When Brandi Sveback and her husband, Chris, bought a house in Mesa six years ago, they had no idea how close the property would come to devastating their plans for the future. A couple with three small children, they just wanted a starter home. Eventually, they intended to save enough money to move to a nicer area with better schools.
Then came the housing bust. Unable to rent, sell, or make payments on their home, foreclosure was their only option. Now, thanks to an under-the-radar piece of legislation pushed by the banking industry and signed into law earlier this month by Governor Jan Brewer, the Svebacks will likely owe the bank close to $100,000.
And they're the lucky ones. Thousands of other homeowners will most certainly face bankruptcy as the result of a law passed at a time other governmental authorities are struggling to figure out ways to help homeowners.
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Marc McCain and others will hold a free seminar on how anti-deficiency laws affect homeowners at 1 p.m. Saturday, July 25, at the Mustang Library, 10101 N. 90th St., Scottsdale. Call 602-859-9450 or e-mail email@example.com by July 23 to RSVP.
Introduced by state Senator Steve Pierce, a Republican from Prescott, the measure will gut the current law, which can protect homeowners from bankruptcy when facing foreclosure. Three representatives of the banking industry testified in favor of the bill when it went before the Senate Finance Committee in June; no one testified against it. The amendment was tacked as a striker to an entirely unrelated bill dealing with the criminal justice system. Apparently no one on the side of the homeowner knew about the change until it was too late.
"I was shocked," says Brandi Sveback, who learned of it only after the governor signed the bill. "For them to make a law to basically wipe out people's lives . . . You go into a home with the intentions of living there — you look for the government to assist you. Now, suddenly we owe the bank tons of money."
Until two weeks ago, things were pretty good for Arizona homeowners. Arizona is one of 20 states with "anti-deficiency laws," designed to protect homeowners from bankruptcy if they face foreclosure.
It would take a law degree and 10 years in the business to understand exactly how the new law changes the way things work. It doesn't completely gut consumer protections, but it raises a lot of questions about just how much those protections have been limited.
Here's how the law has worked: If a homeowner faces foreclosure, the bank can take back only the home — it can't seize assets such as retirement funds and businesses, even if the value of the foreclosed property represents only a fraction of the original mortgage. This essentially protects homeowners already facing financial difficulty from devastation.
With two short sentences, the new law, which goes into effect September 30, nullifies this protection for thousands of Arizona homeowners, leaving them vulnerable to be sued — and possibly bankrupted — by banks for the total cost of their original mortgage.
"Businesses, retirement funds, [the banks] can liquidate you," says Phoenix real estate attorney Jim Eckley, who has nearly 150 clients who will be affected. "It's ugly. It usually pushes an otherwise solvent family into bankruptcy; stripped clean and wiped out by creditors. And in most cases these are not the so-called bad guys taking advantage of the banks — they're ordinary, responsible trustees."
In order to qualify for protection under the new law, homeowners must occupy their house for six consecutive months. They also must have a certificate of occupancy, which shows the city has inspected the new home upon its construction.
No big deal, right? One problem is that some cities — including Mesa — don't issue certificates of occupancy. And many older homes in Phoenix and Glendale weren't issued certificates when they were built. Under the new law, people without certificates and facing foreclosure can be sued by banks because they don't have a piece of paper they never needed — until now.
For many, obtaining a certificate of occupancy is likely to require a full inspection by the city. That could prove costly for people already in dire financial straits who must foot the bill for expensive repairs on a home they're only going to lose to the bank anyway.
Additionally, there are many homeowners — winter visitors, landlords, people with second homes — who don't live on their properties for six consecutive months.
Worse, the law appears to be retroactive. When the change goes into effect this fall, it won't just hit people who take out mortgages from that date forward — it could impact everyone, even if you took out the mortgage on your home 20 years ago.
At this point, it's know difficult to know how the law will be enforced. And frankly, it's a tough time in Phoenix to get any answers. The city's nearly emptied out. None of the three Democrats on the Senate Finance Committee were available for comment; also unreachable: Barbara Leff, the committee's vice chair, or the three representatives for the banking industry who testified in favor of the bill before the committee. Governor Brewer's office did not respond to repeated requests for comment.
However, it wasn't difficult to get a hold of real estate attorneys and real estate agents to discuss the potential ill effects of the law. In fact, last Friday, the Arizona Association of Realtors asked Brewer to adopt an emergency clause to change the new law during the ongoing special session.
"I'm incensed," says Dee Kepp, president of the Southeast Valley Association of Realtors. "I certainly don't understand why legislators would think this is a good thing for Arizona."
Bill sponsor Pierce says that the law was necessary to protect banks from getting scammed.
"[The amendment] was done to help small banks and the community," says Pierce. "This wasn't done to damage anyone."
Small banks are being taken advantage of by irresponsible investors, banking lobbyist Wendy Briggs told the Senate Finance Committee in June.
"People are gaming the system," Briggs testified. According to Briggs, non-Arizona developers were building homes on speculation, abandoning them when they realized they wouldn't be profitable, then claiming the homes were "dwellings" in order to take advantage of anti-deficiency protections to scam banks out of the bulk of the loan.
"We're talking about developers that literally put a sleeping bag on the floor for two nights, and claimed it was their residence," Pierce said during hearing. "We need to do all we can to help the banks in Arizona because there's crisis facing all of them in the near term if we don't."
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Nancy Seeds, president of the national consumer advocacy group Homeowners Against Deficient Dwellings, learned of the new law only this week, when New Times called. She says the intent of the law was good: Arizona needs laws that minimize mortgage fraud. The problem with the bill was its execution — a rushed decision that lacked a balanced debate.
"The Legislature needs to be very careful with the legislation they write and put into law right now because it could have very serious unintended consequences," says Seeds.
Just as concerning to Phoenix-based real estate attorney Marc McCain — whose clients include the Svebacks — is the "sleeping bag" scenario on which the entire bill was based. McCain says it was an invention.
"I'm not saying it's impossible — but it's highly unlikely," he says. "Our Legislature just took a chainsaw to a problem that required a scalpel."