Legislation backed by Scottsdale Republican Sen. Michelle Reagan proposes to allow homeowners who have underwater mortgages to bypass banks and use private investors to refinance their mortgages allowing investors to benefit by earning interest paid by reliable borrowers, while homeowners benefit by lowering their monthly payments and possibly lowering their interest rates.
The legislation has passed the Senate and has been assigned to be heard in the House Commerce Committee, but that hearing is not yet scheduled.
The bill has several roadblocks that would need to be overcome and isn’t without risk. The program is meant to be short term, five to ten years, and works on the premise that prices would rebound by then so the homeowner can refinance their balances through traditional mortgage companies to pay off the investor at the end of the agreement.
It would require changes to current Arizona real estate laws and property records and would require the cooperation of the borrower’s bank. 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.
"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?"
Here are the overall basics of the program:
- 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.
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?
Arizona banking lobbyist Wendy Briggs said the banking industry is "neutral" on the legislation.
Reagan says, “It's a private program that is based on free-market principles.”
And unlike federal anti-foreclosure programs currently in use or being proposed, this one doesn’t require a taxpayer bailout.
What a novel idea.
Tags: Arizona, underwater mortgages, home certificate, investors, mortgage companies, refinance, real estate laws, lender rights, anti-deficiency rights
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