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:
- Washington Examiner picks up AP report on Hawaii’s laws
- Bankruptcies declining in Hawaii but Act 48 may change that
- Foreclosure Overhaul leads to Hawaii housing glut – Yahoo Finance
- Hawaii Public Radio producer Beth-Ann Kozlovich’s erudite perspective and radio interview
- Bob Nakata from FACE shares his perspective from the community side
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.