BY EDDIE KIM – A panel of experts compiled from the mortgage industry, banking and realtor’s associations, community outreach organizations, the judiciary and others testified on Wednesday before key Hawaii legislators behind Act 48 – a recent mortgage foreclosure reform bill – in an attempt to clarify issues surrounding the bill.
The session revealed deep concerns regarding the application of the new law, how lenders will cope with the act’s provisions and if it will, in fact, help Hawaii borrowers to fairly attempt to keep their homes.
The briefing came shortly after recent news of national mortgage giant Fannie Mae’s decision to immediately change it’s non-judiciary foreclosures in Hawaii to judiciary ones, possibly circumventing the new law’s key requirements in the process.
Act 48 was signed into law by Gov. Neil Abercrombie in May of this year in an attempt to stem the state’s increasingly high number of mortgage foreclosures and to ensure that borrowers had a fair chance to communicate with lenders and attempt to keep their homes.
The bill essentially requires lenders to meet face-to-face with borrowers via a neutral third party, to assure that compromising on a loan – instead of simply foreclosing – is a primary option.
Act 48 also forces lenders to actually show proof that they have the legal right to foreclose on a home – something that consumer advocates claimed was skirted in certain non-judicial foreclosure processes.
Kirk Caldwell, a former mayor of Honolulu and current private-practice attorney, stated that this left the foreclosure process with “real opportunities for abuse”.
“Lenders – all lenders, both mainland and the local ones that I’ve represented – saw a faster way to do a foreclosure. Quickly, more and more people started doing these non-judicials,” Caldwell said.
Caldwell continued to say that this non-judicial process gives lenders most of the influence in the foreclosure proceedings.
“They’re the ones who choose to foreclose, they’re the ones that hold the auction, they’re the ones who sign the deed to transfer title,” he said.
The main process in question is “Part 1”, one of two non-judicial foreclosure forms in Hawaii, which is noted for its speed, low cost and relative convenience for lenders. Critics claimed it allowed lenders to get away with giving borrowers poor notice of the foreclosure while discouraging compromise.
The “Part 1” process is contrasted with “Part 2”, a second non-judicial process that has more consumer protections in place, as well as judicial foreclosures, in which a state hearing is held where the borrower can state their case for continuing a loan.
Act 48 places a moratorium on all new “Part 1” non-judicial foreclosures until July 1, 2012 with the hopes of keeping Hawaii homeowners in threat of foreclosures from quickly losing their homes.
Kim Harmon, the policy director of Faith Action for Community Equity, told lawmakers that the law will help increase lender accountability.
“Act 48 closes the non-judicial loopholes that offshore lenders were exploiting to bypass giving borrowers a chance to explain their circumstances,” Harmon said.
There are also questions surrounding Fannie Mae’s decision to immediately switch all its Hawaii foreclosures to judicial ones, which some believe was done in an attempt to avoid neutral-party mediation and other elements of Act 48 rather than to benefit borrowers in any way. A serious concern is that if other lenders follow in Fannie’s footsteps, the courts will not be able to handle all the foreclosure cases.
Rodney Maile, administrative director of the judiciary, testified that the courts “will not have the resources” if judicial foreclosures continue to increase into the long-term.
“Presently, I believe we get about 1,300 cases a year. If that were to double, you would see an increase in the backlog and the processing time it would take,” Maile said.
Some, however, believe that Fannie’s decision is not simple resistance to the law but rather a symptom of Act 48’s being unclear and too hazardous when it comes to potential consequences for lenders. In particular, the Unfair Practices provision of Chapter 667 in Act 48 – which threatens lenders with class action lawsuits if the foreclosure process isn’t strictly by the standards of the new law – was called out as a minefield for lenders trying to figure the bill out.
“Everyone’s standing back, trying to figure out what to do,” Caldwell said. “Why did Fannie Mae decide to take everything to the judiciary? Perhaps because it’s less risk than non-judicial negotiations.”
Gary Fujitani, executive director of the Hawaii Bankers Association, agreed with Caldwell’s sentiments, stating that some provisions of the bill created “big negatives from a business-risk perspective”.
Fujitani reinforced, however, that the main culprits for foreclosure trouble were not local banks.
“The real impact of this bill…will be determined by out-of-state lenders, who have the lion’s share of foreclosures in Hawaii,” he said.
Both Sen. Roslyn Baker, D-Maui, and Rep. Robert Herkes, D-Big Island, leading legislators behind Act 48, agreed that the act needs work.
“Any complex bill of 100 pages will have areas needing improvement and effort,” Herkes said.
The Mortgage Foreclosure Task Force, which was formed in 2010, will be responsible for looking over several aspects of the bill and plans to release a report by November of this year.
And while there were disagreements, all those who testified at the hearing seemed to agree that something needed to be done about foreclosures in Hawaii.
“Until we deal with this issue, we’re definitely not going to get a full economic recovery,” Caldwell said.