HONOLULU -- When Hawaii passed a new law with extensive protections to prevent residents from losing their homes, it was hailed as the nation's strongest foreclosure law - maybe too strong, many warn.
In response to the law, mortgage giant Fannie Mae directed its lenders three weeks ago to move all of its Hawaii foreclosures into the courts rather than use a mediation system the law created.
The courts say they'll struggle to handle the load, with foreclosure cases already taking 12 to 14 months to resolve. Lenders are warning lawmakers that they don't intend to use mediation at all.
The likely result will be further delays in getting foreclosed homes back on the market, prolonging the slow housing recovery at the root of the country's enduring economic troubles.
The 102-page law, signed by Gov. Neil Abercrombie in May, requires lenders to show mediators evidence of legal authority to foreclose, and they can be sued for deceptive practices for missteps in following the law's process.
The law also prohibits lenders from seeking deficiency judgments, which mean the homeowner still owes the remaining mortgage debt that's not satisfied by a foreclosure sale. Such judgments are an option that's still available if lenders instead pursue the court-run foreclosure process.
The law arose from homeowner complaints that out-of-state lenders often rushed the more common foreclosure process that doesn't involve the courts. Residents said the banks didn't have proper documentation or proof that the action was justified, and attempts to work toward payment plans and loan modifications were denied, even though those efforts would ensure banks got paid and property owners could keep their homes.
The law "closed the loophole in Hawaii foreclosure law that allowed lenders across the country to foreclose quickly ... without our local families having a chance of any accountability, and without our families having a chance to explain their side of the story," said Kim Harman, policy director for advocacy group Faith Action for Community Equity.
Fannie Mae decided to seek foreclosures in the judicial system rather than wait for the mediation process to be set up by Oct. 1. In the meantime, Hawaii is operating under what amounts to a moratorium on nonjudicial foreclosures.
Once established, the mediation system is expected to have a foreclosure turnaround time of four or five months - faster than the court process.
"Currently, nonjudicial foreclosures cannot be pursued in Hawaii. The judicial foreclosure process allows homeowners to raise any challenges to the foreclosure in court," said Fannie Mae spokeswoman Amy Bonitatibus in a statement.
Fannie Mae didn't expand on its reasons for moving its foreclosures to the courts, and it hasn't revealed how many foreclosures it owns in Hawaii, a fact that many of its homeowners don't even know.
"Shifting these cases to the Judiciary ... will result in a similarly frustrating situation of a backlog of thousands of cases and further frustration and delay, prolonging an already stressful situation for borrowers and all those involved," said Rodney Maile, administrative director of the courts, in written testimony to the Legislature.
Foreclosure filings were up slightly last month through June 27, to 166 compared with 109 in all of June last year, according to figures the Hawaii State Judiciary provided to The Associated Press. It's unclear how much of the increase can be attributed to Fannie Mae.
But a surge in court filings may be coming soon, both from Fannie Mae and other lenders that follow suit, said Ron Margolis of Hawaii Life Real Estate Brokers.
"Fannie Mae is just the beginning," he told lawmakers at a briefing last week. "We need to make the legislation not so rigid."
Hawaii had the nation's 11th highest foreclosure rate last year, with 12,425 foreclosure cases, according to real estate research firm RealtyTrac Inc. Only about 10 percent of those foreclosures were handled by state courts, a figure that would greatly increase if lenders opt out of mediation.
A lengthy, drawn-out foreclosure process in the courts will not only hinder the time before homes can be resold and lived in again, it also burdens other residents across the country who have nothing to do with the housing crisis, said Gary Fujitani, executive director for the Hawaii Bankers Association, whose members include the nine Hawaii-based banks.
"The more losses Fannie Mae takes, it comes indirectly from the taxpayers' pocket if they don't collect on a timely basis," Fujitani said. "Everybody's looking at Fannie as a private entity, but this is a government-owned enterprise now."
Even if all these foreclosures end up overseen by the courts, the law's defenders argue that judges can require lenders to provide the same documentation that would have been needed in mediation.
A slower foreclosure process would at least give residents every opportunity to fight for their homes and try to agree on a payment plan, said House Consumer Protection and Commerce Committee Chairman Bob Herkes.
Delays are also a gift to homeowners behind on their mortgages who can continue living in their houses during the foreclosure process.
"If we erred on this bill, we erred on the side of the homeowner, not the lender," Herkes said.
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