Hawaii law seen as helping lenders, hurting consumers
POSTED: 1:30 a.m. HST, Jul 25, 2010
LAST UPDATED: 2:05 a.m. HST, Jul 25, 2010
The vast majority of residential foreclosures being conducted in Hawaii are proceeding under a state law that is more than a century old, provides no court oversight and is widely panned by consumer advocates for failing to adequately safeguard the rights of homeowners.
One expert who has analyzed foreclosure laws nationally says Hawaii's 1874 law is among the weakest in the country, partly because it allows a home to be sold relatively quickly without safeguards common in other states.
"It's one of the most lacking in protections of all the laws," said Geoff Walsh, staff attorney for the Massachusetts-based National Consumer Law Center, which last year published a study of state foreclosure laws. Walsh was co-author of the report.
Hawaii's 136-year-old statute allowing so-called non-judicial foreclosures is under increased scrutiny because it has become the predominant method of choice for lenders—mostly national—seeking to do forced sales as homeowners struggle in a sluggish economy.
A task force created by the Legislature this year is scheduled to meet for the first time Tuesday to begin evaluating whether changes are needed, especially in the non-judicial arena.
Many homeowners facing foreclosure have complained that they are being treated unfairly, including some who say they have received foreclosure notices even though they aren't behind on their mortgage payments. The non-judicial process, they add, leaves them at the mercy of their mainland lenders with no defense short of filing a costly lawsuit to try to stop a sale.
HOMES LOSTWhile no one keeps accurate data on non-judicial foreclosures, the sharp rise in foreclosures is reflected below in the number of judicial foreclosures (residential and commercial):
Source: Hawaii Judiciary
Although no data are available on how frequently non-judicial foreclosures are occurring in the islands, industry officials estimate that eight or nine of every 10 residential foreclosures are happening via the 1874 law. The others take place in the courts, with a judge overseeing the process.
No independent oversight occurs during the non-judicial process, which enables a lender to foreclose on a Hawaii home in as little as two and a half months. A court-supervised process generally takes about eight to 13 months to complete.
The problem with the non-judicial system, critics say, is that the 1874 law is too vague, allowing national lenders handling huge volumes of loans to pursue foreclosures.
Lender representatives and other industry executives defend the system, saying it provides homeowners with sufficient due process, costs less than the court-supervised route and helps borrowers wanting to quickly get out from unaffordable financial quagmires.
"There are some situations when a quicker process benefits all parties," said foreclosure attorney Marvin S.C. Dang, who represents lenders.
Auctions can be postponed if red flags arise, and lenders would rather work out a resolution than force a sale, industry officials say.
They also note that the cases with problems represent only a tiny percentage of the total number of foreclosures.
"For the most part, the concept of non-judicial foreclosures is itself not a problem," Dang said. "If things need to be fixed, we can fix the way the process works as opposed to getting rid of the process—because it does work."
Don't tell that to Arnida Gaspar.
The Waikele resident said she and her husband, Laureto, were shocked when they received a loan-default notice, then a foreclosure notice in January from their lender, Bank of America. They were surprised, Gaspar said, because the couple had not missed any payments on their townhouse. The notice said the property was to be sold at a non-judicial auction in March.
When the Gaspars called to clear up the problem, they were told by the bank that they could apply for a loan modification, that their home would not be sold in the meantime and that they shouldn't worry, according to court papers filed in a lawsuit by the couple's attorney, Gary Dubin.
Yet their home was sold at auction April 22 for $184,000—25 percent less than what it was assessed by the city, the documents show. The Gaspars still are in the home.
But Arnida Gaspar, 56, a food services worker at a Waipahu elementary school, is worried about losing the residence she and her husband have owned since 1991. "I can no longer eat," she said. "I have no appetite."
Lanai homeowner Stephen Cheikes, also a BofA customer, can sympathize with Gaspar.
Cheikes, an attorney, said he found a foreclosure notice posted on his property even though he had worked out a permanent loan modification agreement with the bank last year and was current with his payments.
He said he has been trying unsuccessfully since December to straighten out what several bank representatives admitted to him was an error on BofA's part. A recent notice from the bank indicated that his home would be sold at auction Aug. 9.
"It's absolutely ridiculous," Cheikes said. "It's been a nightmare trying to undo the bank's mistake."
Jumana Bauwens, a BofA spokeswoman, said, "We're going to reach out to both customers to see what their concerns are and see what we can do to try to keep them in their homes if that's possible."
She declined further comment, citing the pending litigation in the Gaspar case and that the bank is doing more research on the Cheikes case.
Recognizing problems with the 1874 law, the state Legislature in 1998 passed a bill establishing an alternative process for non-judicial foreclosures. The new process, which took effect in 1999, had more stringent requirements to address concerns about due process and the vagueness of the 1874 system.
But several provisions that lenders consider unworkable were added to the 1998 legislation, effectively undermining the effort to improve non-judicial foreclosures. The result: No lender uses the alternative process.
Before the late 1990s, almost all home foreclosures in Hawaii were done through the court system. That changed when title companies, which previously were reluctant to issue title insurance in non-judicial cases, worked with lenders to implement homeowner-protection measures not specifically required by the 1874 law.
The lenders, for instance, agreed to have the foreclosure notices personally served on the borrower or delivered via certified mail, with signatures required to prove receipt. Lenders also agreed to give up the right to pursue deficiency judgments against a borrower even if the foreclosure proceeds didn't satisfy the outstanding mortgage debt.
In exchange for agreeing to such conditions, some of which were incorporated into the 1998 legislation, the lenders were able to use the fast-track process pegged to the 1874 law.
But even some of those safeguards are falling by the wayside today because mainland lenders are able to find title companies that no longer impose the conditions, industry officials say.
Big Island consumer attorney George Zweibel said the non-judicial process is so defective that homeowners have even fewer rights than renters in Hawaii.
When a landlord wants to take back an apartment from a tenant, the landlord has to go to court and get a judge to approve the request, based on an evaluation of the evidence. Not so with non-judicial foreclosures, Zweibel said.
"This process allows lenders to take people's homes in a fast way without giving them an opportunity to be heard," he said. "In many cases, the homeowners have done nothing wrong."
Hawaii is one of 30 states that permit non-judicial foreclosures, according to Walsh, the consumer law center attorney.
Although the center's study panned the non-judicial system overall for depriving homeowners of basic protections, Walsh said Hawaii's 1874 law is particularly lacking. Once the foreclosure process starts, for instance, the Hawaii homeowner does not have the right to cure the default, something common in other states, Walsh said.
"It makes it really difficult to stop the foreclosure sale while (the process) is going on," he said.
To be sure, many homeowners lose their homes because they bought residences they clearly couldn't afford or accumulated way too much debt from overspending. But others struggle to pay their mortgages because of job losses, major illness, predatory lending or other financial hardships generally outside their control.
Dubin, who represents the Gaspars, said unwarranted foreclosures are depressing Hawaii property values, affecting all homeowners, not just those struggling to make loan payments.
"It's a financial disaster, and it's also creating an enormous amount of emotional distress," he said.
Given the far-reaching effects of the foreclosure problem, Dubin is seeking to have the Gaspar case certified as a class-action lawsuit on behalf of those who have lost their homes through the non-judicial process since 2006 or those currently in foreclosure.
"We've got to do something," Dubin said. "This situation has gotten completely out of control."