BY RON MARGOLIS, RA, ABR – “New Law Flounders!” That was the headline in last week’s Honolulu Star Advertiser. Here’s the back story: When Senate Bill 651 was signed into Act 48 on May 5, 2011, Hawai‘i legislators thought they were taking a powerful and effective step in helping homeowners to deal with their banks.
The 101 page bill was intended to force lenders to make better efforts at negotiating loan modifications with borrowers through a mediation program overseen by the state’s Department of Commerce and Consumer Affairs (DCCA).
Act 48 reformed and redefined the foreclosure process in Hawaii. This law sets up a MFDR (Mortgage Foreclosure Dispute Resolution) mediation process that is now apart of the non-judicial foreclosure process. Here’s the problem: If the banks do not use the non-judicial foreclosure process, there is no mediation required.
So, if the bank does not pursue non-judicial foreclosure parts I or II (there are two styles of non-judicial foreclosure in Hawai‘i) what do the banks do? They file a judicial foreclosure. This is in the Kaua‘i civil court system. The local lenders have always pursued their foreclosure in the court system, so this is nothing new.
However, last week alone, 20 new cases were filed on Kaua‘i. What does this mean? The majority of these new judicial foreclosures are the result of the mainland foreclosing banks, cancelling their former non-judicial proceedings, only to start them over in our Kaua‘i courts.
The mainland lenders are now, post Act 48, simply choosing the safer (for them) judicial process. This is not necessarily good for the homeowners. Deficiency judgements are a key issue. No homeowner wants to lose their home and then have their assets pursued by the lender. Under Act 48, in a non-judicial foreclosure, the bank can no longer pursue a deficiency judgement.
However, in a judicial foreclosure the bank can and will most likely pursue the deficiency judgement. That means if the borrower owes $300,000 and their foreclosed home sells for $200,000, the bank will then file a deficiency judgement against the homeowner for $100,000. This judgement is good for ten years and can be renewed for another ten years.
When this bill was being discussed, Hawai‘i attorneys who participated on the state’s Mortgage Foreclosure Task Force warned legislators that this switch to all judicial foreclosures could be a repercussion of Act 48. Apparently, the legislators did not heed the warnings. Since May 5th, there has not been a single non-judicial foreclosure completed on Kaua‘i. All foreclosures are being restarted in the court system. This was not the intent of the law.
Are the banks bypassing Hawai‘i’s Act 48? Or did the legislators, in their rush to defend homeowners, pass a law that left the banks no choice but to protect their assets in a judicial proceeding?
If there were a way for the chief justice and the state’s judges to integrate the mediation process into the new judicial proceedings (a process the state has now spent hundreds of thousands of dollars on) perhaps homeowners would have a face-to-face opportunity to work out a solution with their lenders. Then, homeowners would have the respect that the state legislators intended them to have when dealing with their delinquent loans, underwater properties, and mainland banks.