since they are technically single family residences on less than 2.5 acres?
Twitter: drubloomfield
09.13.09 at 7:38 am
I’m a little slow to get this post updated, but did want to make sure you are all aware that this legislation has been repealed.