An increasing number of Hawaii attorneys representing mortgage lenders are saying that a new state law intended to help homeowners avoid foreclosure has too many flaws and will go unused.
Three attorneys speaking at a Hawaii State Bar Association meeting Tuesday said a chief reason they will avoid the law is excessive liability for violating vague or even minor provisions of the law enacted in May.
Potential consequences for making a mistake in following the new law were cited by attorneys Frank Hogan, Gary Okuda and David Rosen. The lawyers envision filing foreclosure cases in state court instead of what had historically been an easier and faster nonjudicial process that was overhauled by the law known as Act 48.
"Nobody in their right mind is going to use Act 48," Okuda said.
Predictions that lenders would avoid the new law — which gives owner-occupant homeowners the option of having a mediator help with a loan modification plan — aren’t new.
But the chorus has grown. Several other attorneys at the conference said they believe Act 48 will be avoided en masse. Fannie Mae and Freddie Mac, government-sponsored owners of many home mortgages, directed servicers of Hawaii home loans to proceed with foreclosures in court. Gary Dubin, a local attorney representing borrowers, has criticized the law as unworkable.
No one knows how many lenders will shun the new law when pursuing a foreclosure.
Prior to the new law, the vast majority of residential foreclosure cases were handled nonjudicially. But the new law prohibits any nonjudicial foreclosures until the dispute resolution program is running, which is expected on or before Oct. 1.
Keali‘i Lopez, director of the state Department of Commerce and Consumer Affairs, which is setting up the dispute resolution program, was the keynote speaker at Tuesday’s Bar Association meeting. She expressed doubt that the new nonjudicial foreclosure law will go unused.
"I believe level heads will prevail," she said.
Lopez acknowledged that the law isn’t perfect, and that hopefully the Legislature can tweak the law next year to make it better. But she also suggested some concerns being raised are scare tactics.
The liability issue raised by the panel of attorneys involves a broad definition in Act 48 that makes it an unfair or deceptive act to violate any part of the law.
Everett Kaneshige, DCCA deputy director, said the intent of the deceptive-act language was to punish uncooperative lenders.
Panel participants said unintended violations — perhaps missing a filing deadline because of a computer server crash or making a mistake in a foreclosure notice published in a newspaper — could be used by borrower attorneys to invalidate a mortgage debt. That would wipe out what the borrower owes the lender on the home.
Hogan, who represents Hawaii credit unions, said they can’t afford the risk of an unfair-act violation. "They’re going to go judicial," he said.
Okuda said ambiguities and severe penalties in Act 48 probably open lawyers to malpractice claims if they advise lenders to use the nonjudicial foreclosure process.
Rosen said he’s advised his clients that he won’t file nonjudicial foreclosures. "There’s too much liability for me," he said.
Rosen said he typically gets 50 to 100 nonjudicial referral cases from lenders every month, and predicted that 250 to 500 foreclosure cases will be dumped on an already overburdened state court system that could take up to two years to process a foreclosure case.
Lopez of the DCCA said she doubts lenders will choose to have delinquent loans stuck in court for two years or maybe longer.
Other observers have noted that one benefit of handling foreclosures in court is obtaining a judgment against a borrower for the difference between what a borrower owes and what a lender can obtain selling the home. However, others expect few so-called deficiency judgments will be collected from financially struggling borrowers, who will be encouraged to file bankruptcy to expunge such a post-foreclosure debt.