Act 48: Hawaii’s foreclosure law is still an asset

HONOLULU—Foreclosures may have fallen off the front page, but for those facing the loss of their homes it’s still the leading story.

Things took a turn for the worse when a new law, which was supposed to help homeowners by mandating a face-to-face negotiation with their lenders to try to arrive at an equitable solution, was essentially nullified.

The new law was Act 48, which passed at the end of the 2011 Legislative Session. In mid-June, shortly after its passage, government lender Fannie Mae announced it would move to all judicial foreclosures by the last day of June. Freddie Mac then announced it, too, would do the same. Their decisions seemed to render the negotiation process established by Act 48 impotent.

One big question is why lawmakers didn’t see this coming. An even bigger question is what happens now for homeowners trying to avoid foreclosure.

As bleak as it may appear, and as frustrating as it is for those in any part of the renegotiating or foreclosure process, State officials say there is some flexibility.

Everett S. Kaneshige, deputy director for the Department of Commerce and Consumer Affairs (DCCA), cautions that the decisions by Freddie and Fannie are not static and shouldn’t be regarded as permanent. Kaneshige says both government lenders (and any others who may follow suit) are finding themselves in a reactionary position to an evolving circumstance. 

Currently the situation is this: We have a law calling for two things—a phase in the dispute resolution program handled by DCCA and a moratorium on nonjudicial foreclosures.

The translation is that there may only be one course of action if a lender wants to foreclose now; a judicial foreclosure. The downside for both lender and borrower is that the volume of cases will choke the judicial system, taking much more time, effort, and, likely, money.

Meanwhile, Kaneshige sees an opportunity. “If we are able to do the things that Act 48 asks us to do, set up a program that efficiently handles nonjudicial foreclosure, then I think you may see the switch flip the other way,” he says.

The wait-and-see attitude may be of small comfort to anyone trying to resolve a foreclosure. It also reflects a practical approach and the fact that DCCA has two missions to uphold—a situation that Kaneshige says might be construed as a conflict of interest.

Kaneshige explains: “We have the two constituencies. One of our missions is to protect the consumer and do all we can to make sure the consumer does get a fair opportunity, that laws are followed and that they are not taken advantage of. At the same time, we regulate financial institutions and part of our mandate to make sure the financial institutions, market, and climate remains healthy. Trying to balance those two missions is important.”

Here’s another part of the equation. Lenders have changed in recent years—we’re a long way from the friendly banker trying to make a deal that would benefit the financial institution and be long-term affordable to the borrower. Kim Harmon, policy director for Faith Action for Community Equity (FACE), believes that’s a big part of the problem.

“A lot of the foreclosures happening in Hawaii right now are being driven by companies that don’t have a great reputation and aren’t that well known,” Harmon says. “There are a lot of small mortgage servicers that are foreclosing on our families that seem like they are under the radar. FACE did a study a few months ago and found that some of the lenders and mortgage servicers leading foreclosures were places like Nationstar, Flagstar, and Aurora Loan Servicers; not the neighborhood bank or even the big banks that we know about and can follow in the news.”

Harmon has worked on state and banking lending reform for 12 years and says the surge of mortgage servicing companies was driven by the acceptance of lower lending standards, which subsequently forced big banks to decide whether they would compete. In the end, as accessible and easy as mortgages became, the net result was that lenders sunk to the lowest common denominator. Borrowers became disembodied, objectified means to a short-term financial gain, and easy to unhook from the traditional relationship—and responsibility—between borrower and lender.

Kaneshige says that the problem of remedying the disconnect between the two was the contribution of the DCCA to Act 48. In the mortgage dispute resolution program, their fundamental goal was to bring real people together as a mandatory step in continuing nonjudicial foreclosure.

Whatever the intent, and however optimistic he may be, the reality is that as long as Freddie and Fannie choose the courts over interpersonal negotiations, homeowners facing foreclosure are in for a long wait to find resolution.

Historically there have been far more nonjudicial foreclosures than the judicial variety. Federal housing agencies often required foreclosures to be filed as nonjudicial “except in very unusual circumstances,” Kaneshige says. “It was thought to be faster and more efficient for the lender, but not necessarily for the owner/occupant.”

Ryker Wada, Staff Attorney and Consumer Unit Supervisor for the Legal Aid Society of Hawaii (LASH), says that despite what happens, he is pleased that Hawaii produced Act 48. “It’s a good piece of consumer legislation,” Wada says. And it’s one he agrees is not rendered permanently moot by the Fannie-Freddie decisions.

Although LASH is Hawaii’s largest non-profit law firm, which primarily serves low-income and poverty level populations, Wada says the organization also helps anyone of any income level with foreclosure problems. LASH is also a U.S. Department of Housing and Urban Development (HUD) certified agency, working primarily in the areas of default, foreclosure, and predatory lending counseling.

“The number one thing people can do is find a HUD-certified housing counselor that provides quality advice at no cost to the family,” Harmon says. “We are very lucky to have some excellent not-for-profit organizations to provide that service. That’s the best way for people to get the best response from their bank and get the attention of their lender on the ‘mainland.’”

It’s important to remember that there may not be a straight line to capturing a lender’s attention. People have had to educate themselves and Harmon is adamant that has been one of the best consequences of the foreclosure mess. She is equally as adamant that there will be a next wave of dicey instruments that will appear too good to be true.

Wada, on the other hand, says consumer advocates have no idea how the current situation is going to play out. 

“The ‘your move’ is actually on the part of the servicers and the lenders to decide how they intend to proceed under Act 48,” Wada says. “If everything goes judicial, it’s going have an effect on the judicial system. If everything is moved to the nonjudicial foreclosure process, it will have an effect on dispute resolution, the department, and community action groups.”

The workload may shift from one foreclosure method to another, but it will not go away. The one thing everyone needs to do: Hunker down for the long haul. 

The full Town Square interview with Kim Harmon, Everett Kaneshige, and Ryker Wada is on the show’s archive at www.hawaiipublicradio.org.