Updated 5/5/11 6:18 p.m.
Gov. Neil Abercrombie signed a bill into law Thursday that forces lenders to meet face-to-face with homeowners before foreclosing on a property.
“The credit for this today is, in fact, a reflection of what we try to be in Hawaii, which is good neighbors and good friends to one another,” Abercrombie said moments before signing the measure. “We want to try and avoid if we can, to put the consumer, the homeowner, in a position where they feel the entire institutional establishment is lined up against them. Quite the opposite… We’re trying to move from the consumer, up.”
Proponents say Hawaii will now have one of the nation’s toughest foreclosure laws.
“It is definitely one of the strongest laws in the country,” Kim Harman, policy director for Faith Action for Community Equity (FACE), an organization that pushed for the bill, said in an email. She said some experts consider it the strongest.
One of those experts is Martin Andelman, operator of the mortgage blog “Mandelman Matters”. Andelman has covered the mortgage foreclosure crisis extensively, writing over 400 articles on the issue.
“By far, this bill is the strongest in the country,” Andelman said. “It’s the strongest thing imaginable.”
The goal of the bill, which is based on a similar 2009 Nevada law, is to have lenders and homeowners come up with a compromise for a modified mortgage. Its strength lies in the details.
In short, SB 651 requires lenders to have at least one meeting, which can last up to three hours, with a homeowner in a setting mediated by a neutral third party before the lender can enforce a foreclosure. The meetings are important because, according to Harman and some lawmakers, mainland banks are the culprits behind an uptick in Hawaii foreclosures.
Update In addition to mediation, the bill places a moratorium on all “new non-judicial foreclosure actions,” until July 1, 2012, for foreclosures covered under Part 1 of the state statute governing foreclosures. (For residents who are currently in a foreclosure process, they would have to convert their non-judicial foreclosure to a judicial foreclosure, and then a judge would determine when a foreclosure could take place.) Homeowners dealing with foreclosure on a second home, however, will not be able to take advantage of the moratorium.
Harman cited a Maui woman’s case as evidence of what’s wrong with the current foreclosure process.
“There’s a woman, Marcy Coulton-Crilley, here in Maui, who has been trying to get a loan modification — a HAMP loan modification — from Bank of America for two years,” Harman told Civil Beat. “And at each point, where she really gets Bank of America’s attention and they start working with her on the loan modification, they either are not using the most current documents that she sent them, or what’s entered in the computer as far as her income, or what she owes on the property, is not correct… There’s a real disconnect between Marcy sitting at her house in Kihei, Maui, and the Bank of America folks that she’s talking to on the mainland.”
The mediation meetings will require Bank of America, or whatever lender is involved in the foreclosure, to actually sit down with Coulton-Crilley to discuss what happened, why it happened and whether or not a compromise could be worked out.
At the meetings, a homeowner will be required to provide documentation, such as pay stubs, receipts, proof that payments could be made if the loan were to be modified.
The lender must show evidence that it has the legal right to foreclose on the home. According to Harman, when the Nevada law was first enacted, almost a quarter of the families who were in foreclosure did not have lenders that could prove to the state’s standards that they had the legal authority to take back the property.
For the more than 5,000 Honolulu residents alone whose homes were foreclosed in 2010, the impact of the bill could be substantial.
“For the lender — and this is where our bill is unique — we think it’s the strongest requirement for proof of the chain of title in the country,” Harman said. “There have been a lot of problems with securitization and lenders actually trying to collect or enforce foreclosures on mortgages that they don’t actually own.”
Historically, Harman said, a bank would give a mortgage and hold it until maturity. “Now, we have families whose mortgage has been bought and sold eight or nine times,” she said.
Lenders tried to process too many mortgages, too quickly, using imprecise methods, according to Harman. Because of this, “there are definitely folks in Hawaii who are being foreclosed on by lenders and mortgage servicers that don’t have legal standing, or can’t prove their legal standing to pursue the foreclosure.”
Some lawmakers worry the bill will grow government and increase costs while the state is dealing with a billion-dollar-plus deficit.
“Somewhere, somehow, there’s going to be additional costs and those costs are going to find their way to somebody,” said Republican Sen. Sam Slom, who, along with Democratic Sen. Michelle Kidani, voted against the bill. “Most likely, all of the rest of us who are paying our mortgages.”
The bill requires both the lender and homeowner to pay a $250 filing fee before the mediation process, which is intended to help cover costs. But it’s not known how much lawyers will charge for the mediation.
Sen. David Ige, who co-introduced the bill, told Civil Beat it will ultimately be a cost-neutral program. Any money initially provided by the Legislature, he says, will be returned to the general fund after it becomes self-sustaining.
“There was a provision in the bill that allowed us to loan the program some money up front and have it restored to the general fund so there’s no general fund impact,” Ige said. “So I do think that those involved believe that it is a self-funding program and that the cost of it wouldn’t be too onerous.”
Ige conceded that “only time will tell” whether there is more financial burden on the state than expected.
Besides the money issue, Slom questioned the proposed moratorium, calling it an interference in the contractual process.
“I think it’s not fair to those people and those lenders that have played by the rules, played by the book, done what they’re supposed to have done,” Slom told Civil Beat. “If there’s any fraud or any information that’s not true that people relied on, that’s different… I’m not trying to give anybody a free pass, especially lenders that operate in that fashion.”
He said he is researching the possibility that the bill is unconstitutional. However, he said lenders should be doing more to sit down with clients to improve personal service, and that there are aspects of the bill he supports.
“The fact that we went from the state a decade ago with probably one of the lowest rate and number of foreclosures to one of the highest now, it’s a problem,” Slom said. “And it’s a serious problem in that the community has an interest in preserving property, property rights and property ownership. So you don’t want to bounce people out and you want to make sure that they have certain rights, they’ve been told of their rights, and maybe that has not always been true. So those are good things.”
Under the law, the mediation meetings must begin before October 1.
Below is the video of Abercrombie’s press conference before signing the bill into law.