In mid-June, lender Fannie Mae made a decision that threw many in Hawaii for a loop.
The company, which operates in the secondary mortgage market, announced that it would convert all of its non-judicial foreclosures in Hawaii to judicial foreclosures, meaning homeowners facing financial troubles would face a judge rather than a mediator in resolving their loans.
The move generated criticism from lawmakers and advocates, who said Fannie was skirting the intent of what some have said is the nation’s strongest foreclosure law, just passed by the state Legislature.
Given the size of the company, the decision raised questions about whether a 100-page law had really taken into account how to address the foreclosure problem.
In fact, a spokesman for Fannie says it opted to go to court in response to the legislation.
The uproar over Fannie’s foreclosure decision started on June 14.
“Our announcement is consistent with Hawaii law and was made in response to recent Hawaii legislation,” the company said in an email to Civil Beat. “Currently, non-judicial foreclosures cannot be pursued in Hawaii. The judicial foreclosure process allows homeowners to raise any challenges to the foreclosure in court. Fannie Mae continues to encourage homeowners to reach out as early as possible to their servicers to pursue modifications and other foreclosure prevention solutions.”
Gov. Neil Abercrombie in May signed Act 48. Among other things, the law required lenders to meet face-to-face with homeowners in a neutral mediation meeting. It also required lenders prove they have the legal authority to foreclose on a home before being allowed to proceed.
Critics of Fannie’s move theorized that the lender was attempting to avoid the requirement to prove it had ownership of a foreclosure.
But Fannie has stuck by its assertion that it converted its foreclosures, at least in part, because “non-judicial foreclosures cannot be pursued in Hawaii.”
Act 48 placed a moratorium on all new non-judicial foreclosure actions until July 1, 2012, for foreclosures covered under Part 1 of the two-part state statute governing foreclosures.
What is less obvious in the statute is that there is also a de facto moratorium on non-judicial foreclosures covered under Part 2 of the foreclosure statute as well. While there is no specific language in the bill preventing Part 2 non-judicial foreclosures, the bill bans all non-judicial foreclosures until Oct. 1, when the Mortgage Foreclosure Dispute Resolution Program, or mediation, begins.
“New nonjudicial foreclosures are currently on hold until the Mortgage Foreclosure Dispute Resolution Program which will be administered by the DCCA begins,” Cathy Yasuda, spokesperson with the Department of Commerce and Consumer Affairs, wrote Civil Beat in an email. “Existing nonjudicial foreclosures may also be on hold depending on their status as of May 5, 2011 (which is the date that Act 48 was enacted).”
Essentially, Fannie had two courses of action post-legislation: 1) Wait until October and proceed with non-judicial foreclosures under the guidelines of Act 48; or 2) Convert its non-judicial foreclosures effective immediately under the guidelines of the courts.
Sen. Rosalyn Baker, who co-introduced the bill that became Act 48, says Fannie’s decision was rash.
“I think that Fannie didn’t really consider the full ramifications of undoing everything they had started, and converting everything over, when, from a timing perspective, and what it’s going to cost them, and what it potentially could cost homeowners out here, and it doesn’t really get them any closer to resolving foreclosures,” Baker told Civil Beat. “It doesn’t make sense from a timing perspective, from a money perspective.”
Yasuda indicated that if Fannie’s decision was time-based, the switch to judicial won’t help its cause.
“We are aware of certain comments stating that the length of time to pursue a nonjudicial foreclosure under Act 48 will approximately be the same as a judicial foreclosure,” Yasuda wrote. “We believe that the specific time frames mandated under Act 48 should allow a nonjudicial foreclosure to be completed significantly faster than a judicial foreclosure once the Mortgage Foreclosure Dispute Resolution program becomes operative.”
If other lenders follow in Fannie’s footsteps, and covert non-judicial foreclosures to judicial, it could swamp the resources of the judiciary. After the news of Fannie’s decision broke, the Star-Advertiser’s Andrew Gomes reported that state Circuit Courts handled about 10 percent of all foreclosures in Hawaii in 2010. If lenders convert all their foreclosures, a backlog looks inevitable.
Others have speculated that Fannie’s move was strictly a financial one. For example, a judge could order a deficiency judgment, which enables a lender to go after a borrower’s assets to make up the difference once a foreclosed home is sold. Deficiency judgments are not typical in non-judicial foreclosures. And while the judgments are not issued automatically for judicial foreclosures, the potential financial burden for someone who has defaulted on a mortgage could be be greater than had they gone through a non-judicial process.
Whatever its reason, it’s difficult to get Fannie to elaborate on the decision to convert. Last week, a scheduled conference call was canceled when the company learned a foreclosed homeowner would be on the line. Press being included on the call was also apparently a factor in Fannie not wanting to participate.
On Wednesday, lawmakers will hold an informational briefing on Act 48.
“Assuring fairness and transparency in the mortgage foreclosure process is very important for so many families here in Hawaii,” Baker said in a press release regarding the meeting. “We think Act 48, which was signed into law by the Governor on May 6 (sic), will help the situation for many of our homeowners. The foreclosure issues are complex. Our intent is to share with the public the status of implementation of the new law and clarify any ambiguities in Act 48.”
The meeting will be held in Conference Room 325 at the state Capitol, beginning at 1:00 p.m.