There is an intriguing situation playing out at the legislature, and I’m not talking about the budget.

A little background: In AZ, if you go in to foreclosure,  the bank takes back your property and sells it at a loss, they can’t come after you for the difference. The act of coming after you for the difference is called “deficiency.” Therefore, Arizona is an “anti-deficiency” state.

In other words, let’s say you bought a house for $200,000, but could not make the payments and the bank forecloses. They can only sell it for $150,000. They can’t come after you for the balance of $50,000.

That is why Arizona is such a great place to get a fresh start. We’ve been that way for a while. Banks don’t like it, but people do.

So, along comes freshman Republican Senator Steve Pierce, R-Prescott. He passes a bill that makes Arizona a deficiency state, so that banks can come get the balance from people. Well, actually, the bill allows deficiency only in those cases where the owner has owned the property for less than 6 months. He was trying to target people who flip houses.

Well, the bill has caused quite a few problems. Most importantly, it will encourage more foreclosures and bankruptcies. Here is why: Arizona has a relatively short foreclosure period (90 days). If banks know that all they have to do is wait out an owner in order to foreclose and still be able to go after the deficiency, then they are more likely to do that. This will impact more than just people who are flipping homes. This could impact all kinds of buyers, not just “flippers.”

So, the Arizona Association of Realtors (AAR), who did not see the implications when the bill first passed, have jumped in to action. They asked the governor to put the topic in the call for special session (which we are in now). They also convinced the original bill sponsor to advocate for the repeal of his own bill –a pretty impressive feat, if you ask me.  See the letter to the governor here.

So, now we are in a real pickle. The original bill goes in to effect on Sept. 30th of this year. Yet, despite several attempts, the AAR has not been able to get the repeal through the legislature. See the Arizona Republic article here.

What does this mean for you? Well, if the repeal does not go through, watch for more foreclosures starting in about December. I don’t expect a dramatic increase in foreclosures, but this will add to the mix. There will also be a suppression of investment purchases.

In my opinion, we’ve done well with anti-deficiency in Arizona. Sure, there are folks who should not be lending money. But, perhaps the banks should look inward to consider why they keep lending to people who default within six months of purchasing a property.

I encourage you to call your legislator and ask them to support a return to our traditional anti-deficiency status.

Stay tuned.