March 16 2011
Arizona legislation to help homeowners under water
Some Arizona homeowners under water on their mortgages might be able to reduce their interest rates and monthly payments if a proposed state program becomes law.
The "home certificate" program laid out in a new bill is intended to help homeowners lower their mortgage payments even if they can't refinance their mortgages through a traditional bank.
The proposal is both unprecedented and controversial. Essentially, it would create a separate market for mortgage financing from private investors, bypassing banks. Investors could benefit by earning interest paid by reliable borrowers, while homeowners could benefit from lower monthly payments and lower interest rates than they currently have.
Although the plan's backer says it could help many homeowners, critics say lenders will be reluctant to agree to the system.
The program, which is intended to be short-term, might also put borrowers at risk and won't work if home values don't rebound enough for borrowers to refinance later, letting investors get back the money they put in.
Since the crash in home values, many Valley residents now owe more on their mortgages than their homes are worth. In that situation, they typically can't qualify to refinance. Their homes aren't worth enough for lenders to issue them a new mortgage at a lower interest rate.
That situation leaves homeowners, even those with good credit who can make their payments, unable to take advantage of lower interest rates.
Those are the homeowners the bill aims to help.
The legislation, backed by Scottsdale Republican Sen. Michelle Reagan, has passed the Senate and has been assigned to be heard in the House Commerce Committee, but that hearing is not yet scheduled.
Reagan said she believes the bill can help responsible homeowners unable to refinance to current low interest rates and set up a system for investors to make money.
"It's a private program that is based on free-market principles," Reagan said.
How it works
The system would work this way:
- Arizona homeowners would qualify if they were current on their mortgage payments but owed more than their houses were worth.
- Qualifying homeowners would enter a marketplace managed by a state agency that has not yet been designated. They would publicly post the monthly payment they were willing to make - typically a payment lower than their current bill and equivalent to their current mortgage but with an interest rate of 2 to 5 percent.
- Investors would evaluate those mortgage requests and then bid on the loans they wanted to buy.
- When investors and borrowers were matched up, the investors would pay off the homeowners' old loans. Homeowners then could make payments, at a lower interest rate, to the investors. Investors would make 2 to 5 percent interest, which Reagan noted is more than they can currently earn by saving cash in a bank.
- Borrowers would have to sign away their "anti-deficiency" rights. Laws in Arizona say banks in most cases cannot pursue homeowners to recoup any losses after foreclosing on a home. Waiving anti-deficiency rights is meant to reassure investors that borrowers wouldn't abandon their homes without repaying.
- Investors would receive a home certificate giving them lender rights to the house as collateral for the short-term loan. Each month, 3 percent of a homeowner's payment would go into an insurance fund that would help cover potential losses for investors. The fund would be managed by a government agency.
The system would make the deals temporary. After five to 10 years, homeowners would have to pay back investors' principal. The bill anticipates that, by then, home values will have rebounded, allowing borrowers to refinance through a traditional home lender.
The idea is stirring controversy. The bill is difficult to understand; the plan has never been tried before and the system would require changes to current Arizona real-estate laws and property records.
"The legislation sounds similar to how people bid on tax liens in Arizona, but the bill is very vague and hard to figure out," said Jay Butler, director of realty studies at Arizona State University. "Also, who says lenders are going to agree to it?"
That issue is key to the program. Once a private investor agrees to take over a mortgage, the original lender has to agree to the deal.
Typically, a homeowner is allowed to pay off the balance of a loan at any time. But, in this case, the homeowner is not the one paying off the loan. A third-party investor provides the cash and then that investor, not the bank, profits off the borrower's payments.
In essence, the banks would have to agree to give up their future profits to OK the deals.
Other questions remain: Would enough investors be willing to participate in the program, given that the homes are worth less than the value of the loans? Would homeowners who have signed over their anti-deficiency rights but who later lose their jobs and their homes end up also being sued by investors?
"The program has noble intentions," said Marc McCain, a Phoenix real-estate attorney, "but without widespread lender . . . support and participation, it is not likely to provide much practical benefit."
Reagan is addressing the lender issue with plans to add an amendment calling for "deemed foreclosures" in Arizona.
The move appears to be intended to force banks to give up the mortgages. But specifics on how it would work are not yet clear.
Reagan said it would help ensure that lenders must sell mortgages to investors.
"Any term with foreclosure is scary to homeowners, but deemed foreclosures will not hurt their credit," Reagan said.
Last week, Reagan met with Gov. Jan Brewer's office to discuss the legislation and what agency could handle the insurance fund.
Ira Hecht, a New York attorney and accountant who crafted the idea behind the bill, participated in one of the meetings via conference call.
Reagan said Hecht approached her about launching the program in Arizona because many homeowners in the state are still making their payments despite a huge drop in home values.
Reagan is proposing to run the insurance part of the program through the Arizona Housing Authority, which is part of the state's Housing Department.
Mike Trailor, director of the Housing Department, said his agency is asking questions about the proposed program. The finance division of the Housing Department can issue bonds and provide other financial instruments potentially needed for the program.
Rep. Debbie McCune Davis, D-Phoenix, said legislation to help homeowners avoid foreclosures, instead of refinancing a loan they can afford, should be a bigger concern for the Legislature.
Arizona banking lobbyist Wendy Briggs said the banking industry is "neutral" on the legislation.
"This is a completely voluntary program for homeowners and investors," Reagan said. "If people don't like the terms, they don't have to participate. But, for so many of us underwater on our mortgages, it's our only option to take advantage of the current low interest rates."