Act 48 – Will this Foreclosure Law Ruin the Hawaii Market?

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BY TRACY STICE, R, Broker In Charge, ABR, CRB, CRS, GRI, GREEN – Will Act 48, the Hawaii Foreclosure Law, ruin the Hawaii real estate market?

This is my 32nd year in Hawaii Real Estate and each year is very different. We certainly have a dynamic business. Waking up unemployed every day does have its benefits though, you learn to adjust very quickly, or you don’t eat. I like to eat as those of you who know me can tell.


On May 6th, 2011 Act 48 became law in Hawaii. I first blogged about Act 48 here, Act 48 – Hawaii Real Estate Values to Decline. In my earlier blog, I predicted that the courts would clog up with judicial foreclosures. That prediction is starting to happen a lot faster than I thought.

Fannie Mae announced June 10, 2011 that they will now only be doing judicial foreclosures in Hawaii. Read the Fannie Mae announcement here. Today, I attended a free educational seminar for real estate brokers on Maui presented by Title Guaranty Escrow that provided additional insight into the new law.

Hawaii has two types of foreclosures:

  1. Judicial
  2. Non-judicial

Lenders may choose either form to foreclose at their discretion. Non-judicial has two forms, part 1 or part 2. Up until now, a lender could choose either form. Part 1 is quick, gives poor notice to the party being foreclosed upon, and is the lowest cost and quickest option for lenders as it does not require a court or judicial process. Act 48 has put a moratorium on Part 1 foreclosures until July 1, 2012.

Non-judicial part 2 still does not require a court process, but lenders had not been using it because it required the borrower to sign a conveyance document back to the lender; Act 48 eliminated this requirement. Part 2, non-judicial foreclosures may still proceed.

Judicial foreclosures are held in court auctions and have a confirmation process to keep bidding open for 30 days after the auction. The key difference between the two types of foreclosures is that a deficiency judgment against the borrower is allowed under the judicial process, but is not allowed under the non-judicial process.

What is this going to do to the market?

Here is my prediction for the short term market over the next year:

  1. We will see an immediate and very large reduction of new REO (bank owned) real estate in the Hawaii market. Already, many listings have been removed from the Hawaii MLS inventory.
  2. We will see very few new REO listings come up for sale, unless they have gone through the judicial foreclosure process.
  3. The existing REO inventory will be scooped up by savvy buyers who want to buy at the bottom of the market.
  4. We will see a price escalation almost immediately as a result of the diminished supply of REO properties. Short term prices will jump across the board.

This model, Supply and Demand graph, illustrates this very simple economic principle. Less inventory with the same demand equals higher prices.

So, the question is, are we at the bottom of the market? My simple answer for the remainder of 2011 and first half of 2012 is yes. After that, a lot could happen. With a moratorium on all Part 1 non-judicial foreclosures until July 1, 2012, things will change.

What will happen for sure are some of the following:

  1. Banks will finally wake up to short sales; they will have no choice unless they want to sit on the properties for years to come. It will now become attractive to buyers to place short sale properties under contract as there will be hope that the lenders will now respond.
  2. Many delinquent owners will continue to occupy properties and not pay their mortgages.
  3. Foreclosure in Hawaii will be limited to either Part 2 non-judicial foreclosures, or to the judicial foreclosure process which could now take up to 5 years if Hawaii does not offer some expedited judicial process immediately, and that is very unlikely to happen with the current budget crisis in Hawaii.

For lenders, the options are extremely limited and they have been backed into a corner. Now that the courts will be backed up, will they begin to entertain short sales with a little more haste and enthusiasm?

An interesting side note to this whole article is that for the most part, almost all of the local Hawaii banks, Bank of Hawaii, First Hawaiian Bank, and American Savings, have been following the much slower, but more certain path of judicial foreclosure since the crisis began.

My son, Jeremy, and I have facilitated the sales of many REO properties for these local banks and we have not had one problem with obtaining title insurance, or loans for any of the properties we have sold over the past three years. We have also represented many buyers on REO/bank owned/foreclosed properties and we know what to look out for and how to get the job done.

If you want to buy Maui REO properties, or make an offer on a short sale and/or if you agree/disagree with my analysis, contact me today.

Tracy Stice, R(B) wrote this for He is with the Hawaii Life Real Estate Brokers. Reach him at