Arizona's growth, in many ways, was based on growth, which is an inherently shaky deal. People were coming here for jobs building houses for people who were coming here. The place was growing because the place was growing, which calls to mind an image of a dog chasing its tail, for some reason.
Anyway, the result of the rapid growth was that real estate in the greater Phoenix area saw tremendous, rapid appreciation. People were signing contracts to build new houses with no intention of ever living in them OR renting them out. Rather, people (investors from out of state, in many cases) would lock in the price, have the home built, and then sell it OVERNIGHT for gains of $40k-$50k.
Obviously this was all a house of cards, ready to fall apart, and of course it did. Over the past 36 months, most homes have lost close to 50% of their "value". That already sounds pretty bad, but it's not my point.
Many of the loans to buy these homes in 2005-2006 were interest-only ARMS that have since reset to higher rates, leaving many people in homes they never should have bought, with payments they can't possibly afford, and are now losing to foreclosure. Now it sounds even worse, but it still isn't my point.
Other people have lost their jobs. Some of these people had poorly-chosen loans, and some of them had nice 30-yr fixed rate loans that even the most conservative of advisors would have liked. Doesn't matter - lose your job, lose your home to foreclosure. Now it sounds REALLY bad, but it STILL isn't my point.
Here's the thing. Unlike most other states, Arizona has some pretty comprehensive "anti-deficiency" laws. Several cases have made their way up the appelate courts in AZ, so the interpretation of these laws has been clarified quite a bit by the courts. And here's what it boils down to, for most homeowners: If you lose your home to foreclosure, and if your loans were "purchase money", then your lenders can NOT pursue you afterwards for any losses they were unable to recoup by foreclosing and selling your home. If you owed $100k on your home, but the bank only sold your home for $80k, too bad for the bank - they can't do anything to recover the $20k.
What about the people who bought a $500k home by taking out an 80% loan (for $400k) and a 20% second loan ($100k), bringing $0 to closing? BOTH of those loans are covered by the anti-deficiency statutes.
Wow - is that my point? Are these laws what is pushing the foreclosure rate so high? NOOOOO! And THAT is my point. These laws are not publicized on TV, or on the radio, or in the local papers. The general man-on-the-street believes the following: "Gosh, my house is only worth $200k right now and I owe $390k on it; if I were to sell it, I would have to bring a check for almost $200,000 to the closing, just to get away from my house."
Imagine what will happen when people like that guy begin to realize that if they walk out of their homes and stop making payments, all they will lose is the house. They will have lousy credit for 7 years because of the foreclosure. However, they will NOT be forced into bankruptcy, they will not have to "sell their stuff", and they will not ever have to pay back that $200k (in the example I used).
Right now most of the foreclosures are people who took out stupid loans, or lost their jobs, or for whatever reason are "losing" their homes. However, if people become aware of the laws in AZ, you will start to see a TON of people who just choose to walk away - people for whom it becomes a business decision, a chance to improve their financial position by $100k-$200k-$300k at the cost of "having bad credit" for seven years. At this point most people still seem to worship their FICO scores, but I predict that may change. VERY, VERY SOON.
The foreclosure rate in Arizona is already staggering, but if this news catches hold (and I expect it will, at some point), homes will be worth next to nothing. The house that was worth $400k in 2006 will be worth about $50k.
