A previous version of this story listed that an interview subject, Lynn Noffsinger had purchased his title insurance policy from Fidelity National Title Insurance Company. He actually bought his policy from First American Title Company Inc. It is the policy of West Hawaii Today to correct promptly any incorrect information.
KAILUA-KONA — Foreclosed properties bought at auction often afford buyers a chance at a lucrative deal.
But if you’ve purchased a property anywhere in Hawaii that’s been through a non-judicial foreclosure, you may have acquired considerably less than you bargained for — or potentially nothing at all.
That’s because of several class action and individual action lawsuits that have been filed across every county in the state. The lawsuits allege the banks that administered mass foreclosures during and after the 2008 housing crisis using the non-judicial foreclosure process — meaning without the supervision of the court — did so without following proper procedure.
If a judge rules that a lender didn’t follow the highly specific power of sale outlined in the mortgage contract and supplemented by Hawaii’s non-judicial foreclosure statute part 1, then the sale is void and the property is returned to its original owner.
Such a determination by a judge doesn’t necessarily leave the current title holder on the street absent compensation, particularly if he or she holds title insurance. But it does place on the title company the burden of reimbursing the current holder the monetary value of the property outlined in the title insurance policy.
Because the number of lawsuits challenging the legitimacy of non-judicial foreclosures conducted in Hawaii over the last several years has recently skyrocketed and yet continues to climb, title insurers are wary of insuring future sales of any property that’s gone through the process, whether it was bought firsthand from the bank or secondhand from a private citizen.
When they are willing to insure, it’s not necessarily at fair market value.
“If the sale is void, that means when the bank sold the property to the new owner, the new owner got nothing,” said James Bickerton, an Oahu attorney who to date has filed nearly 60 lawsuits against financial institutions contesting the legitimacy of their foreclosure procedures. “So there are dozens and dozens of people sitting on property they thought was good because they bought it from a bank. That’s where the title insurance comes in. Title insurance companies have to step up and take care of it.”
Losing value on non-judicial foreclosures
Gretchen Osgood, principal broker and owner of Hawaiian Isle Real Estate, found out about the amended policies of title companies the hard way earlier this year. Her husband, Randy, purchased a unit at Kona Mansions from Bank of New York in 2013, as well as title insurance from Fidelity National Title and Escrow. The property had been through a non-judicial foreclosure in 2008.
More than three years after Randy purchased the unit for $72,000 and spent more than $10,000 to upgrade it, Osgood said the property’s face value has risen to around $160,000. The long-term plan has been to sell the unit for profit after utilizing it for several years as a rental — a typical tactic of real estate investors.
But when examining the process of sale, Osgood discovered no title company would offer to insure the property for any future buyer for more than $69,000 — the same amount Randy received on the policy he purchased in 2013 and nearly $100,000 short of the unit’s current market value.
“The reason you buy title insurance is to validate the title as valid so you can resell it. That’s why you pay for title insurance, and that’s why lenders require you to buy them title insurance as well,” Osgood explained. “Now, we don’t have the ability to get title insurance re-issued for this property for the face value of what we would sell it at. No buyer in their right mind would buy a property unless you can get title insurance for it, otherwise you could end up with a property you can’t resell, as we have now.”
Osgood added they could sell the property for $69,000 and lose part of their investment along with their equity. So the unit is technically re-sellable, but not at a price anywhere near what it would command on the open market.
Suzanne Patterson, who works at Kona Resort Properties, said word has been circulating within the real estate community about the concern since this summer, when issues arose for several brokers across the industry almost simultaneously.
One couple in Kona was served a lawsuit as they left their home one afternoon with their daughter on the way to her wedding.
“We were aghast by the fact this even happened,” Patterson said. “It’s a bad situation. These are local people, not cash buyers, but people getting loans. They are real people.”
One real estate agent who requested anonymity said the circumstances surrounding non-judicial foreclosures and the inability to insure them have created a major public relations crisis for the industry, as both title insurers and real estate agents are concerned about how these developments will affect buyer perception of the market.
For people with substantial portions of their finances tied up in one or several of these properties, the situation could become dire, especially if any issues arise demanding a sale of property to create cash flow.
“Lots of people won’t care,” Osgood said. “But for some, it will be catastrophic.”
Comparing judicial, non-judicial foreclosures in Hawaii
The differences between judicial and non-judicial foreclosures are stark, starting with the presence of a court authority in the process.
“In a judicial foreclosure, you have judicial supervision of how the transaction or foreclosure is being conducted,” said Robert Triantos, administrative partner in the Kona Office of the law firm Carlsmith Ball. “In a non-judicial foreclosure, it’s just the attorney going out there, publishing in the newspaper, holding the auction, sometimes extending the dates, maybe following the letter of the law, maybe not.”
Non-judicial foreclosures are not permitted in every state but have always been a staple of the real estate industry in Hawaii, said Bruce Graham, an attorney at Ashford & Wriston in Honolulu who also teaches a transactional property/real estate class at University of Hawaii at Manoa’s William S. Richardson School of Law.
The process of non-judicial foreclosure, which Graham characterized as essentially a reversion to the foreclosure process of 17th century England, became popular in the immediate aftermath of the housing crisis as financial institutions were foreclosing on a massive scale.
“Non-judicial foreclosures were more expeditious and less expensive than judicial foreclosures,” said Stephen Whittaker, Big Island real estate attorney and broker.
Triantos explained, however, that is no longer the case. The law in Hawaii was changed approximately two years ago, he said, making the judicial method considerably less expensive. The development has spurred a migration back to the judicial process, especially considering the position of title companies.
Triantos added it’s been roughly a year since most title insurance companies decided it wasn’t worth the hassle or the financial risk to insure properties that have been through non-judicial foreclosures in Hawaii.
“The title insurance companies are essentially saying they are not going to go back and investigate whether everything was done correctly,” Triantos said. “They are making a business decision. Whether that renders (the properties) unsellable — it probably does. But I’m not going to say it’s the title insurance companies that have put the properties in those positions.”
The only recourse for those who’d like to sell is to scour the industry for a title company that might be willing to insure a sale, sell at a substantial markdown or simply sit on the property until the statute of limitations to challenge the title expires.
Bickerton said the applicable statute is the same as the one dealing with the recovery of a property someone is occupying. While that issue is currently under legal review, he said one judge has already agreed with him on his interpretation.
If Bickerton is correct, the applicable statue of limitations to contest title is 20 years.
The catalyst for change
The Honolulu law firm Bickerton Dang has been the most prominent filer of lawsuits contributing to the change in title company policy.
As of Monday, the firm had filed 51 individual actions against banks challenging the legitimacy of foreclosures, at least 15 of which originated on Hawaii Island. Bickerton’s firm is also behind seven class action suits naming Bank of America, U.S. Bank, Wells Fargo and Deutsche Bank as defendants.
The class action suits don’t directly involve title insurers, Bickerton said, as his clients in those cases are simply seeking damages against the banks.
The individual actions do involve title companies because the current owners of the properties are also named in the lawsuits, as the plaintiffs are asking for the return of their former properties.
Bickerton said that Fidelity National Title Insurance Company and First American Title Company Inc. are the most commonly named title institutions in his clients’ lawsuits.
He explained that title insurers haven’t done anything expressly wrong, but asserted the banks had no legal right to sell the foreclosed properties and title companies were an integral part of those sale processes.
Steve Gottheim, senior counsel for the American Land Title Association, explained Bickerton’s approach from a title company’s point of view.
“Plaintiffs’ attorneys try to basically name everybody they can possibly think of that has ever been connected to the mortgage in some way,” Gottheim said of lawsuits like those being headed by Bickerton’s firm. “The tactic from those attorneys is to name everyone and every company they can think of, make it as painful as possible, and see if any or all of them are willing to come to the table and pay the client(s) something to go away.”
How homeowners can be hurt at foreclosure auctions
The grounds for Bickerton’s filings are that lenders performed non-judicial foreclosures improperly, a claim that can be made for several reasons.
The most prominent reason, present in almost all 58 of Bickerton’s cases, is that lawyers enlisted by banks to handle foreclosures didn’t provide proper notice of the date and time of auctions.
When Bickerton’s clients granted power of sale to lenders in the initial contracts, the mortgages specified that if lenders reclaimed the properties by way of foreclosure, they were required to publish the date and time of auctions in general circulation news outlets in the counties where the auctions were to be held.
Bickerton said lawyers would regularly put up the initial notice, then postpone the auction and never republish the specific details.
He added a typical example involved an auction being slated for December. Then, at the auction, the bank’s lawyer announced the proceedings would be postponed until a later date but never published a circulated notice containing the new, pertinent information.
Bickerton said he is working on multiple cases where auctions were continued in that fashion as many as 12 or 13 times. He and his clients want to know why.
“The banks may have had other reasons, but it looks like it’s a possibility they were doing it to reduce the amount of buyer interest to (acquire the properties) for themselves,” Bickerton said. “You can see the temptation for the mortgagee to under-publicize a sale. They don’t have to let someone else get it if it’s a deal. Instead of selling it at a fire sale auction price, they can retail it and extract more value.”
Osgood explained that banks are allowed a credit up to the face value of what is still owed on the mortgage, plus penalties and interest for non-payment. That typically allows banks a credit large enough to claim the property at auction, particularly if they’re only bidding against themselves with what Osgood characterized as “monopoly money.”
This can create a problem for borrowers who defaulted because it tends to drive auction prices down. In judicial foreclosures, those which are overseen by a court of law, lenders can often seek a deficiency judgment if the amount the property sells for is less than the amount the bank is owed.
At first glance, that wouldn’t appear an issue for a non-judicial foreclosure, because generally the security, or the reclaimed property itself, satisfies the debt. Plus, there’s no legal entity to render a deficiency judgment because there was no court presiding over the process.
Even in such cases where there were no monetary consequences for a borrower due to an unfairly low auction price, the foreclosure may still be voided simply because proper protocol wasn’t observed, creating grounds for a lawsuit.
But Bickerton explained there tend to be actual monetary damages for many of his clients despite going through non-judicial foreclosures because they took out second mortgages on properties the initial lenders later reclaimed.
“I’ve got a lot of clients where the second mortgagee went after them for the deficiency because that lender is not getting paid,” Bickerton said. “The first bank is the only one that bid on the property because the auction date was not publicized. The bank bid what it was owed, acquired the property, and then the second bank says, ‘What about me?’ The junior bank then turns around and goes after borrower. They are allowed to do that because the debt hasn’t been paid.”
Bickerton said the notion that auctioneers must publish postponements as well as initial auction details is being challenged currently in the Hawaii Supreme Court based on a case argued last year. The seven class action lawsuits his firm has filed are on hold until that ruling is handed down.
More potential pitfalls
But there remain other methods lenders used that Bickerton claims didn’t fit the specifications outlined in both Hawaii law and the specific mortgages, so all individual actions his firm is handling are moving forward.
One such issue is providing sufficient notice of a foreclosure and the subsequent proceedings. The law states a physical notice must be posted on the property at least three weeks before its sale, and the language of the mortgage may require more notice and in a different form.
Bickerton mentioned one case on Hawaii Island he recently took up in which the final public notice was published on Nov. 2 for a Nov. 3 auction. Final publication notice is supposed to be published at least two weeks prior to the date of auction.
The physical notification of the borrower, which was supposed to be posted on the property three weeks prior to any auction, wasn’t posted there until Nov. 10, a week after the auction had concluded.
“That’s quite common, that sort of sloppiness,” Bickerton said. “Banks just treated people very, very poorly, not really recognizing that these are contractual powers that people have granted them that they have to honor. Banks need to step up and solve this problem they created.”
Another potential issue can be holding an auction for a property in a separate county from the one in which the property is located, because this can also produce the effect of driving down the price at auction.
Business strategy for the title companies
The alleged missteps of lenders during non-judicial foreclosures and the resulting lawsuits have combined to create hesitance on the part of title insurance companies to insure the resale of properties that have been through the process.
First and foremost, it’s a financial risk. Title insurers not only pay out claims if a title is successfully challenged by a former title holder, but also pay to represent the current title holder in legal proceedings.
“In title insurance, about 80 percent of your dollar is spent upfront so the title company can review the title, understand what some of the risks are and try to fix those risks before you even buy the property,” Gottheim, senior counsel for the American Land Title Association, said. “So only a smaller portion of the dollar is really available to cover claims.
“When you have the increased potential risk of somebody coming back and challenging the ownership of the home because of a foreclosure that there wasn’t a good view into, it can create some challenges on the pricing dynamic and the economics of that policy.”
Gottheim explained the better the title insurer’s understanding of the foreclosure process, the more effectively it will be able to represent a policy holder in any potential legal challenges.
Acquiring a good view into a foreclosure proceeding can be riskier and more difficult to accomplish if the process wasn’t overseen by the courts.
People who challenge title based on improper foreclosure proceedings rarely win their properties back, Gottheim said. But even if the title company never has to pay out a claim, just the process of defending title in court can be pricey.
“The easier it is for a title company to know what happened in that foreclosure, the easier it is to get lawsuit kicked out early at a lower cost,” Gottheim said. “The less we know about that process, the more expensive it becomes.”
The result of these risks, as Triantos explained, has been title companies making the business decision over the last year not to insure such properties — or not to do so at more than the value of the policies currently held, which may be substantially less than the properties would command on the open market.
But such practices may have existed even before the last year. While going through a purchase process for a condo at Kona Bali Kai six years ago, Lynn Noffsinger noticed something curious in the fine print on his First American title insurance policy. His agent at the time, Osgood, negotiated its removal from the contract.
“He was reviewing title policy offered to him during escrow. In the exclusions section, the company listed a foreclosure as an exclusion,” Osgood said. “It was in about eight-point type in the generic template part of the title policy. His diligence is how we discovered it.”
Marcus Ginnaty, media relations manager for First American, said his company “evaluates non-judicial foreclosures on a case-by-case basis in order to consider the unique circumstances of each foreclosure when considering whether or not to offer a title insurance policy.”
Fidelity representatives did not return a request for comment on their current title policies in regards to properties that have been subject to non-judicial foreclosures.
As for those who hold title to properties that have been through non-judicial foreclosures, and who wish to alleviate themselves of potential litigation as well as the anxiety surrounding whether their title may one day be contested, Gottheim explained they are simply in a tough spot with limited recourse.
“It can become a challenge. There’s not a lot of good options for them at that point,” he said. “If they’re not able to get title insurance up to the amount that would cover (the property’s) worth, a lot of times what becomes difficult is thinking about their next steps.”