UPDATED 6/20/11 10:30 a.m.

I told you so.

That’s what Hawaii foreclosure attorneys were probably thinking after the news broke that mortgage giant Fannie Mae said it was converting all of its non-judicial foreclosures into judicial foreclosures, essentially skirting Hawaii’s new foreclosure law.

Was SB 651 — what some called the nation’s strongest foreclosure law — overhyped?

At least one foreclosure attorney thinks so. Gary Dubin says that while lawmakers were well intentioned, he warned them the bill wouldn’t solve Hawaii’s foreclosure mess. Two days after Gov. Neil Abercrombie signed SB 651 into law, Dubin predicted Fannie’s move.

On May 8, Dubin emailed Civil Beat: “It is actually a cruel joke and virtually will not be used, as lenders will now merely unanimously elect judicial foreclosures and bypass the new DCCA moratorium/mediation procedures if and when they ever get going.”

Lawmakers touted SB 651 as a major accomplishment of the 2011 legislative session. The bill was hailed by supporters because it stipulated mandatory mediation between lenders and homeowners, as well as requiring lenders to prove the legal authority to foreclose on a home. The law had the potential to impact thousands of Hawaii residents.

Lawmakers anticipated some conversions, but not the volume that Fannie has promised.

“We contemplated that there would be some conversions,” Sen. Rosalyn Baker, who co-introduced the bill, wrote Civil Beat in an email. “But when you consider the amount of time that a judicial foreclose takes and the expense, it didn’t seem logical that there would be large (numbers) of conversions.”

According to Dubin, other lenders will soon follow suit.

“The minute this bill was signed by the governor, it was like a hurricane in the Pacific with a forecast that it was going to hit us in five or six days,” Dubin told Civil Beat. “It was as inevitable as a hurricane pointing right at us. There was no way the lenders would not get out of the system.”

Good Intentions, Bad Outcome?

Dubin is licensed to practice in Hawaii and California. His law firm has represented borrowers, not lenders, since 1972.

“I would say every foreclosure defense attorney and every foreclosure attorney in the state knew that the lenders would most likely switch to judicial,” Dubin told Civil Beat.

Foreclosures are incredibly complicated — the most complicated issue facing the country today, he said, and it’d be impossible for lawmakers to write legislation that could address all the moving parts.

Supporters of SB 651 believe Fannie made the decision to convert the foreclosures in order to avoid having to prove that it has the legal authority to foreclose. Kim Harmon, policy director for Faith Action for Community Equity (FACE), who pushed for the bill’s passage, told Civil Beat in May that lenders were processing too many mortgages too quickly, resulting in wrongful foreclosures.

But Dubin said Fannie isn’t trying to avoid the law — it’s about money.

“They’ll provide the same hocus pocus to the courts. And the courts actually will have more teeth in order to challenge them,” he said.

Dubin said the procedures of the new foreclosure law are cumbersome and costly. For example, he said the new law gives the borrower the right go through the mediation procedure even after the notice of foreclosure by power of sale is filed and after a public advertisement regarding the sale is issued in the newspaper.

“Then the lender will have to go and advertise again in the paper,” Dubin said. “Now these little teeny small print ads in the Star-Advertiser cost about $1,800. And now there’s no competition between the Advertiser and the Bulletin, because the Bulletin is gone, now they’re upping their rates. Plus the new law requires that the type be bigger. So, probably, the Advertiser will be charging about $5,000 to $7,000 for every foreclosure ad… So, in my view, it’s just a matter of cost.”

Additionally, Dubin told Civil Beat the judicial process has automatic deficiency judgments — which enable a lender to go after a borrower’s assets to make up the difference after a foreclosed home is sold.


However, Everett Kaneshige, deputy director of the Department of Commerce and Consumer Affairs, says that deficiency judgments are not necessarily automatic. In an email to Rep. Bob Herkes, which was forwarded to Civil Beat, Kaneshige wrote:

“As discussed during our meeting today, in order to obtain a deficiency judgement, a motion needs to be made to the court. The court will then evaluate the motion and supporting documents and then it may issue a deficiency judgment order. Since the court has discretionary authority whether to issue the order, it would not be correct to characterize deficiency judgments as being ‘automatic’ in judicial foreclosures.”

Opposition to the Bill

Harmon argues that because the Hawaii law is based off a near identical 2009 Nevada law — with the exception of the proof of authority to foreclose requirement — and that Fannie hasn’t switched its Nevada foreclosures to judicial, it’s evidence that Fannie is trying to specifically avoid the proof stipulation.

A Fannie representative wouldn’t comment to Civil Beat regarding the matter. Dubin said he is not familiar with the Nevada law.

Only two members in the Hawaii House of Representatives voted against the bill, Republicans Gil Riviere and Barbara Marumoto. Riviere tells Civil Beat he wasn’t surprised by Fannie’s move.

“I fully expected a reaction from the industry and I was not surprised to hear about Fannie Mae’s Hawaii new policy on foreclosures,” Riviere wrote in an email. “Likewise, I will not be surprised if more policy adjustments follow that make borrowing in Hawaii even more difficult than it already is.”

Riviere said the law will ultimately make lending more difficult, hindering borrowers and depressing home values.

Civil Beat asked Herkes, another co-introducer of SB 651, if it was an oversight on lawmaker’s part that Fannie, and possibly other lenders, would convert all of their foreclosures. Herkes replied:

“We had our hands full just trying to get protection for owner occupants under non-judicial as evidenced by the length of the bill. Otherwise, we have great confidence in our judiciary, as did the mortgage foreclosure task force in their recommendation to create a streamlined conversion process.”

He told Civil Beat legislators would consider amending the judicial process in the next legislative session. He added that judges could impose many of the same protections found in the bill.

How Bad is the Mortgage Problem?

Dubin says the mortgage problem is so bad, that it has the potential to literally destroy the country.

“At stake is the future of the United States of America,” Dubin said. “Because this is going to bring the whole country down, this foreclosure mess. The important thing is not to protect lenders. The important thing is not to protect borrowers. Really, the important thing is to protect the value of the damn property.”

Dubin believes that mortgage foreclosures could be handled more effectively if every county in the state had a foreclosure judge, specifically trained to handle foreclosure issues. Or, perhaps a foreclosure court, similar to the state drug court. He also said the state attorney general’s office could be used, to force lenders to get approval from the AG before being allowed to foreclose.

The reason that’s different from mediation is because the AG would have more power — subpoenaing witnesses, for example — rather than sitting down with a neutral third party to “hold hands,” as Dubin puts it.

While Dubin describes SB 651 as being essentially toothless, Sen. Baker believes the Fannie decision is just a bump in the road. She, Herkes and other lawmakers will seek support from Hawaii’s congressional leaders to try and address the problem.

“As with any new law, there are apt to be a few wrinkles along the way,” Baker wrote Civil Beat in an email. “If all the actors/stakeholders act in good faith, it can be a win-win. Unfortunately, some have chosen not to act in good faith.”