Saying it’s not fair to them, bankers and mortgage brokers on Wednesday beat back a proposal that would have essentially forced them to help homeowners who continue to pay their mortgages even though they are “under water.”
After a two-hour hearing, Rep. J.D. Mesnard, R-Mesa, refused to even allow a vote on the proposal in the House Commerce Committee to have the state intervene to provide financial relief. Mesnard said he concluded there was insufficient support for the legislation.
That stranded the plan crafted by Sen. Michele Reagan, R-Scottsdale, and effectively killed it for this year. Reagan had managed to have the proposal approved unanimously earlier this year by a Senate panel only to have Senate leadership refuse to bring it to the floor.
Wendy Briggs, lobbyist for the Arizona Bankers Association, said there were constitutional problems with having the state arrange with investors to buy up the mortgages. She said these include the state interfering with existing contracts.
But Jim Lundy, the association’s president and president of Alliance Bank of Arizona, acknowledged the financial component to the opposition. He said the plan amounts to the state “using the police power” to intercede in legitimate contracts, and deny the banks every cent that they might otherwise get.
Reagan conceded as much. But she said it’s unfair of the banks to refuse to even consider any relief for underwater homeowners who have been doing all they can to stay current.
And Rep. Debbie McCune Davis, D-Phoenix, said bankers need to understand is that, without help, some of these homeowners eventually will fall behind and be unable to keep making those payments. The result, she said, is a lose-lose situation: The owner loses the home, the bank has to sell the home for less than what is owed, and the house ends up being snapped up by an investor.
McCune Davis said this is a far better solution, what with half of all mortgages on Arizona homes larger than the value of the property.
That solution, even by Reagan’s admission, is quite complex.
SB 1221 is aimed at those whose homes are worth less than they owe but have opted not to do a “strategic default” and walk away. That is an option in Arizona, where state law precludes lenders from pursuing borrowers for the difference between the loan balance and what they can get in selling off the property.
Reagan said these are people who are “playing by the rules.”
In essence, the state would use its power of eminent domain to acquire the property. Then, using money provided by those who bought state-issued bonds, the state would pay the mortgage holder the appraised value of the property, plus 1 percent, with the homeowner getting a lower-cost interest-only payment until the housing market improves.
Homeowners, who would get the title back after the refinancing, would sign a promissory note for the difference between the home’s value and what is owed, but be required to pay only the principal, with no interest.
Cathy Gomez of St. Patrick’s Catholic Community in Scottsdale said state action is necessary because people in this situation have no other option.
“They have depleted absolutely everything,” she told members. Gomez said this bill is “for people who are killing themselves to stay whole on their mortgage” but cannot sell their homes for what is owed.
Lundy acknowledged that lenders see no advantage in allowing the homeowners who are still paying to refinance at currently more attractive interest rates.
But Briggs said the alternative in Reagan’s bill — giving the lenders the value of the home plus 1 percent, with only an interest-free promissory note for the balance — is not fair.
“You’re taking essentially a performing note and running it through a shredder,” she said.
“This is a proposed solution that would use the police power of the state to cram down millions of mortgages on hundreds of lenders, arbitrarily,” he said. He said even if the lenders get paid the full value of the home, they get only “some hope” the balance of the mortgage will be repaid — and even then, without interest.
Don Hagan, lobbyist for the Arizona Mortgage Bankers Association, said those who borrowed money and agreed to repay should not be given this kind of relief at the expense of the lenders.
“I hear a lot of blaming going on of people who are upside-down on their mortgage,” McCune Davis responded.
“What the bankers are saying is they made a terrible mistake and they need to live with it,” she said. McCune Davis said that not only ignores the effect of foreclosures on the community but that bankers and lenders have been bailed out by the federal government.
“I’m having a really hard time being sympathetic,” she said.