Hawaii Nonjudicial Foreclosure After Act 48: The Title Risks That Remain for Investors

The $187,000 Lesson in Waimalu

An investor purchased a single-family residence in Waimalu, Oahu at a nonjudicial foreclosure auction in November 2023 for $187,000—roughly 40% below assessed value. The property had been through Hawaii's post-Act 48 nonjudicial foreclosure process, complete with the required dispute resolution and published notices. The investor's preliminary title search showed the foreclosing lender in first position and a subordinate HELOC that would be wiped by the sale. Two months after closing, the former owner filed a motion to set aside the foreclosure, alleging the foreclosing lender failed to comply with the owner-occupant notification requirements under Hawaii Revised Statutes § 667-22. The circuit court granted a temporary restraining order. The investor now holds title to a property they cannot sell, cannot refinance, and cannot evict from—while the litigation drags into its second year.

This scenario is not hypothetical. It is happening across Hawaii's foreclosure market, and investors who assume Act 48's reforms eliminated title risk are learning otherwise.

What Act 48 Actually Changed

Act 48, enacted in 2011 and codified primarily in HRS Chapter 667, Part II, fundamentally restructured Hawaii's nonjudicial foreclosure process in response to the robo-signing scandals and concerns about borrower due process. Prior to Act 48, Hawaii's nonjudicial foreclosure operated under a relatively streamlined power-of-sale framework that allowed lenders to foreclose without court involvement, provided the mortgage contained a power-of-sale clause.

Act 48 preserved the nonjudicial option but layered significant procedural requirements:

Mortgage Foreclosure Dispute Resolution Program (MFDR): Under HRS § 667-75 through § 667-86, before a lender can proceed with nonjudicial foreclosure on owner-occupied residential property, they must participate in the state-administered dispute resolution program administered by the Department of Commerce and Consumer Affairs (DCCA). The lender must file a notice of intent to foreclose with DCCA and provide the borrower an opportunity to request dispute resolution.

Enhanced Notice Requirements: HRS § 667-22 mandates specific notice content, timing, and delivery methods. The foreclosing party must serve notice by personal delivery, certified mail, or posting on the property—and must include specific statutory language about the borrower's rights, including the right to participate in dispute resolution.

Affidavit Requirements: Under HRS § 667-32, the foreclosing party must record an affidavit after the sale affirming compliance with all statutory requirements. This affidavit becomes part of the chain of title and is supposed to provide purchasers with assurance that the process was followed.

Conversion Option: HRS § 667-30 allows the foreclosing party to convert a nonjudicial foreclosure to a judicial foreclosure at any time, and requires conversion if the borrower requests dispute resolution and the parties cannot reach agreement.

These reforms were designed to protect borrowers. But they created a procedural minefield that generates title defects years after the foreclosure sale.

Why Procedural Compliance Creates Title Risk

The fundamental problem with Act 48 from an investor's perspective is that the validity of your title depends on the foreclosing lender's compliance with a complex statutory scheme—and that compliance is not self-evident from the recorded documents.

Under HRS § 667-33, a foreclosure conducted in violation of the statutory requirements may be voidable. Hawaii courts have interpreted this to mean that substantial compliance is required, but what constitutes "substantial compliance" versus a fatal defect remains fact-specific and litigated case-by-case.

Consider the notice requirements under HRS § 667-22. The statute requires that the notice be served not less than sixty days before the auction. It must contain specific language about the borrower's rights. It must be served by specific methods. If the property is owner-occupied, additional notice requirements under the MFDR program apply.

A standard title search will show you the recorded affidavit under HRS § 667-32. That affidavit will state that the foreclosing party complied with all requirements. But that affidavit is a self-serving document prepared by the foreclosing party's attorney. If the borrower later proves the notice was defective—wrong address, missing statutory language, improper service method—the affidavit's assertions are worthless, and your title is compromised.

The Hawaii Supreme Court addressed this tension in Santiago v. Tanaka, 137 Hawai'i 137 (2016), holding that nonjudicial foreclosure purchasers are not protected as bona fide purchasers against claims of procedural defects in the foreclosure process. The court reasoned that because the entire validity of a nonjudicial foreclosure depends on strict compliance with the statutory scheme, a purchaser cannot claim good-faith reliance on a process that was fundamentally defective.

This ruling gutted the traditional BFP protection that investors rely on in other contexts. In Hawaii, you inherit the lender's procedural failures.

The MFDR Problem: When Dispute Resolution Goes Wrong

The Mortgage Foreclosure Dispute Resolution program creates a separate category of title risk that is nearly impossible to detect from recorded documents.

Under HRS § 667-80, if a borrower requests dispute resolution and the lender fails to participate in good faith, the DCCA may issue a certificate barring the lender from proceeding with nonjudicial foreclosure for one year. But the deeper problem is what happens when the dispute resolution process is completed—or allegedly completed—and the borrower later claims it was defective.

The MFDR program requires the lender to provide specific documentation to the borrower and the neutral during the dispute resolution session, including a net present value analysis comparing foreclosure to loan modification. Under HRS § 667-82, the lender must make a good-faith effort to reach agreement. What constitutes "good faith" is inherently subjective.

An investor purchasing at the subsequent nonjudicial foreclosure sale has no way to independently verify what happened in the MFDR session. The recorded documents will show that a certificate was issued allowing the foreclosure to proceed. But if the borrower later sues claiming the lender submitted fraudulent NPV calculations or refused to consider legitimate modification offers, the investor's title becomes collateral damage in that litigation.

In Hungate v. Law Office of David B. Rosen, the Hawaii Intermediate Court of Appeals held that borrowers could pursue claims against foreclosing parties for MFDR violations even after the foreclosure sale was completed. While that case involved claims against the lender rather than the purchaser, it illustrates the ongoing litigation exposure that Act 48 procedures generate.

Association Liens: The Risk Act 48 Did Not Address

Act 48 reformed mortgage foreclosure procedures. It did nothing to address the separate—and often more dangerous—issue of association liens in Hawaii's condominium and planned community developments.

Under HRS § 514B-146, a condominium association has a lien on each unit for unpaid assessments. This lien has limited priority: it is subordinate to a first mortgage recorded before the assessments became due, but the association has a "super-lien" for up to six months of assessments that takes priority over even a first mortgage.

Here is where investors get burned: the association's lien for assessments accruing after the first mortgage was recorded is subordinate to that mortgage. When the first mortgage forecloses, that subordinate portion of the association lien should be extinguished. But the super-lien portion—the six months of priority assessments—survives.

An investor purchasing at a mortgage foreclosure sale in a Hawaii condominium may inherit thousands of dollars in association assessments even though the mortgage foreclosure should have wiped subordinate liens. The statute is clear, but associations routinely claim amounts beyond the statutory super-lien, and investors find themselves negotiating or litigating before they can take possession.

The problem is compounded in planned community associations governed by HRS Chapter 421J. That statute provides associations with lien rights but does not include the same priority structure as the condominium statute. Investors purchasing foreclosed properties in planned communities often discover ambiguous lien situations that require legal resolution.

In Kailua-Kona, an investor purchased a foreclosed townhome for $243,000, believing the mortgage foreclosure extinguished all subordinate liens. The association filed a lien for $31,400 in unpaid assessments, legal fees, and collection costs. The investor spent fourteen months and $18,000 in legal fees establishing that only $4,200 of that amount—the statutory super-lien—survived the foreclosure. The remaining amount was extinguished, but the association had already filed a foreclosure action of its own, clouding title during the entire dispute.

Title Insurance Gaps in Hawaii Foreclosure Purchases

Title insurance is available for Hawaii foreclosure purchases, but policies routinely exclude or except the specific risks that Act 48 creates.

A standard owner's policy will except any defects in the foreclosure procedure that would render the sale voidable. The title company is not going to insure you against the risk that the foreclosing lender sent the notice to the wrong address or failed to properly conduct the MFDR session. Those are exactly the risks you face, and they are exactly what the policy excludes.

Some title companies will issue "foreclosure endorsements" or enhanced coverage for additional premium, but these endorsements typically require the title company to review the foreclosure file—the actual notice documents, proofs of service, MFDR certificates—and independently assess compliance. This review takes time and costs money, and many title companies simply decline to do it for auction purchases where the investor needs to close quickly.

Moreover, title insurance policies except association assessments and liens. Even if you obtain coverage for the foreclosure procedure, you remain exposed to the association super-lien risk unless you obtain a specific subordination or payoff from the association before closing.

What TitlePin Would Have Shown

The Waimalu investor's situation was preventable. Not because the outcome of the litigation was predictable—title disputes are inherently uncertain—but because the risk factors were identifiable before the auction.

A TitlePin report on that property would have flagged several red flags:

Prior Litigation History: The borrower had previously filed a complaint with DCCA regarding the MFDR process. That complaint was dismissed, but its existence indicated a borrower prepared to litigate procedural issues. TitlePin tracks regulatory complaints and agency filings that do not appear in standard title searches.

Notice Irregularities: The foreclosing lender's affidavit referenced service by posting after failed attempts at personal service and certified mail. TitlePin's analysis would have noted that posting-only service is permitted under HRS § 667-22 but creates higher litigation risk, particularly where the borrower remained in possession of the property.

Extended Timeline: The foreclosure took eighteen months longer than typical, with multiple continuances of the auction date. TitlePin tracks auction history and timeline anomalies that suggest procedural complications.

AOAO Assessment Status: TitlePin's lien search would have identified $8,400 in unpaid association assessments, with collection activity dating back eleven months. This was not disclosed in the foreclosure documents and would have required payoff or negotiation before taking clean title.

None of these factors alone would have made the purchase impossible. But together, they would have told the investor: this is a property with above-average litigation risk and certain additional costs. The investor could have adjusted their bid accordingly, required specific title insurance coverage, or walked away.

The Judicial Foreclosure Alternative

Hawaii still permits judicial foreclosure under HRS Chapter 667, Part I. Judicial foreclosure takes longer and costs the lender more, but it produces a court-supervised sale with a confirmation order that provides the purchaser significantly greater protection.

Under HRS § 667-51, a judicial foreclosure sale is confirmed by court order after a hearing. The confirmation order extinguishes subordinate liens and provides finality that nonjudicial foreclosure cannot match. A borrower who wants to challenge the foreclosure must do so before confirmation; post-confirmation challenges are limited to fraud or lack of jurisdiction.

For investors, this means that properties foreclosed through judicial process carry substantially less title risk than nonjudicial foreclosures. The price difference at auction often reflects this—judicial foreclosure properties may sell closer to market value because investors are willing to pay for cleaner title.

The challenge is identifying which foreclosures proceeded through which process. Judicial foreclosures will have a recorded commissioner's deed and a corresponding case in circuit court. Nonjudicial foreclosures will have a recorded affidavit under HRS § 667-32 but no court involvement.

County-Specific Considerations

Hawaii's foreclosure market operates differently across the four counties, and investors need to adjust their diligence accordingly.

Honolulu County (Oahu): The highest volume of foreclosures and the most active secondary market for foreclosure properties. The First Circuit Court handles judicial foreclosures, and the DCCA's MFDR program is most familiar with Oahu procedures. However, the complexity of Oahu's condominium market—with hundreds of associations, varying governing documents, and aggressive collection practices—creates disproportionate association lien risk.

Hawaii County (Big Island): The foreclosure timeline tends to be longer due to court capacity constraints. Many properties are in rural subdivisions with irregular access, creating additional due diligence requirements around easements and road maintenance agreements that interact with foreclosure title issues.

Maui County: The combination of high property values and active vacation rental market means foreclosed properties often have unreleased liens from short-term rental management companies, cleaning services, and property managers who filed materialman's liens that may or may not have been properly addressed in the foreclosure.

Kauai County: Lower foreclosure volume, but a higher percentage of agricultural properties with conservation easements, water rights issues, and state agricultural lease complications that require specialized analysis.

Statute of Limitations and Stale Claims

One question investors frequently ask: how long can a former borrower challenge a nonjudicial foreclosure?

Under HRS § 657-1, the general statute of limitations for contract actions is six years. Claims based on fraud have a six-year limitations period under HRS § 657-1(4). Actions to recover real property have a twenty-year limitations period under HRS § 657-31.

For practical purposes, this means a borrower can challenge a nonjudicial foreclosure for procedural defects for at least six years after the sale. Claims framed as fraud or wrongful foreclosure may have similar or longer limitations periods depending on how they are pleaded.

The Hawaii Supreme Court has not definitively ruled on when the limitations period begins to run for nonjudicial foreclosure challenges—whether it is the date of sale, the date of recording the affidavit, or the date the borrower discovered or should have discovered the defect. This ambiguity extends the practical risk period.

An investor purchasing a property that was nonjudicially foreclosed three years ago is not in the clear. The former borrower may still have viable claims, and those claims can cloud title even if they are ultimately unsuccessful.

Key Takeaways

• Hawaii's Act 48 (HRS Chapter 667, Part II) created extensive procedural requirements for nonjudicial foreclosure that generate ongoing title risk; the recorded affidavit of compliance is not sufficient proof that the foreclosure was valid.

• The Hawaii Supreme Court's Santiago v. Tanaka decision eliminated bona fide purchaser protection for nonjudicial foreclosure buyers, meaning you inherit the foreclosing lender's procedural failures.

• Association liens under HRS § 514B-146 (condominiums) and HRS Chapter 421J (planned communities) survive mortgage foreclosure in part, and associations routinely overclaim amounts, requiring negotiation or litigation before clear title.

• Judicial foreclosure produces significantly cleaner title through court confirmation, but these properties are less common and often priced higher at auction.

• The statute of limitations for challenging a nonjudicial foreclosure extends at least six years, and potentially twenty years for actions to recover real property; a "seasoned" foreclosure is not necessarily a safe foreclosure.

Sources

• Hawaii Revised Statutes Chapter 667, Part II (Nonjudicial Foreclosure Under Power of Sale)
• Hawaii Revised Statutes § 667-22 (Notice of Default and Intention to Foreclose)
• Hawaii Revised Statutes § 667-32 (Affidavit After Public Sale)
• Hawaii Revised Statutes § 667-75 through § 667-86 (Mortgage Foreclosure Dispute Resolution Program)
• Hawaii Revised Statutes § 514B-146 (Association Lien for Assessments)
• Hawaii Revised Statutes Chapter 421J (Planned Community Associations)
• Hawaii Revised Statutes § 657-1 (General Limitations Period)
• Santiago v. Tanaka, 137 Hawai'i 137 (2016)
• Hawaii Department of Commerce and Consumer Affairs, Mortgage Foreclosure Dispute Resolution Program Administrative Rules
• First Circuit Court of Hawaii, Civil Procedure for Foreclosure Actions