Problems with Hawaii’s Non-Judicial Foreclosure
Pursuant to the New Statute

    As we discussed in our “Non-Judicial Foreclosures in Hawaii” article, the Old Power of Sale Statute provides for one method to pursue non-judicial foreclosure via a power of sale.  The New Power of Sale Statute provides for an alternative method to the Old Statute. The purpose of this article is to point out the problems with the New Statute and why the Old Statute is still the popular choice for non-judicial foreclosures despite the passage of the New Statute.

    Similar to the Old Statute, the New Statute requires that the mortgage must contain a provision allowing the foreclosing mortgagee to foreclose under a power of sale.  There is specific language referenced in the statute.

    When the mortgagor or borrower has breached the mortgage agreement and the foreclosing mortgagee intends to conduct a power of sale foreclosure, the foreclosing mortgagee is first required to send a written notice of default to the mortgagor, borrower and any guarantor.  There is specific language that the notice of default must contain.  Before the deadline date in the notice of default, the foreclosing mortgagee is required to record the notice of default. 

    If the default is cured as required by the notice of default, the foreclosing mortgagee is required to rescind the notice of default.  However, if the notice of default is not cured, then the foreclosing mortgagee can proceed with a public sale of the mortgaged property pursuant to the requirements provided under Hawaii statute, which includes the public notice.  

    After the public sale has been conducted and the purchaser has completed the purchase by paying the full purchase price and costs for the purchase, both the foreclosing mortgagee and mortgagor/borrower are required to convey the property to the purchaser by a conveyance document.  The sale of the mortgaged property is completed when both the conveyance document and affidavit regarding the public sale signed by the foreclosing mortgagee are recorded in either the State of Hawaii Bureau of Conveyances or the Land Court if the property is Land Court property. 

    Although this method of non-judicial foreclosure by power of sale is supposedly faster than pursuing a judicial foreclosure, the following are some of the major problems with this method:

(1) The foreclosing mortgagee’s notice of default must follow the strict rules of Hawaii Revised Statutes.

(2) The borrower or any other creditor having a recorded lien on the mortgaged property can still file an action for judicial foreclosure of the mortgaged property in the circuit court of the circuit where the mortgaged property is located provided that such filing is done within a specific time period.

(3) The foreclosing mortgagee must carefully adhere to the Hawaii Revised Statutes’ requirements for a power of sale because the borrower, the mortgagor, and any creditor having a recorded lien on the mortgaged property still has the right to file an appeal within a specified time period in the circuit court where the mortgaged property is located to contest the validity of the sale.

(4) The mortgagor/borrower is required to sign the conveyance document. This requirement is a major problem because if the mortgagor/borrower is uncooperative, then the mortgagee cannot comply with this requirement.   

(5) The foreclosing mortgagee is unable to obtain a deficiency judgment because the recordation of both the conveyance document and the affidavit operates as full satisfaction of the debt owed by the borrower to foreclosing mortgagee even if the foreclosing mortgage receives nothing from the sale proceeds, unless the debt is secured by other collateral, or except as otherwise provide by law.

    As you can see, there are significant issues to resolve when foreclosing under a power of sale pursuant to the New Statute, even some that allow a mortgagor/borrower to get a court involved, thereby causing the foreclosing mortgagee to incur legal and commission fees in any event.  The aforementioned problems make foreclosure pursuant to the Old Statute the more attractive method to foreclose.   However, please note that even under the Old Statute, the mortgagee will not be able to obtain a deficiency judgment because there is no court involvement in the power of sale process.  Therefore, we recommend judicial foreclosure, particularly when the value of the mortgaged property is substantially less than the loan. Therefore, please contact us if you need a Hawaii attorney in your corner.