If mainland mortgage lenders follow Fannie Mae’s footsteps — opting to send foreclosures through the judicial system — officials say it could overwhelm Hawaii’s courts.

“We are experiencing right now an increase (in judicial foreclosures),” Rodney Maile, administrative director of the courts, told lawmakers at a Wednesday information briefing on recent foreclosure legislation. “If that continues in the long run, we will not have the resources.”

Maile said in order to handle the heavier volume, the judiciary would need to ask the Legislature for more money.

On June 15, lending giant Fannie Mae announced that it would convert all its new and pending non-judicial foreclosures in Hawaii to judicial foreclosures. Fannie has said it made the move in response to Act 48, a new law that placed a temporary moratorium on non-judicial foreclosures in Hawaii.

Last year, the courts handled about 10 percent of state’s foreclosures. But some mortgage experts say 2011 will be a different story.

“From the real estate side, one of the concerns about Act 48, is it going to help us move the properties through (the foreclosure process), or is it going to delay things?” asked Ron Margolis, described in a Senate press release announcing the informational briefing as “one of the isle’s best known foreclosure experts”.

“I believe that Fannie Mae is just the beginning of what we’re going to see,” Margolis said. “That this is all going to go into our court system.”

Expect a Flood

Lawmakers leading the briefing included Sen. Rosalyn Baker and Rep. Bob Herkes, both co-introducers of the bill that became Act 48.

“I think this is one of the major pieces of legislation that the Legislature enacted this year,” Baker said in her opening remarks. “As with everything, we really need to see how it plays out and whether it achieves our objectives, or whether we need to make some tweaks.”

Former Honolulu Mayor Kirk Caldwell, now an attorney in private practice, voiced concerns about the law from the standpoint of lenders, which his firm has as clients.

Caldwell said banks are likely backing away from the non-judicial process for fear of being sued. He echoed others comments in predicting that national and local lenders alike will turn to judicial foreclosures.

“This (law) is very process-driven,” he said. “If you don’t follow it exactly, you can get sued.”

Act 48 states: “Any foreclosing mortgagee who violates this chapter shall have committed an unfair or deceptive act or practice.”

Caldwell said the offense typically results in class action lawsuits and so-called “treble damages” would apply — meaning the court can triple the amount of the damages to be awarded.

He also noted that the judicial process could work to borrowers’ advantage because it allows for oversight by a judge. Foreclosure judges, he said, have been known to be sympathetic toward consumers. He also said the judicial route can result in a borrower getting a higher bid for a distressed property.

Not every testifier expressed concern with the law as written.

Support and Reaction

Kim Harmon, policy director for Faith Action for Community Equity (FACE), told lawmakers Act 48 has tightened foreclosure loopholes commonly used by lenders in the past.

“What we’re still celebrating — actually, just a few days ago, we had yet another celebration of Act 48 on Maui… is that the act closes the non-judicial loophole that so many off-shore lenders were using to speed through foreclosures without our local families having a chance for any accountability, and without our families having a chance to explain their side of the story,” Harmon said.

Non-judicial foreclosures became popular with lenders in the 1990’s, according to Caldwell. He said the process is faster and allows lenders to be “in the driver’s seat” when it comes to foreclosing on a home.

Typically, lenders have used Part 1 of the two-part state statute governing foreclosures in the non-judicial process. Part 2 of the statute is seen as more cumbersome for lenders, with more consumer protections, and has largely been ignored.

But the use of non-judicial foreclosures has opened the door to problems.

“Lenders, all lenders, both mainland and the local ones that I’ve represented, saw a faster way to do a foreclosure,” Caldwell said. “So quickly, more and more people started doing non-judicials… Under the power of sale language, they’re the ones who foreclose, they’re the ones that hold the auction, they’re the ones who sign the deed to transfer title. And there’s real opportunity for abuse.”

The response to the potential abuse was Act 48. When passed, supporters hailed the legislation as the nation’s strongest foreclosure law. The bill forces lenders to have face-to-face mediation with a neutral party to try and develop a compromise that will keep a family in their home. Additionally, the moratorium on non-judicial foreclosures — the length of which varies — was meant to help prevent families from being evicted.

But Fannie’s switch to judicial foreclosures essentially allowed it to skirt the new consumer protections laid out in Act 48. Rather than having to wait around until at least October for the moratorium on Part 2 non-judicial foreclosures to die, by converting, the judicial processess are under way.

But if more lenders follow Fannie’s lead, as is expected, the courts will have a backlog.

“I don’t want to see it get into a backlog where, then, nothing happens,” said Rep. Joe Souki, present at the information briefing.

Maile responded: “We share your concern… We are at almost capacity. We can handle a spike, we can handle a temporary increase… Presently, I believe we get about 1,300 cases a year. If that were to double, you would see an increase in the backlog and the processing time it would take.”

The Hawaii Mortgage Foreclosure Task Force, formed in 2010 to recommend policies and procedures to improve the foreclosure process in Hawaii, was represented by its acting chair, Marvin Dang. He said the task force would consider several aspects of Act 48 and present a report to the Legislative Reference Bureau by Nov. 1 this year.

The report will address several of the issues raised in the briefing.