Hawaii Supreme Court Changes Longtime Method of Calculating Foreclosure Deficiency Judgments

In a 3-2 decision, decided on April 30, 2020, in Hawaiiusa Federal Credit Union v. Monalim, the Hawaii Supreme Court took the opportunity to rewrite foreclosure law from the bench. 

The Concurring and Dissenting Opinion (Nakayama and Recktenwald) summarizes the issue:

The Majority adopts a new rule that will change Hawai‘i’s traditional method of calculating deficiency judgments. Under the new rule, mortgagors are entitled to a hearing to determine the “fair market value” of a property at the time of a foreclosure sale. The circuit court will be required to calculate the amount of the deficiency judgment based on a new formula in which the greater of the “fair market value” or the court-confirmed sale price will be deducted from the outstanding debt.

The Dissent opines that the facts of this case do not support the adoption of the Majority’s new rule:

First, I believe that by rationalizing the adoption of this new method based on the possibility that the deficiency amount in other foreclosure cases could be inequitable, the Majority oversteps the authority entrusted to this court to determine, in each case, if the law was applied correctly to a specific set of facts. The Majority should exercise judicial self-restraint in this case and leave the decision of whether or not to enact this new rule to the Legislature. Second, the new rule will require the court to select from the fair market value estimations of competing experts. The additional time and expense of this process will unnecessarily burden both the parties to foreclosure actions and the courts. Finally, the new rule will not, as the Majority avers, protect both parties to the mortgage.

Noting that the “vast majority of jurisdictions which have chosen to adopt the new rule have done so by legislative action,” the Dissent concludes:

Given courts’ relative lack of expertise on these policy considerations, the new rule should not be adopted through judicial activism. It should be left to the Legislature to determine whether enacting the new rule will truly serve the State’s best interests.

In practical terms, this new judicial rule will be good for debtors, bad for lenders, and bad for new Hawaii homeowners.  First, compared to other states, Hawaii residents seek larger mortgages for purchasing homes in Hawaii’s high-priced market.  As lenders apply more stringent requirements in response to the cost of recovering defaults based on the above decision, scrutiny on loan applicants will increase making it more difficult for borrowers to qualify.  Second, in addition to the Dissent's points, one might also question whether this change by the court was required now, rather than by the legislature, since Hawaii ranks in the middle of pack (2019) when it comes to the rate of foreclosures among states.  Third, this new rule will not improve Hawaii's record among states as the longest average time to foreclose.  Under the new rule, the question of fair market value becomes a fact issue that will take more of the court's time and increase costs and fees to resolve.