Foreclosures drop 74% under new state law

Hawaii home foreclosures remained depressed for a fourth consecutive month in September under a state law that created a freeze on many new out-of-court cases.

A report released Wednesday by real estate research firm RealtyTrac said there were 414 foreclosure filings statewide last month in Hawaii. That was about one-quarter the year-ago volume of 1,617 filings. Last month’s tally was up by one from 413 in August.

The artificial lull in foreclosures has catapulted Hawaii into a favorable position in a national ranking of foreclosure activity, but is masking what foreclosure attorneys say is a ballooning backlog of delinquent mortgages that will need to be resolved.

A de facto moratorium on initiating many nonjudicial foreclosure cases — out-of-court foreclosures that historically accounted for an estimated 90 percent of foreclosures in Hawaii — began May 5 with the enactment of the new law.

The moratorium ended Sept. 27 when the state allowed lenders to resume nonjudicial cases under a program that forces lenders to participate in a mediation program with qualified borrowers if borrowers so choose.

But as of Wednesday, no lender had filed a nonjudicial foreclosure case with the agency handling the program, the Department of Commerce and Consumer Affairs.

Local attorneys representing lenders have complained that punitive penalties allowed by the law for even the most minor infractions would prompt lenders to steer clear of using nonjudicial foreclosures in favor of the more expensive and time-consuming judicial process.

So far, lenders have not overwhelmed Hawaii’s judicial system with foreclosure cases, though the number of cases has dramatically increased.

Last month, the state Judiciary reported 335 new foreclosure cases, about triple the volume of 106 in the same month last year. Judicial cases have roughly been between 200 and 300 per month since June, up from closer to 100 in the same months last year.

Not all nonjudicial cases are being inhibited by the new law. Homes owned by investors, time shares and foreclosures initiated by homeowner associations aren’t subject to the mediation program and many other provisions. The mediation program is applicable to homeowners who have resided in their homes for a minimum 200 days.

RealtyTrac doesn’t appear to be counting all Hawaii judicial foreclosure cases in its report because of the way it collects its data. The company reported 233 default notices that typically represent the start of a foreclosure case. RealtyTrac also reported 40 auction notices and 141 properties that were repossessed by lenders last month.

Based on RealtyTrac’s count, Hawaii had the 32nd best rate of foreclosure filings last month based on one filing for every 1,245 homes. Total filings were down 74 percent from a year ago.

Nevada had the worst rate at one foreclosure filing per 118 homes. Vermont had the best rate based on one filing per 18,485 homes. The national rate was one filing per 605 homes.

Nationally, foreclosures have been down for a year largely because lenders were forced to review and revise the way they were processing cases and handling documents.

"U.S. foreclosure activity has been mired down since October of last year, when the robo-signing controversy sparked a flurry of investigations into lender foreclosure procedures and paperwork," James Saccacio, chief executive officer of RealtyTrac, said in a statement. Saccacio said it appears the downward trend is about to change direction, with foreclosure activity slowly beginning to ramp back up.

Foreclosures in Hawaii, however, could remain depressed. Some industry observers expect the Legislature will try to make the law more palatable to lenders. A task force representing the mortgage industry and consumers is expected to release recommendations to the Legislature on ways to improve the foreclosure problem by the end of the year.