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Update on Hawaii's New Foreclosure Law, Act 48 – Judicial Foreclosures in Hawaii? Non-judicial is DEAD (For Now)

Well, it’s been around two months since Governor Abercrombie signed Senate Bill 651 into our states new foreclosure law, Act 48. The intention was clear – Protect Hawaii owner-occupants from the runaround, delay, and seemingly abusive tactics of the mainland lenders. Lenders like Bank of America, GMAC, Chase, Aurora Loan Servicing, and dozens of others who would tell a homeowner that their loan modification was almost completed and then go and foreclose on the same home, forcing a family out in the street.

On May 8th, merely three days after the enactment of the new foreclosure law, attorney Gary Dubin, a prominent Honolulu foreclosure defense attorney who makes his living filing injunctions on the banks and stopping foreclosures, emailed Honolulu Civil Beat, an online news source covering the state and government issues. Dubin wrote, “It (Act 48) is actually a cruel joke and virtually will not be used as lenders will now merely unanimously elect judicial foreclosures and bypass the new DCCA moratorium/mediation procedures if and when they ever get going.”

Then last month, we started to see the proverbial “writing on the wall.” Fannie Mae, one of our nation’s leading investors and holders of mortgages, announced they were canceling all non-judicial foreclosures that had not gone to sale and would be moving their foreclosure proceedings into the courts. Eighteen days later, on June 30th, Freddie Mac issued a similar servicing directive.

Included in the directive was the following language, “Effective immediately, due to recent changes in Hawaii State Law affecting non-judicial foreclosures, servicers must:

  • Commence all new Freddie Mac foreclosures in Hawaii as judicial foreclosures
  • Convert all non-judicial foreclosures to judicial foreclosures in Hawaii that have not proceeded to foreclosure sale

“In certain circumstances, Freddie Mac may be required to re-foreclose certain recent REO acquisitions that resulted from non-judicial foreclosures. Upon being notified, servicers must rescind the non-judicial foreclosure and recommence the action as a judicial foreclosure. In addition, due to the recent change in the foreclosure process, we are currently reviewing the maximum allowable attorney fee for Hawaii and will communicate any revision to such amount, if applicable, in a future bulletin.”

Let me give you a little background. Hawaii State Law provides for both a judicial and a non-judicial foreclosure process. A judicial foreclosure takes three to four times as long as a non-judicial foreclosure – ten to fourteen months and with a cost of $9,000-$10,000, versus three to four months and a $3,000-$4,000 cost for non judicial.

Hawaii also has two non-judicial foreclosure laws, found in “Part I” and “Part II” of Chapter 667, Hawaii Revised Statutes. Part I is an older law, dating back to the 1870’s; Part II dates only to 1998. Part I is a simpler process that lacks some of the notice and due process procedures found in Part II. Nevertheless, for the last decade or more, Part I was the preferred non-judicial procedure because it was quicker and less cumbersome. Moreover, as originally enacted, Part II had a fatal flaw – it required the person being foreclosed upon to actually sign the final foreclosure deed. Since the odds of that occurring were extremely remote in a typical foreclosure, no one used Part II for their non-judicial foreclosures.

Section 40 of Act 48 provides that no non-judicial foreclosures may be conducted under Part I of Chapter 667 until July 1, 2012. Essentially, this moratorium forces anyone – including a homeowners association – wishing to proceed with a non-judicial foreclosure to follow the more lengthy procedures required under Part II of chapter 667.

In other words, any lender or condominium association wishing to conduct a non-judicial foreclosure must follow Part II until July 1, 2012. Plus, the changes made to Part II will make it so cumbersome for the foreclosing lenders that the choice is simple. The benefits in time and cost of pursuing a non-judicial foreclosure were eliminated by Act 48, and it’s risky to boot for the lender. It’s exactly what Mr. Dubin, and many attorneys I spoke to here on Kauai, predicted.

Last week, I was invited to present at an informational briefing to the House Committee on Consumer Protection and Commerce at the State Capitol. The purpose, my invitation stated, was to update the committee on the impact and implementation of Act 48, and to identify and/or clarify any ambiguities in its provisions. At the end of the three-hour session, there didn’t seem to be many ambiguities. There have been a number of posts and articles on the subject which, if you are interested, you can link to here:

In essence, here is what has occurred. The State of Hawaii passed a law forcing the banks to stop what they are doing with their Part I non-judicial foreclosures. The state put a moratorium on non-judicial foreclosures and developed a process by which the banks would mediate with the homeowners. The banks, lenders, servicers, whatever you call them, responded by moving everything into the court system. Not much ambiguity there.

Everett Kaneshige from the DCCA spoke about setting up the mortgage ADR (alternate dispute resolution) process as defined in Act 48. The DCCA was allocated $1.8 million, the initial $400,000 to setup this dispute resolution program. The DCCA must identify and hire “neutrals” who will serve in this mediation process. Being a Realtor, who works with homeowners, helping with short sales, loan modification, and other ways to avoid foreclosure, I applied immediately. But, what if there is no dispute resolution? What will this time, money, and effort be for? If the law mandates the homeowners have an option for an ADR when a non-judicial foreclosure is filed, and there are no non-judicial filings, what’s the point?

Bob Nakata is a member of Faith Action for Community Equity and a gentleman who presented at the same meeting I attended. Bob is passionate about fighting for homeowner’s rights and he notes, “There was some difference of opinion at last week’s legislative briefing about whether Fannie’s conversion to all judicial foreclosures was a “business decision,” or if it was an attempt to circumvent the new non-judicial requirements because Fannie Mae (and now Freddie) are worried that they will not be able to prove legal standing to foreclosure, that too many of the mortgages they hold contain fraudulent or missing documents, or that Hawaii’s UDP (Unlawful and Deceptive Practices) laws will prove too strict for their casual record keeping.”

I was thinking along similar lines. One idea could be to have our Hawaii Chief Justice instruct our judges, that when the judicial foreclosure is filed, have the first order of the civil judge be the ordering a “mandatory mediation,” so that we can utilize the dispute resolution resources the DCCA is building for the ADR process. The banks and its representatives will have to show they have the proper paperwork to proceed with the foreclosure, put the onus on them.

Prior to this occurrence, we can utilize a portion of the DCCA budget to bring in national experts in forensic audits of mortgages who can really educate our judges and neutrals to the fine science of issues surrounding the scrutinizing information, the pooling and servicing agreements, FWP (free writing prospectus), the loan take, and all assignments and transfers.

Many of the errors made by lenders are down deep in the complexity of the trusts, CDOs, and other financial instruments. The State of Florida recently won a $2 million settlement against a foreclosure law firm who filed foreclosures improperly. $1 million was given to a non-profit to help homeowners fight foreclosure. If Hawaii wants to fight for our homeowners and call the banks to the mat, we’ll need to do something beyond Act 48 the way it currently stands.

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Randy Brummett, RA

July 8, 2011

Aloha, Ron.

Thanks again for bringing us the latest on Act 48.
I was wondering what Bob Nakata meant when he said ‘whether Fannie’s conversion to all judicial foreclosures was a “business decision,” or if it was an attempt to circumvent the new non-judicial requirements…’ Isn’t every decision a ‘business decision’ when it comes to how a business will operate? It seems that the non judicial process is under scrutiny now because of the massive amounts of foreclosures going on. The government is reacting to the cries of those who are in trouble (Those who, for whatever reason, can’t afford their homes anymore)and called an audible. Fannie and Freddie are just reacting.The Banking industry is an over regulated system. If they could operate more like a business and less like a government institution, I believe things would not be as messed up as they are right now.
But that’s just my opinion, I could be wrong.

Randy Brummett, RA

July 8, 2011

Aloha, Ron.

Thanks again for bringing us the latest on Act 48.
I was wondering what Bob Nakata meant when he said ‘whether Fannie’s conversion to all judicial foreclosures was a “business decision,” or if it was an attempt to circumvent the new non-judicial requirements…’ Isn’t every decision a ‘business decision’ when it comes to how a business will operate? It seems that the non judicial process is under scrutiny now because of the massive amounts of foreclosures going on. The government is reacting to the cries of those who are in trouble (Those who, for whatever reason, can’t afford their homes anymore)and called an audible. Fannie and Freddie are just reacting.The Banking industry is an over regulated system. If they could operate more like a business and less like a government institution, I believe things would not be as messed up as they are right now.
But that’s just my opinion, I could be wrong.

Ron Margolis

July 9, 2011

Yes, every decision is a business decision. My notion is that Bob was contemplating their motivation. Was it pro the judicial process or a reaction to the cumbersome nature of the newly modified non-judicial part II process. Either way, it’s Fannie Mae’s $$$ and they will do what is in their best interests regardless of their willingness to help a homeowner.

Ron Margolis

July 9, 2011

Yes, every decision is a business decision. My notion is that Bob was contemplating their motivation. Was it pro the judicial process or a reaction to the cumbersome nature of the newly modified non-judicial part II process. Either way, it’s Fannie Mae’s $$$ and they will do what is in their best interests regardless of their willingness to help a homeowner.

Michele McKinley

July 11, 2011

Aloha Ron,

Thanks so much for writing your blogs about the new law. Please do more it is very good reading. I have been Sharing your info with my clients and also Facebook, etc. Thanks again… Great JOB!!

Michele McKinley

July 11, 2011

Aloha Ron,

Thanks so much for writing your blogs about the new law. Please do more it is very good reading. I have been Sharing your info with my clients and also Facebook, etc. Thanks again… Great JOB!!

Aloha Tony

July 13, 2011

This bill should help keep a lot of Hawaii homeowners in their homes, and on that respect alone it is probably a good thing. But what will do more to secure the financial stability of local homeowners than anything else is simply an improvement in the global economy. Even the tsunami in Japan has slightly reduced Japanese tourism to Hawaii, which is not helping our economy.

Aloha Tony

July 13, 2011

This bill should help keep a lot of Hawaii homeowners in their homes, and on that respect alone it is probably a good thing. But what will do more to secure the financial stability of local homeowners than anything else is simply an improvement in the global economy. Even the tsunami in Japan has slightly reduced Japanese tourism to Hawaii, which is not helping our economy.

How Hawaii’s New Foreclosure Law Affects Short Sales « Hawaii Real Estate Market

July 19, 2011

[…] does this mean in a practical sense? My Hawaii Life colleagues Ron Margolis, RA and Tracy Stice, R (BIC) have written excellent articles on Act 48 and its consequences. What I can […]

How Hawaii’s New Foreclosure Law Affects Short Sales « Hawaii Real Estate Market

July 19, 2011

[…] does this mean in a practical sense? My Hawaii Life colleagues Ron Margolis, RA and Tracy Stice, R (BIC) have written excellent articles on Act 48 and its consequences. What I can […]

Tracy Stice

July 22, 2011

Ron,

Your point about bringing even the judicial foreclosures to the table prior to allowing a formal filing for judicial foreclosure is a good point. Why even allow the process to start if the foreclosing entity can’t show standing? What would be accomplished is that the lenders who really have their house in order will be first in line instead of just filing and plugging up the system even more.

Your blog is very well thought out and helpful to all.

Mahalo !

Tracy Stice

July 22, 2011

Ron,

Your point about bringing even the judicial foreclosures to the table prior to allowing a formal filing for judicial foreclosure is a good point. Why even allow the process to start if the foreclosing entity can’t show standing? What would be accomplished is that the lenders who really have their house in order will be first in line instead of just filing and plugging up the system even more.

Your blog is very well thought out and helpful to all.

Mahalo !

G

October 14, 2011

Thank you very much for your informative article. As a homeowner struggling to keep her home the prospect of foreclosure is very frightening. The banks have been very challenging to deal with, its all over the news… what i didnt realize is that the Home Owner Association is the real threat! They are the most difficult to work with, and seem to have incredible power to take a home! Unlike the banks they dont seem to have a need to find out reasons behind back pay or troubleshoot options even in this crazy economy! A regular owner cannot stand against their legal power or even keep up with rapidly increasing debt load when lawyers are used for customer service! It almost seems they use homes in their jurisdiction as a business and homeowners get caught up in the whirlpool struggling to swim. How is it anyway that the HOA which represents the owner can hire lawyers against the owner, and have the owner pay for it? So confusing..anyway thanks again for the helpful information

G

October 14, 2011

Thank you very much for your informative article. As a homeowner struggling to keep her home the prospect of foreclosure is very frightening. The banks have been very challenging to deal with, its all over the news… what i didnt realize is that the Home Owner Association is the real threat! They are the most difficult to work with, and seem to have incredible power to take a home! Unlike the banks they dont seem to have a need to find out reasons behind back pay or troubleshoot options even in this crazy economy! A regular owner cannot stand against their legal power or even keep up with rapidly increasing debt load when lawyers are used for customer service! It almost seems they use homes in their jurisdiction as a business and homeowners get caught up in the whirlpool struggling to swim. How is it anyway that the HOA which represents the owner can hire lawyers against the owner, and have the owner pay for it? So confusing..anyway thanks again for the helpful information

Carol Henry

July 4, 2012

What if a person actually would like to enter foreclosure because he/she is so upside down in their mortgage. At some point it may make absolutely no sense to continue paying,(poor investment) even though they have the income to do so. How is a foreclosure such as this being handled by the state and lenders?

Ron Margolis

July 5, 2012

Carol,
Depends on the lender. In Hawaii, which is a recourse state, there are many better options than allowing a bank to foreclose. The bank in a judicial foreclosure will pursue a deficiency judgement which is good for TEN years and can be renewed for another ten years. So why would a homeowner want a judgement for 20 yrs if they are underwater. A short sale is a better solution. Even if it means a borrower must bring some money to the closing, it may be better for the borrower. Looking at each scenario, a borrower must make a financial decision as to what is the most benign solution for them given all the ramifications. You can email me with the specific of your situation if you wish. Aloha

Allan Sharp

April 18, 2015

Looking for advise. Our AOAO has a few units that we have non-judicially foreclosed on. Does the board have the right to vote for those units when a vote of owners is required for any initiative? Thanks! Allan

Carol Henry

July 4, 2012

What if a person actually would like to enter foreclosure because he/she is so upside down in their mortgage. At some point it may make absolutely no sense to continue paying,(poor investment) even though they have the income to do so. How is a foreclosure such as this being handled by the state and lenders?

Ron Margolis

July 5, 2012

Carol,
Depends on the lender. In Hawaii, which is a recourse state, there are many better options than allowing a bank to foreclose. The bank in a judicial foreclosure will pursue a deficiency judgement which is good for TEN years and can be renewed for another ten years. So why would a homeowner want a judgement for 20 yrs if they are underwater. A short sale is a better solution. Even if it means a borrower must bring some money to the closing, it may be better for the borrower. Looking at each scenario, a borrower must make a financial decision as to what is the most benign solution for them given all the ramifications. You can email me with the specific of your situation if you wish. Aloha

Allan Sharp

April 18, 2015

Looking for advise. Our AOAO has a few units that we have non-judicially foreclosed on. Does the board have the right to vote for those units when a vote of owners is required for any initiative? Thanks! Allan

Kathleen Noonan

April 13, 2016

Foreclosure was completed on my Kauai home on 11/24/15. Imagine my shock when I received a 1099c in the mail recently which would drastically affect my income taxes for 2015! My questions are: what is the Hawaii statute of limitation for protecting an unpaid debt and if there is NO check mark in the 1099c box 5, (which reads : “If checked, the debtor was personally liable for repayment of the debt”) , does that Really mean what it says, is this something you are familiar with? Maholo for any information you can give me.

Kathleen Noonan

April 13, 2016

Foreclosure was completed on my Kauai home on 11/24/15. Imagine my shock when I received a 1099c in the mail recently which would drastically affect my income taxes for 2015! My questions are: what is the Hawaii statute of limitation for protecting an unpaid debt and if there is NO check mark in the 1099c box 5, (which reads : “If checked, the debtor was personally liable for repayment of the debt”) , does that Really mean what it says, is this something you are familiar with? Maholo for any information you can give me.

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