Banking Law

Bankers and realtors are clawing and scratching at each other again, this time in Arizona over a new law that takes effect September 30 and that removes that state law's "anti-deficiency" protection for homes owned by borrowers who have not occupied the home for at least six consecutive months. Bankers are tired of being stiffed by investors who walk away unscathed when the homes they buy turn out not to be worth the balance of the loan against them. Realtors, on the other hand, are worried about the negative effect this will have on sales of second homes in Arizona, a justified concern in a state that appeals to grey-haired retirees and others on the downhill slide of the race of life.

In a blow to bankers, the legislator who sponsored the new law now says that he'll lead a fight to repeal it.

Sen. Steve Pierce, R-Prescott, said there are too many "unintended consequences" from his legislation designed to help banks who find themselves stuck with homes worth less than the amount owed and no way to recover the difference.

Pierce said, though, he still believes those banks deserve protection, particularly from real estate speculators. So he will attempt to re-craft the legislation, perhaps in a special session later this year.

"Unintended consequences" is a law that almost always flows from governmental action. It's why a slow, deliberative process is usually results in more well-crafted legislation than simply rushing things through at a break-neck pace, like the U.S. House of Representatives keeps trying to do with executive pay restrictions and [shudder] health care "reform." In Arizona, at least, responsible legislators are willing to rethink their actions. A politician admitting that, like most human beings, he might have made a mistake is about as likely as this blogger turning down a date with Catherine Zeta-Jones. Senator Pierce ought to be applauded.

To the credit of bankers, they're willing to work with the realtors to try to alleviate the most egregious "unintended consequences."

...[T]he protection would not be available to those who buy a home for a relative, as the property would not be occupied by the borrower. [Arizona Bankers Association president Tanya] Wheeless said her organization is willing to consider changes to help that.

"We do not want to see your 86-year-old grandmother out on the street with a deficiency judgment," she said. "So there is some room to talk about close family members in the home."

Wheeless, however, is unwilling to budge on the second big issue: restoring anti-deficiency protection for the second homes that some people have, even as vacation properties.

"In our view, second homes are generally viewed as investments, both by the people that buy them and the people that have them," she said.

Pierce says that he'll try to have the current law repealed before September 30. If so, I assume that the legislature will take a second look at the issues and craft something that, to the extent possible, is some form of compromise between the realtors and the bankers. However, it appears from the comments of Ms. Wheeless that second homes are going to be the sticking point for such an agreement. Eventually, that issue may have to be fought out again, with a winner and a loser, and with the consequences that flow from that decision having whatever impact on Arizona's recovery from its current economic woes that might result. At least the time around, the legislators who pass the next version of this law can't say they weren't warned.