Fannie Mae To Cancel Any Pending Nonjudicial Hawaii Foreclosures and Restart Them in Court

Foreclosures might swamp isle courts

Fannie Mae eschews a quicker, nonjudicial process in response to a new Hawaii law

By Andrew Gomes
Article from: Star-Advertiser

One of the nation’s biggest owners of home mortgages has made a move that could add to an already overburdened Hawaii court system’s caseload.

Fannie Mae, a publicly owned company created and overseen by the federal government, recently instructed companies that handle foreclosures for its loans to file all new Hawaii foreclosures in court.

Fannie Mae also told the firms known as loan servicers to cancel any pending nonjudicial Hawaii foreclosures and restart them in court.

Fannie Mae took the steps in response to Hawaii’s new foreclosure law enacted last month. Critics are concerned Fannie Mae might be attempting to sidestep the main intent of the law, which was to engage mediators to help homeowners avoid foreclosure.

The vast majority of residential foreclosures in Hawaii in recent years have been conducted out of court through a nonjudicial process because it was quicker and cheaper than going through court.

The law was changed in part because the nonjudicial foreclosures left borrowers with little opportunity to contest repossessions even in cases where they believed a lender was improperly taking their home.

The new law, Act 48, gives qualified owner-occupants of Hawaii homes the option of having a dispute resolution professional assist with foreclosure mitigation in front of a lender representative before a foreclosure sale can proceed.

Fannie Mae’s directive, issued Friday, drew criticism from a local homeowner advocacy group that lobbied for Hawaii’s new law.

The Rev. Bob Nakata, a member of Faith Action for Community Equity, said Fannie Mae is attempting to bypass the new law. “Just two days ago, 25 churches got together from two islands and celebrated our new foreclosure mediation law, and now Fannie Mae is trying to outmaneuver us,” he said. “It stinks. Our government-sponsored enterprises are supposed to help us, not take away everything we have fought for.”

Some supporters of Hawaii’s new law fear the move by Fannie Mae, which buys U.S. single-family home loans from loan originators, could spur similar moves by giant banks and other big holders of Hawaii home mortgages, shunting aside the revamped nonjudicial foreclosure law and overwhelming the state court system.

Fannie Mae declined to say whether it established its new policy to avoid nonjudicial foreclosures in Hawaii under the new law or whether the policy is only temporary until it’s possible to file new nonjudicial foreclosures.

The new law resulted in a de facto moratorium on nonjudicial foreclosures because the state Department of Commerce and Consumer Affairs won’t accept any new nonjudicial foreclosure filings until the mediation program is running. The law also prohibits any nonjudicial foreclosure auctions until borrowers have an opportunity to participate in the program.

The program is expected to be running by Oct. 1.

Fannie Mae spokeswoman Amy Bonitatibus said policies are regularly reviewed and adjusted as needed.

“Our announcement is consistent with Hawaii law and was made in response to recent Hawaii legislation,” she said. “Currently, nonjudicial foreclosures cannot be pursued in Hawaii. There is not currently an end date listed in the announcement we issued, but again, we regularly make updates and changes to reflect the current law and foreclosure processes in a state.”

Kim Harman, Hawaii policy director for Faith Action for Community Equity, questioned whether Fannie Mae is trying to avoid requirements for documenting original and amended mortgage agreements and promissory notes under the new law.

Harman said the documentation requirement is the only substantial difference between Hawaii’s law and a Nevada foreclosure mitigation law upon which Hawaii’s law was modeled. Fannie Mae hasn’t banned nonjudicial foreclosures in Nevada.

State Rep. Bob Herkes, who along with Sen. Rosalyn Baker was a chief architect of the law, said Fannie Mae would be misguided if it intends to avoid better documentation by running foreclosures through Hawaii courts.

Herkes intends to ask the Judiciary to hold mortgage holders to the same documentation standards contained in the nonjudicial foreclosure law.

Some Hawaii foreclosure industry attorneys had warned that lenders might flock to judicial foreclosures, in part because lenders can pursue borrowers for any difference between what a borrower owes and proceeds from selling a foreclosed home. This difference, referred to as a deficiency judgment, could help offset higher expenses of judicial foreclosure.

However, others believe the extra time and expense of judicial foreclosure, especially if Hawaii courts get bogged down, still make judicial foreclosure less attractive than the revamped nonjudicial foreclosure process.

While Fannie Mae seeks to proceed with Hawaii foreclosures in court, it is also offering financial incentives for loan servicers to avoid foreclosure and was instructed by the Federal Housing Finance Agency in April to not start a foreclosure if a borrower and servicer are engaged in a good-faith effort to resolve a mortgage delinquency.

So far, there has not been a huge increase in judicial foreclosures in Hawaii, considering that the new law went into effect May 5.

For all of May, there were 141 judicial foreclosure cases, up from 119 in May 2010, according to Judiciary figures. Nearly all of the increase occurred on the Big Island.

For all of last year, state Circuit Courts handled 1,331 foreclosure cases. That figure is estimated to be around 10 percent of all Hawaii foreclosures.

The Judiciary, in testimony on Senate Bill 651 that became the foreclosure mitigation law, expressed concern that any big increase in judicial foreclosures could dramatically delay cases unless new judges and staff are hired.

According to real estate research firm RealtyTrac, close to 500 new foreclosure cases a month were filed on average this year through April.

The Judiciary estimated it would cost about $4.3 million a year for additional personnel to handle such an increase.