Where Does Hawaii’s Act 48 Go This Year (2012)?

In 2011, the Hawaii Legislature passed Act 48, a lengthy bill intended to reform the foreclosure process in Hawaii. From the day the law passed, non-judicial foreclosure, the preferred methods for mainland banks to rapidly foreclosure on distressed homeowners, was killed. There have been no non-judicial foreclosures since May 5th when the law passed.

When combing my Google Alerts tonight, I saw that Rep. Herkes, the Chair of the Consumer and Commerce Committee, had submitted an editorial piece to the Star Advertiser, Hawaii’s largest newspaper, and Star-Advertiser would not print it. I think Rep. Herkes makes some excellent points, so let me share his perspective and comments and add a few thoughts of my own further down the page:

Last Thursday, this paper (referring to the Star Advertiser) reprinted old news about Act 48. We already knew the foreclosure rate dropped 50%-60%. We already knew the banks are foreclosing through the courts to avoid penalties for fouling up the new non-judicial process. We can only speculate why the repeat messaging and why this paper is so intent on spinning Act 48 as a failure. Their editorial last Monday provides some clues. Its title, “Reform law to let lenders, borrowers settle homes fairly” presumes Act 48 isn’t “fair” to lenders. What they’re really talking about is a loss of privilege. In light of all the illegality, we were obligated to limit their license to self-police.

Remember – almost half the other states disallow non-judicial foreclosures. Banks only started foreclosing non-judicially in Hawaii after a law was passed in 1998. But there’s a twist to the legislative history – which this paper aptly explained in 2010: the 1998 law was so defective, it went unused – only to revive an arcane law from 1874. The Star Bulletin reported the 1874 law was created to drive Native Hawaiians off their land. Title insurers resigned to work with that law and helped lenders develop a non-judicial “practice” that was palatable to them.

After the economy tanked, the mainland banks became desperate for capital and our so-called “law” made Hawaii a perfect target. Act 48 stopped the hemorrhaging under the 1874 law and fixed the 1998 law the banks pushed so hard for just fourteen years ago. That’s all the time it took for lenders to consider the 1874 fast-track their right. How rude of us. Here’s another strange statement from the editorial: “While delinquent homeowners might have been helped by the resulting sharp decline in foreclosures, the change in recent months could prolong the negative effects on the housing market.” Huh?

Let me break down the cause and effect. Act 48 guarantees third-party oversight in owner-occupant foreclosures – in court or dispute resolution. No more free rides on the 1874 express. The new express train requires banks to show their legal standing to foreclose – or they’re thrown off. That frightening prospect resulted in the sharp decline of foreclosure activity. By slowing down the rate of wrongful, fraudulent, and avoidable foreclosures, we’ve stopped a flood of inventory from dragging down home prices and keeping folks from going further underwater. I doubt Hawaii’s homeowners view this as a “negative.” In fact, that is a “negative” our Federal Reserve is trying to achieve. The prestigious Council of State Governments also recommended that states enact their own Act 48.

Simply asserting there are “negative effects on the housing market” without explaining what they are is an insult to readers. Ironically, the editorial was printed the same day Paul Brewbaker lectured the legislature on Hawaii’s economy. He spoke at length about Hawaii’s housing market, emphasizing that Oahu’s prices are slowly stabilizing and that neighbor island prices are tracking the market on the mainland. He didn’t mention any “negative effects” specifically created by Hawaii’s Act 48. There are more colossal market forces at play.

I have grown tired of arguments that rely on fabrications and baseless doomsday scenarios. We cannot ignore the rule of law because someone affected (a realtor, banker, mortgage broker?) claims it’s bad for business. Resolution to this crisis cannot rest solely on the simpleton’s question to troubled homeowners, “did you pay your mortgage?” We also need to be asking the banks, “did you cheat?”

Pay attention this legislative session. We’re going to apply what we’ve learned from Act 48′s shake-out – and do what is best for Hawaii’s people.

I’m glad to read Rep Herkes comment. He understands well that the banks have been negligent, abusive, and disrespectful to American homeowners and he’d like them to be held accountable. One thing I do not understand in his column though, Rep. Herkes implies 3rd party oversight in judicial foreclosures. Has MFDR process defined in Act 48 been applied to the judicial proceedings? Have the judges in all our counties attended any seminars or workshops from the nations foreclosure defense and fraud experts to learn what exactly to look for when the proceedings come their way?

The judicial system appears (I cannot be sure) to be moving slower than ever with an ever growing load of judicial proceedings. On my little island of Kauai, all 300 plus non-judicial proceedings were cancelled and all are slowly beginning again in the courts. Yes, we’ve slowed down the banks a lot, but I thought the law’s intention was to help Hawaiian homeowners stay in their homes for good. By placing leverage on the banks, the banks would need to be more reasonable with homeowners. I can testify that this is not and may not happen. This law is just buying a lot of time for homeowners and sometimes free time. Modifications have NOT gotten any better.

In fact, it’s well known that if the owner of the note has heavy insurance on the secured trust where the loan is setting, the loan will NOT be modified. It’s not in the financial interest of the noteholder to do so. Kudos to Rep Herkes and his peers for their efforts, but it’s going to take more than Act 48 to keep Hawaiian homeowners in their homes that have lost 30-50 per cent of their value since 2008.

And as far as the market is concerned, the Oahu market is very different from the neighbor islands. As long as there are a large amount of pending foreclosures and some shadow inventory (those homes already foreclosed on, but the banks are still reviewing if they did the process properly and have not released the properties for sale), the market won’t recover.

I’ve seen reports that we won’t return to 2006 prices til 2023. Yes, the market is at the bottom, and it’s probably a deep and wide trough that will be here for several years to come. Act 48 WILL NOT help our real estate market to recovery. That’s my 2 cents.