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Arizona S.B. 1451 – The Good, The Bad, The Uncertainty

Earlier this month, Arizona State Senator Michelle Reagan (R) submitted SB 1451 to the Arizona State Senate.  The bill seeks to solve the underwater mortgage problem in Arizona by using the state’s power of eminent domain to write down Arizona homeowners’ mortgage debt.

Proponents of the innovative bill suggest that it could fix the Arizona real estate market by allowing underwater homeowners that are current or could get current on their mortgage payments to refinance their homes at market value today; meaning, potential principal reductions for Arizona homeowners that would effectively end the impending wave of strategic defaults and foreclosures.

Opponents of the bill argue the bill is unconstitutional because it would illegally infringe upon valid contracts between lenders and Arizona homeowners thus placing Arizona citizens at risk of not being able to find financing in the future.

At this point, the only thing certain about the bill is . . . its uncertainty.

As of today, the bill is in stalled in the appropriations committee waiting to be scheduled on the calendar for debate and a vote.  If the bill makes it out of committee, it still must pass both the Senate and the House and then be singed into law by the Governor.  Assuming the bill does pass, it is unclear exactly how much money will be raised and available for underwater homeowners to use in the bonds issued under the bill. In addition, it is unclear how long it will take to organize the new administrative agency, “The Arizona Housing Finance Reform Authority,” that will wield the taking power of the state and oversee the enactment of the bill.

To further complicate matters, the banking industry will inevitably file lawsuits challenging the validity of the bill.  The outcome of those lawsuits are anything but certain. Finally, an issue that is not being addressed is the potential tax consequences that participating homeowners will experience after the state takes the property and sells it back to the homeowner at a much lower price.  Banks that are taking a loss will certainly still send participating homeowners a 1099 for debt forgiveness income that will be followed by a substantial tax bill.

All of this uncertainty must be balanced against the impending certainty of the expiration of the Mortgage Debt Forgiveness Relief Act of 2007 that allows homeowners to exclude income from debt forgiveness on their principal residence if sold before January 1, 2013.  It is unlikely that S.B. 1451 will be up and running before that expiration date.  That means that Arizona homeowners are left with the unenviable task of deciding to roll the dice with another government program that may pan out and allow them to keep their homes at a payment they can afford in the future or to take preemptive action to avoid a potentially devastating tax bill.

The real estate attorneys at the Wells Law Group will continue to carefully monitor the progress of S.B. 1451 and update our clients with any developments.

You can learn more about the bill HERE.

For more information and to discuss possible strategies available to you, contact the Wells Law Group today at (480) 428-3290. Our real estate attorneys will discuss each of the potential options available to underwater homeowners and provide answers to your questions.