Hawaii is the site of one of the nation’s first tests of strengthened foreclosure laws, and some say the Island State is proving that beefed-up laws designed to protect homeowners may only end up eroding stability in an already weak housing market.
Strengthened foreclosure laws in Hawaii may add to the eroding stability in the state’s already poor housing market.
The legislation, Act 48, was intended to address problems in the former foreclosure procedure, which some borrowers said was a too-rapid process that prevented them from being able to adequately fight for their homes, dispute weak documentation, or pursue loan modifications. The new law essentially revamps the state’s non-judicial foreclosure routine, putting in place a system that gets in-trouble borrowers into loan modification programs instead of foreclosure. Those loan modifications, under the auspices of the law, would be handled through a mediation program run by the state’s Department of Commerce and Consumer Affairs. Advocates of Act 48 say that it is successful at closing glaring loopholes in the non-judicial foreclosure path, which some felt were being fraudulently exploited, to the detriment of borrowers, by unscrupulous lenders and collectors.
Critics, however, say that the strength of Act 48 is overkill, and that it is harming homeowners through its souring effect upon the local housing market. Turned-off by stringencies in the new law, as well as the loss of certain loss-remuneration rights, a number of lenders are opting to forego the mediation process (which won’t go into operation until October of this year), and move straight into the judicial foreclosure process. The lack of a non-judicial foreclosure option amounts to a foreclosure moratorium in the state until October; the state saw a 66-percent drop in foreclosure filings in June.
After being signed into law in May, mortgage giant Fannie Mae had all of its lenders in the state steer clear of the non-judicial state-run mediation process and instead follow judicial foreclosure through the court system. Although exact numbers are unknown, just the Fannie Mae foreclosures are estimated to range in the thousands, dumping a glut of homes onto an already overworked system. Some officials are saying that it may take those courts more than a year to work through the inventory, nearly three-times longer than the estimated 4-5 months that the mediation process is expected to take.
Delays of this magnitude, of course, draw out an already painfully-slow recovery process. As the homes stall in lengthy foreclosure, they will continue to cast a shadow over local housing markets, which won’t clear until excess inventories are subsumed by consumer demand. And, until the consumer can get to these homes hanging in foreclosure limbo, the palling effect of these foreclosures bodes poorly for housing recovery in the island state.
Bryan is a member of New Homes Section and a proud contributor to its blogging network. 
You erroneously assume that the moratorium will delay the “recovery” in the Hawaii housing market. Not so. There was no recovery even before the moratorium. Many lenders has already decided to not dump all their REOs on the market because that would only drive prices down further, so they are sitting on a large undisclosed inventory. At the same time, lenders stopped lending in Hawaii (except in a few cases) because the average Hawaii resident cannot qulify for a loan that is repackaged for sale or sponsored by FreddieMac or Fannie Mae. Don’t let the greedsters tell you this moratorium made the market worse: It stabilized a market that was in a freefall. It’s a good law. Peter Klika, Esq., Kapaau, Hawaii