An overhaul of the state’s 1-year-old foreclosure law is expected to pass the Legislature today.
Conference committees in the state House and Senate agreed Friday on major modifications to the law intended to protect Hawaii homeowners from largely unregulated foreclosures conducted out of court. A vote by the full House and Senate is scheduled for today.
The law, Act 48, unintentionally led lenders to file all Hawaii foreclosures in court, leaving unused a new mediation process that aimed to give homeowners a better chance at avoiding foreclosure.
“It’s a really good bill,” said Sen. Rosalyn Baker, chairwoman of the Senate Commerce and Consumer Protection Committee.
Most major modifications in the bill were recommended by a task force representing mortgage lenders and borrowers.
Other changes not recommended by the task force also made it into the bill, including a requirement that attorneys handling foreclosures attest that they know of nothing false in the documents they file on behalf of lenders.
The way foreclosure auction notices are published also has been broadened to include a state Department of Commerce and Consumer Affairs website and qualified weekly newspapers. Previously, such notices had to be filed in daily newspapers, including the Star-Advertiser, with the largest circulation in the same county as homes being auctioned.
After Act 48 was adopted in May, foreclosures dropped to around 400 per month, down from nearly 1,000. All foreclosures since May have been filed in court. Previously, the vast majority of Hawaii foreclosures were nonjudicial because the process was quicker and cheaper than going through court.
Act 48 was intended to protect homeowners and curb what consumer advocates said were lender abuses. At the same time, the mediation process was supposed to allow nonjudicial foreclosures to proceed in cases where homeowners had no realistic prospect of maintaining their mortgage.
Some observers consider the results of Act 48 good for consumers, saying more people are avoiding foreclosure even with a law that isn’t functioning as it was intended. The law was intended to guide lenders and homeowners into a mediation process prior to going to court, but that hasn’t happened.
Critics of the law say it has brought on an artificial slowdown in foreclosures that is drawing out a recovery in the local housing market as a backlog of delinquent loans balloons, creating a “shadow inventory” of homes that one day may spill into the foreclosure arena.
After the law is revised, it’s unclear whether lenders will embrace the changes and return to nonjudicial, or out-of-court, foreclosures.
Lender representatives on the task force wanted lawmakers to eliminate severe penalties provided for in Act 48. Such penalties include the potential to void a foreclosure sale, and were construed by lenders as being possible even upon making minor mistakes such as a typographical error.
HB 1875 specifies about a dozen situations in which severe violations, referred to as unfair or deceptive trade practices, would apply.
These situations include:
>> Failing to tell a borrower that mediation through the state’s dispute resolution program is available.
>> Continuing with foreclosure if a loan work-out is agreed to or a mortgage delinquency is cured.
>> Completing a nonjudicial foreclosure while a homeowner has been accepted or is being considered for a federal loan modification program.
The bill further specifies that a foreclosure sale can’t be voided for unsubstantial or nonmaterial violations. Voiding a foreclosure sale would also have to be approved in Circuit Court, under the proposed changes to the law.
Other changes under the bill would make permanent the mediation program administered by the Department of Commerce and Consumer Affairs, and an alternate option for homeowners to have a nonjudicial foreclosure transferred into court.
The way foreclosure and debt collection is handled by homeowner associations and planned community associations also was overhauled. One change to this area gives homeowners an opportunity to avoid foreclosure by associations if they pay delinquent association charges within 60 days after the start of foreclosure or if they submit and maintain a payment plan that lasts no more than 12 months unless more time is given.
The Rev. Bob Nakata, a representative of community advocacy group Faith Action for Community Equity who was involved in helping reform Hawaii’s foreclosure law last year, said he hopes the refinement prompts lenders to use the mediation service.
“We succeeded in plugging the (foreclosure deluge), but we didn’t succeed in helping the homeowners get a better deal,” he said. “I’m hoping we can do that. They need help.”
