Bills aim to correct flaws in foreclosure law

A handful of bills dealing with home foreclosures in Hawaii have been introduced at the state Legislature this year, including one that would have the state pay off troubled mortgages, then rent or sell the homes back to occupants.

At least eight foreclosure-related bills were proposed this month, many of which seek to amend a law enacted last year that set up new rules for foreclosures but isn’t working as intended.

The law, Act 48, overhauled rules for nonjudicial, or out-of-court, foreclosures, which used to be how lenders handled the vast majority of foreclosures in Hawaii because it was quicker and cheaper than going through court.

Act 48 gave qualified owner-occupants an option to have a dispute resolution professional assist with foreclosure mitigation in front of a lender’s representative before a foreclosure sale can proceed.

The option was supposed to curb what consumer advocates said were lender abuses, and still allow foreclosures in cases where homeowners had no realistic prospect of maintaining their mortgage.

Lenders, however, balked at a penalty provision that could render a nonjudicial foreclosure sale void if they violated even the most trivial part of the law. So after Act 48 took effect in May, lenders have filed all foreclosures in court, creating a flood that threatens to bog down the judicial system.

Two bills would amend the penalty provisions in the law.

One, House Bill 1875, was drafted by a task force that submitted a report to the Legislature last month recommending numerous revisions to the law.

The task force suggests that the law specify about 20 violations that would constitute unfair or deceptive acts subject to invalidation of a foreclosure sale.

The other, House Bill 2018, proposes other changes to the unfair or deceptive acts language in the law.

Two other House bills — HB 1862 and HB 1863 — propose technical changes to parts of the law.

Three bills address foreclosure not directly related to Act 48.

House Bill 2033 would prohibit lender agents from repossessing a home unless it is abandoned for more than 30 days in nonjudicial foreclosure cases. The bill also would impose stiff penalties if lender agents breach a loan modification agreement or use knowingly false evidence in a home foreclosure proceeding.

House Bill 2019 would prohibit lenders from trying to have a borrower pay for the difference between what they owe on their mortgage and what a property sells for at a judicial foreclosure auction or a short sale before foreclosure.

Perhaps the most unorthodox bill is House Bill 2103, which would have the state become a sort of home mortgage lender by establishing the Bank of the State of Hawaii.

The bill proposes using state general funds to buy troubled mortgages at a discount, then sell the home back to its occupant for less than the occupant owed on the original mortgage but more than the state paid. If the occupant can’t afford repurchasing the home, the state bank could rent it to the occupant for fair market value.

To service mortgages, the state bank would contract with local financial institutions.

The bill doesn’t intend to compete with other lending institutions originating mortgages. Purchases by the state bank would involve only mortgages in default or with borrowers who were denied a loan modification under a federally sponsored loan modification program. Also, the homes would have to be the primary residence of a borrower. And the mortgage must be determined by the state to have a problem documenting the right of the mortgage holder to foreclose.

This last requirement deals with a difficulty some lenders have had showing documentation that they transferred rights to the mortgage to investors or other entities. Some foreclosure cases have been challenged in court on these grounds and prevented lenders from completing foreclosure.

HB 2103, introduced by six lawmakers including House Speaker Calvin Say, says it aims to reduce the number of "wrongful and fraudulent foreclosures conducted by trustees of securitized instruments that lack adequate legal standing to collect on certain mortgage loans."

A lender with a problematic mortgage could be offered as much as 75 percent of the balance due on the loan by the state as a purchase price under the bill. Any homes acquired by the state through such loan acquisitions would be offered for repurchase to occupants for up to 90 percent of the prior loan balance. If an occupant repurchases the property, they would be prohibited from reselling it for a period of time not yet specified in the bill, and share any appreciation gained from a sale later.