How is The New Hawaii Foreclosure Law Working So Far?

Opinion pieces, analyses and letters are intended to provide a diverse range of views from our community. They are not intended to represent the views of Maui Now.

By Lisa Teichner

Act 48, the Hawaii Mortgage Foreclosure Law became effective in May of this year and in less than 3 months, we are beginning to see some indication of the impact of this new law. At this point however, no one can say (or is willing to say) for certain how deeply Act 48 will impact our housing market and overall economic health down the road.

Maui has already been classified as the island which has suffered the most since the recent recession and is currently the only island which does not show upward motion in the existing single family homes sales graph. Home sales did seem to be “smoothly converging to the low to mid 400,000s,” according to Paul Brewbaker, of TZ Economics. But how will the new foreclosure laws ultimately affect what seemed to be a flattening of the housing market?

Many folks living on outer islands such as we Mauians do not realize that Oahu has hardly been affected by the recession and due to this, Hawaii has actually fared better than 46 of our United States. Their private sector jobs are increasing and monthly unemployment rates are decreasing.

What will continue to impact Hawaii is Act 48. Let’s look at how Act 48 affects the parties involved and what impact it appears to be having on:

Lenders/Banks/Mortgagees

Lenders have already begun preparing to mediate with Hawaii borrowers, in fact some folks have already been contacted to supply their “information packets.” We spoke to one couple who has already met with their lender, Bank of America, and received  a loan modification which significantly reduced their monthly payment. The official program, the Mortgage Foreclosure Dispute Resolution (MFDR) Program, which is being administered by the Department of Commerce and Consumer Affairs – Office of Administrative Hearings with assistance from the judiciary, must begin no later than October 1st. For more information about participating in this program, you may go this state government web page.

Because of the moratorium and a lender cannot foreclose non-judicially under part 1 of chapter 667 of the Hawaii Revised Statutes and the judicial process will continue to be a log jam, they may become more accommodating with short sales. Timelines may get shorter and processes streamlined. In fact, in addition to the Treasury’s Home Affordable Foreclosure Alternatives (HAFA) Program, Bank of America has created a Cooperative Short Sale Program for qualified non-owner occupants, which streamlines the short sale process and offers borrowers $2,500 upon successful closing.

Borrowers in Default

Considering that per Act 48 “there shall be a moratorium on all new nonjudicial foreclosure actions under part I of Chapter 667, Hawaii Revised Statutes for properties located in this state ” which will end on July 1, 2012, there have been no new nonjudicial foreclosures. However, there have also been no old non judicial foreclosures and no more auctions at or across from, the courthouse.

The new law changes the rules for lenders on non-judicial foreclosures so Fannie Mae, for example, has officially canceled all non-judicial foreclosures in the state and switched to judicial. Many other lenders have also followed suit. What this means is that the judicial system, which was already backed up as it was, is now looking at 3-5 years and soon likely 5-7 years before they can push properties to auction dates.

So what does that mean? Some attorneys say it means that some borrowers may live in their property, without making payments for up to seven years. We are beginning to hear stories that some homeowners who were not struggling may now be purposefully defaulting. Some renters may not be paying their landlords if they know the property is in foreclosure and more Hawaii landlords may have to deal with the eviction process. Hawaii mortgage delinquency rates had been subsiding as home prices were settling but we’re anxious to see what the future quarters will show. Currently Hawaii ranks number 18 on the delinquency rankings by state with the top three being Florida, Nevada and New Jersey. Delinquency rates from high to low, categorized by county would be Hawaii, Maui, Kauai and again faring much better, Honolulu.

The people of Hawaii and the legislature decided that something needed to be done to assist the many Hawaii homeowners in distress, many who were unable to receive any assistance or cooperation from their lenders.  Many are hopeful that the law will serve one of its intended purposes and in forcing lenders to literally sit down face-to-face and mediate with borrowers, providing them with their options, there will be a high number of successful loan modifications and many homes will be saved from foreclosure auction.

Buyers

We may be seeing no new inventory or purchasing options. New inventory, specifically Bank Owned/REO properties are rapidly drying up due to no auctions being held. So if you are a buyer waiting for the cork to come back out of the faucet, you may have to wait a long time. You may also be looking at bidding wars on the “good ones” that are left.

Condos and financing: If you would like to buy a condo and you need a loan to do it, you also may not be able to get what you want soon. There are already only a handful of complexes on the island that qualify for FHA loans and more and more each day that you can’t even get conventional financing for (10% down or more) due to Association delinquency rates.

Condo and Planned Community Associations

The Associations are taking a big hit in this one too. We already mentioned that delinquencies may continue to increase and many don’t understand how this affects a community, especially other owners who are members of that particular Association. For example, if there are 30 owners who are part of an Association of Apartment Owners/Condo Association and 3 owners stop paying, the association may be able to financially support themselves with reserves until the property is sold or foreclosed. However, if 10 (30%) or 15 owners (50%) default during the same period, the Association may be forced impose a special assessment and the other owners may have to cough up the extra dough to make up the delinquency. This may put a financial strain on the current owners and ultimately create more defaults. One can begin to see the domino effect this can create.

One recourse an Association has would be to foreclose on the delinquent owner, take over the property and rent it out to cover the payments until the lien holder forecloses. The only problem is that the Association currently must go through the same non-judicial process as the banks. Unfortunately, this issue was not anticipated or resolved as part of Act 48. The only assistance that the Condo Associations received was in regard to REOs where a new buyer may be liable to pay up to $7,200 towards back-owed maintenance fees. How will this impact our housing market and economic health? Time will tell.

At this point and often with new legislation, there are still more questions than answers. Your real estate attorney is an excellent resource for you if you have questions about your particular situation. Even if you are not in one of the above-mentioned categories, it is important to stay educated and keep your finger on the pulse of the progression and continued impact of this new law as ultimately, it does affect us all.

As mentioned in the previous article ‘What the New Mortgage Foreclosure Bill Means for Hawaii Homeowners,’ please keep in mind that this information is limited in terms of what is included in the new law and what may be applicable to our community. Due to the sheer length of the new law and because there is currently very little indication of how it works in practice, we will have to wait a bit longer before more attorneys will discuss it in a public forum. We were told that the Hawaii State Bar Association will meet to discuss the document further sometime this month.

In the meantime, if you have questions about how this information may affect your situation, you may wish to contact one of the attorneys listed below who specialize in real estate law on Maui:

Some Maui Real Estate attorneys:

Dave Jorgensen (Takitani, Agaran & Jorgensen), 808-242-4049   [email protected]

Michael Collins (Cain & Herren), 808-242-6139, [email protected]

Tom C. Leuteneker (Carlsmith, Ball LLP) 808-242-4535, [email protected]

James Fosbinder (Ivey, Fosbinder, Fosbinder, LLLC), 808-242-4956, [email protected]

Ryther Barbin (Law Offices of Ry Barbin), 808-242-9702, [email protected]

This article is for informational purposes only and is not legislation, evidence of legislative intent nor is it meant to be construed as legal advice. Please consult a licensed attorney for legal advice.

Lisa Teichner, author, is a Realtor Broker with Green Realty Group and may be reached at 808-870-1009, [email protected].