By Rob PerezSunday, October 21, 2001
When a lender sells a Hawaii home at a foreclosure auction, the state requires that the auction be advertised in a general-circulation newspaper where the home is located.
Foreclosure sales of homes
hurt by legal shortcuts
The idea is to get as much public exposure as possible to attract bidders and get the highest price for the foreclosed property.
All homeowners should support that notion. Low prices generally tend to depress property values in a community, especially if many foreclosures occur in a short period.
But a marketing practice used by some mainland lenders until earlier this year has raised questions about whether hundreds of Hawaii homes sold in non-judicial foreclosures -- those handled without court oversight -- got the best prices possible.
To fulfill the advertising requirement, the lenders published the required auction notices in the Hawaii Hochi, a mostly Japanese-language daily newspaper with a circulation of only 5,000 to 6,000 -- not even 1 percent of the state's population.
Its target audience: People fluent in speaking and reading Japanese.
Most local lenders use Honolulu's two English-language daily newspapers, the Honolulu Star-Bulletin or Honolulu Advertiser, to publish foreclosure notices. Ads in those papers are more costly but get much wider exposure, real estate professionals say.
The Star-Bulletin has a daily circulation of roughly 70,000 and the Advertiser more than 150,000.
Lenders stopped using the Hawaii Hochi around the beginning of the year partly because of questions raised about whether such notices fulfilled the state requirement.
Some real estate experts said using a little-read publication was not conducive to getting the best prices for properties.
"It defeats the whole purpose," said Eddie Flores Jr., a Realtor who teaches a course about foreclosures. "To me, all they're doing is fulfilling the legal requirement."
Representatives of lenders who used the Japanese newspaper didn't return calls seeking comment.
But when a property falls into foreclosure, the lender makes a business decision on how to get the most for the home at the least expense, one attorney said.
Lenders use the non-judicial process, instead of the more stringent judicial one, in certain cases because it is a less costly and less time consuming way to take over a home after the owner has defaulted on the mortgage.
Gary Dubin, one of the few attorneys in town who defends homeowners in foreclosure cases, believes use of the Hawaii Hochi effectively has invalidated hundreds of non-judicial foreclosures advertised in that paper.
In a pending lawsuit in state court, Dubin has asked that any foreclosures advertised solely in Hawaii Hochi be voided.
The Japanese newspaper, however, countered that a 1963 court order designated Hawaii Hochi a general-circulation daily newspaper for the purposes of publishing legal notices. The Star-Bulletin and the Advertiser also were named.
Lenders can cite the nearly 40-year-old order to argue that they were following the letter of the foreclosure law. But advertising in a such a limited-circulation publication seems to violate the spirit of the law.
Hawaii Hochi's limited reach, in fact, has at least one major title company wary when it comes to foreclosure notices.
Title Guaranty of Hawaii won't offer title insurance on foreclosed homes advertised through Hawaii Hochi, according to Lorrin Hirano, legal counsel for the company.
Another foreclosure practice that critics have questioned involves the auction itself.
Many lenders require the successful bidder at a non-judicial auction to have the entire amount on hand, not the 10 percent typically required at judicial auctions.
Such a requirement, critics say, limits the pool of potential bidders and undermines efforts to get the highest prices.
Dubin cites that and the Hawaii Hochi issue to underscore what he says are major flaws in the 1874 state law that lenders use for non-judicial foreclosures.
Like other consumer attorneys, he said the antiquated law is unconstitutional, providing homeowners with little or no protections when facing unjust foreclosures. Moreover, Dubin said, the system doesn't result in fair prices.
Dubin said the law is so lacking in standards and is subject to so many abuses that he doesn't believe it can survive scrutiny by the Hawaii Supreme Court. He is in the process of bringing several appeals to the high court.
Some attorneys say the non-judicial process happens so quickly -- sometimes in less than three months -- that unsophisticated homeowners don't realize they're losing their homes until it's too late.
"The law is tipped way in favor of the lender and against the consumer," said attorney John Paer.
Indeed, title companies typically require lenders to take additional steps beyond what the law specifies -- such as notifying the borrower by certified mail -- to prevent problems from cropping up.
Lender representatives say consumers already have sufficient protections under the mortgage agreements, including requirements for plenty of notice to correct loan defaults. Foreclosures usually are a last resort.
If a lender doesn't comply with the mortgage terms, "that doesn't mean there's a problem with the non-judicial process," said attorney Marvin Dang, who represents lenders.
And if the law has such serious constitutional flaws, they would have been raised in the more than 100 years it has been on the books, Dang said.
The law was little used until just a few years ago, however, because title companies were reluctant to issue insurance on non-judicial foreclosures.
Partly to address the title companies' concerns, the Legislature several years ago passed a more stringent version for handling non-judicial foreclosures.
But that law only applies to mortgages issued since July 1999, and lenders still have the option of using the old one.
None have opted to use the newer law. They consider it unworkable.
Whatever shortcomings there are in the old law, expect to see the system used more frequently in the months ahead. The growth in non-judicial foreclosures in recent years should accelerate as Hawaii's economy worsens in the aftermath of the terrorist attacks.
That, unfortunately, will mean more people losing their homes.
Star-Bulletin columnist Rob Perez writes on issues
and events affecting Hawaii. Fax 529-4750, or write to
Honolulu Star-Bulletin, 500 Ala Moana Blvd., No. 7-210,
Honolulu 96813. He can also be reached
by e-mail at: email@example.com.