But the impact of the change is much larger. It makes some homeowners in foreclosure liable for the difference between their mortgage and what their lender can recoup from reselling the house. In the current housing market, the difference is generally more than $100,000 on the typical Valley foreclosure. [1]
Twist and I have made something like a career out of harassing the Arizona real estate industry and the Arizona Republic’s Catherine Reagor in particular, but I don’t see too much separation between us on this one. [Update 7/27: however, see comment #4 below -- thanks again to Ms Reagor for breaking a story that was threatening to fall through the cracks]
Doom readers will know my opinion that American lawmakers shouldn’t touch recourse mortgages with a barge pole, but it looks like the Arizona Legislature wants to dive right in.
Guys, they tried this in Old Testament times. It didn’t work then, and it won’t work now.
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[1]: "New law triggers fear for housing: It holds some owners liable for debt, even in foreclosure", by Catherine Reagor, Arizona Republic, July 26, 2009.
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Breaking News
Coming from New England, the concept that a mortgage loan could be non-recourse is utterly alien to this region’s mindset. It wasn’t until the meltdown happened and I started reading this blog and all of the other mortgage blogs that I ever knew that mortgages were non-recourse in some states. Reading same, I was struck by the thought that “how could anyone be so stupid”?
Back when I was a banker, we regularly used the threat of a deficiency judgment to get the debtor to sign a deed-in-lieu in return for a waiver of deficiency. Given that our mandatory judicial foreclosure process took a year at best, we just wanted the damn thing done.
First, I must comment that I am ashamed for being unaware of this bill (now law) until I heard a blurb on a Phoenix radio station news break on Saturday. I then read the extended Republic article this morning. I follow politics and real estate issues closely, and live in Arizona. Shameful. Time to re-subscribe to the excellent Arizona Capitol Times.
Now, whom does one root for, the bankers or the realtors? I have to say, removing the anti-deficiency protections from investors/speculators sounds like the best idea to come out of the Arizona legislature in a long time.
I mean, if we want to grant some protection for buyers of a personal residence, that protection remains. But why encourage turning the AZ housing marrket into one big casino all over again? The new law says that six months of residency in the house is required for protection against deficiency suits. That seems to me to be completely reasonable.
Capt. -
I grew up in 02420, but didn’t know NE was into recourse mortgages. In this complete transcript of the March 26, 2009 AEI seminar on Danish recourse mortgage practice the discussants are figuring recourse would have to go at the federal level. I rant on about the subject a bit in the footnotes, and here.
I believe the oldest known fragment of human writing was a clay tablet featuring a Mesopotamian scribe’s math exercise in compound interest. We’ve been wrestling with this issue for, like, forever. Within the context of this blog, it just seems like forever.
Russ-
I must say, this should bring speculation in Arizona to a screaching halt. I view that as a good thing. The housing market shouldn’t be like trading in pork bellies. An investment property should an investment, not a roll of the dice. I do think that a primary residence is a completely different animal and should be protected. Of course, how many speculators managed to have multiple primary residences?
That said, I find it amazing that they could pass this thing without folks like you and I knowing about it. I tend to distrust anything that is snuck in under the radar- remember how well that alt fuel vehicle thing worked out?
John-
Thank you so much for grabbing this story and posting it. When I’m on the road like this, important stories would fall through the cracks if you weren’t there to grab them. : )
i actually had a couple clients email me articles on this a few weeks back. i paid no attention (and to be honest…thought they may have been spam that was sent to my clients, as they looked like a generic fax from someone with an agenda) since i had not seen anything about it here or on other legitimate sites. it does seem like a pretty BIG change to go unnoticed? it definitely makes me wonder. i would love to see the speculators begin sharing the cost of this whole mess with us though!! i’d also love to see the first time buyers actually get some of these “deals.” i read in the republic his weekend, about young couples puting 15+ different offers in and getting nothing. speculators just kept out bidding them. don’t remember the exact example, but there was one offer they made on a (about?) 120K home only to have an investor offer 30K more than asking!!!!!
twist -
Thanks for the kind words. That being said, Doom readers everywhere hope the Traveling Twists find an internet connection before I have to resort to posting another poem …
This kind of coincides with the mainstream news today, in a funny sort of way of course.
New home sales are up, and so are mortgage delinquencies.
This upsets me greatly, but not for reasons most people would think of.
Article 1, section 9(3) of The Constitution states that no ex post facto law shall be passed.
If you have a non-recourse mortgage and are foreclosed on they are now going to change that to a recourse mortgage. They are changing a contract that they’re not a party to…
So people will have to be responsible for their own debt? How shocking.
On way or another, someone pays for losses on foreclosures. Why not the person that got themselves into the mess to begin with? It’s one way to make sure they never do it again.
Of course there are always stories about folks that have a two-earner household that can no longer afford it due to a job loss. People need to plan for the worst-case scenario, not the best-case.
When we bought our house, we were a two-earner household. We made the decision to qualify for a loan that could be paid by ONE salary, in case something happened. Well, something did happen, and thankfully we are getting by ok.
Now I’m supposed to side with those that would turn this state back into a “casino” as Russ aptly put it? While we’re struggling to keep up with our responsibilities?
Maybe we should have non-recourse car loans, credit cards, and instalment loans too?
@cobra2411:
Read the article. It explicitly states that the new law is not retroactive.
@Steve Eisenberg:
My take is this: The meme in the mortgage blogs is that the disaster happened because the originators had no financial interest in the loans that they were originating and that the cure is to require everyone through whom the loan passes from origination to final securitization to own a piece of the loan. I agree with this concept, and it’s the blueprint upon which the EU has just restructured its mortgage market.
If the originators have to have skin in the game why should the borrower be free to walk?
Maybe we need to read it again:
“The new law isn’t retroactive, but those facing foreclosure now could be affected if the lender doesn’t foreclose and take back the home until after Sept. 30.”
–I read that to say foreclosures filed in the past are not subject to this law but “new”
foreclosures, even under “existing” contracts, will be subjected to this new rule. (Assuming, of course, that it becomes legal to change the rules mid-stream.)
I guess in a perfect world we would have a system where investors would pay a price for taking a chance. Like loosing their investment.
I guess in a perfect world lending institutions would know what they were doing and require investors to have a certain amount to loose before approving loans.
So maybe if lending institutions where held more accountable for their decisions we wouldn’t need a law to protect small community banks from their poor decisions.
Meh.
I’m of the opinion that lenders should suffer a penalty for loaning money foolishly, and borrowers who default after getting in clearly over their head should both suffer.
Pain is one of those teaching tools life has presented us with. It should be used.
As it stands right now in recourse parts of the country, (As far as I know, which isn’t very far) when the bank comes after you, they’ll often take a substantial loss on the deficiet just to get it done with.
For example, if your deficit is $100,000, the bank might offer to settle it for $20,000, because they don’t think there’s a very high likelyhood of getting all that money.
More folks will bankrupt (if they can) on a $100,000 deficiency than on a $20,000 one, and collecting $20,000 is better than collecting nothing.
Anyway, that’s why I don’t have a problem with recourse mortgages. In practice, everyone who does something stupid (borrower and lender) gets hurt, and maybe learns something in the process.
I believe the buyer and the lender should both take some responsibility for a foreclosure. We generally have to pay for our poor investments. On the other hand, exactly how many government bailouts took place? Shouldn’t that money help out?
A recent academic publication in this issue, arguing that a switch from non-recourse to recourse may do little to reduce foreclosures, but lead to an increase in bankruptcies:
http://www.stanford.edu/group/siepr/cgi-bin/siepr/?q=system/files/shared/pubs/papers/briefs/policybrief_jly09.pdf