BY REP. ROBERT HERKES – I’d like to respond to Ron Margolis‘ article on Act 48, Hawaii’s new mortgage foreclosure law, published May 16, 2011. I was taken aback by Mr. Margolis’s bold statement: “I’m not sure if I agree with the state getting involved in the repair of a system that appears totally broken…” If it is not the state who should get involved in repairing a system that is totally broken, then who should?
Mr. Margolis, RA, also fails to clarify which system we’re repairing. If he means the system of mortgage lending that used adjustable rates and balloon payment riders, a system that required no income verification or no down-payment, a system that was riddled with fraud and deceit at origination – the system that led to the subprime mortgage debacle and financial collapse of the nation, then he may be surprised to learn that we’ve actually adhered to his advice in this legislation. Act 48 does not touch any of this.
What Act 48 does do is repair the state’s non-judicial foreclosure process. A foreclosure cannot happen without state laws that authorize it. Without state involvement, there would be no way a lender could recoup their investment. Act 48 removes potential for lender abuse of that process.
Mr. Margolis states in bold font that the new law “disallows the bank to pursue a deficiency judgment in a non-judicial foreclosure action.” It’s curious why this is bolded, because this is nothing new. Generally, title insurers didn’t underwrite non-judicial foreclosures that allowed for deficiency judgments.
Therefore, as a matter of practice, banks didn’t go after deficiencies because they wanted to get clear title. It’s just now clearly established in law. In fact, the prohibition against deficiency judgments was already codified in Hawaii’s alternate Part II non-judicial foreclosure process.
The mortgage foreclosure task force – with members representing interests from all stakeholders – recognized this and through consensus, recommended that this also be made clear in the Part I non-judicial process. However, the task force’s proposal tempered this by allowing deficiency judgments in cases where the borrower owns other real property. For Mr. Margolis to flag this amendment serves no purpose other than to generate a false sense of injustice to the banks.
Mr. Margolis also expresses concern that the banks will be more inclined to foreclose judicially, which subjects a homeowner to a potential deficiency judgment and responsibility for interest, penalties, and legal fees. This is certainly a possibility, but with the expected rise in judicial foreclosures, banks may wait longer for hearing dates and court dispositions.
If the banks are truly good at what they’re in the business of doing, which is making decisions about money, they may realize that it is too costly and time-consuming to hire the lawyers and file the additional lawsuits required to obtain and collect on a deficiency judgment – if in fact there is one. For those borrowers truly in trouble, filing for bankruptcy may also make that deficiency judgment go away. This result reflects a market correcting itself for a mortgage loan that shouldn’t have been made in the first place – whether it was because a borrower wasn’t qualified, the property was appraised in an overly inflated market, or both.
Mr. Margolis also doubts the efficacy of the mortgage foreclosure dispute resolution process and the hiring of its third party neutrals. To ensure the quality of neutrals, I invite him to apply. He may be pleasantly surprised at how tightly the program has been crafted to require that homeowners undergo financial counseling and submit all income documentation several weeks before dispute resolution discussion begins. If they fail to do so, then the non-judicial foreclosure can proceed.
Finally, Mr. Margolis, a realtor, predicts that the real estate market will suffer because of the slowdown in foreclosures. This may be true. But he is sorely misguided by projecting blame for any downturn on this legislation. The blame lies with the banks, whose negligence, fraud, and abysmal customer service created the need for government scrutiny.
It is the banks that made the risky loans that became the toxic assets that helped set our national economy into a tailspin. The resulting job loss led to more foreclosures. (And I would also like to note that many realtors were complicit in this fiasco by encouraging borrowers to buy homes they couldn’t afford.)
Act 48 may add more time to the foreclosure process, but this is small potatoes compared to the colossal market forces that created the mess we’re in.
Rep. Robert N. Herkes, D-Kona, represents District 5 on the island of Hawaii