MAUI WIPEOUT: Residents swept in debt

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EDITOR'S NOTE: After riding a wave of prosperity, Maui County residents are struggling to cope with a recession that has swept through the islands. Today's report on Maui foreclosures and bankruptcies begins a series of stories this week looking at how the financial crisis is affecting the community and how residents are pulling their lives back together. Monday's report will examine the different segments of Maui's economy - tourism, construction/ development, agriculture and government employment.

WAILUKU - There were so many homes scheduled for Friday's foreclosure auction that John Andersen started getting lost as he scanned through the list while trying to keep up with the auctioneer.

The executive director of Na Hale O Maui attends the daily auctions held on the steps of the Wailuku courthouse and sees lists of 20 to 30 homes on a busy day. At Friday's auction, there were 44.

"This was the first time I had serious trouble keeping track," said Andersen, head of a community land trust for affordable housing.

Of the properties scheduled for auction, three were sold and two were canceled - meaning the owners had worked out a deal with the bank to get out of foreclosure.

That left 39 properties "deferred," or rescheduled for auction, keeping them in limbo for another week, another month or longer, on a list of pending foreclosures that is growing longer every day.

There were 380 properties in Maui County going through foreclosure as of Friday, compared to fewer than 100 just one year ago.

Foreclosure numbers are skyrocketing because homeowners can't make mortgage payments as the recession sweeps through the islands and properties are in foreclosure longer without being sold or canceled.

"The buildup really has me concerned," Andersen said. "It's like a dam that has water coming up higher and higher behind it."

In places where distressed properties have flooded the market, real estate prices have been driven down even further than they've already been taken by the sagging economy, he noted. And the longer a home stays in foreclosure, the longer it goes unmaintained, becoming more expensive to rehabilitate and turning into an eyesore for the neighborhood.

The growing number of foreclosures is just one indicator of how the national and global economic crisis is hitting home on Maui. Bankruptcy filings have also soared, with 264 Maui County residents filing for bankruptcy in the first half of this year, compared with 151 filings for the same period last year, and 83 from January to June in 2007.

Experts working with bankruptcies and foreclosures said the trend started after last year's mass layoffs at Molokai Ranch, Aloha Airlines, ATA and Maui Land & Pineapple Co., and filings have increased at a steady clip ever since.

They said they're seeing bankruptcies and foreclosures affecting more and more middle-class families. But the biggest trend they've noticed is the sheer volume of people in serious trouble.

"The layoffs are really beginning to take their toll," said Wailuku bankruptcy attorney Ry Barbin. "I'm starting to get a lot of calls."

Bankruptcies and foreclosures are a key indicator of the community's economic health, said University of Hawaii Economic Research Organization economist Carl Bonham.

"In some ways what you're seeing in foreclosure data and bankruptcy data is mostly a symptom of the overall status of the economy: high unemployment rate, loss of income, and the end of the housing bubble," he said.

A high number of foreclosures can actually make the problem worse, he added, because it further depresses home prices.

In general, Maui and other Neighbor Islands have had a more difficult time than Honolulu, because of a more significant slump in tourism and a deeper drop in the real estate market.

"There was a bigger building boom, and now a bigger building collapse," Bonham said.

For a large number of families, foreclosure and bankruptcy go hand in hand.

"It seems like more and more people are upside-down on their real estate," Barbin said, meaning that they now owe more money on a home than the property is actually worth.

While most Chapter 7 bankruptcies require the debtor to sell off his or her assets to settle debts, filing for bankruptcy under Chapter 13 potentially allows someone who's behind on payments to freeze the delinquent portion and pay it off over time. That's an attractive option to families facing foreclosure and hoping to keep their homes.

"Because of the increase in foreclosures, we're seeing an increase in Chapter 13-type bankruptcies," said Wailuku bankruptcy attorney David Cain.

That gives some clients "unrealistic expectations" - hoping they can avoid losing their home, even though both spouses are out of work and have no income.

"There are limits to what we can do," Cain said.

He said the socioeconomic class of people filing for bankruptcy is changing.

"What we're seeing now are a lot of professionals going bankrupt, such as real estate professionals, mortgage brokers," he said. "Individuals who four or five years ago were really on top, now are being forced to file."

But no group is being spared the financial pain, he said. Cain said he's seeing people of all ages and all walks of life filing for bankruptcy.

"We're seeing an increase in pretty much everything," he said.

Four years ago, there was a huge spike of filings due to a change in law that made it harder for individuals to wipe out their debts through bankruptcy. The filings peaked in October 2005, with 236 bankruptcies filed in Maui County just before the law changed.

Filings dropped off sharply after that, with an average of 6.5 bankruptcies per month in 2006. But they started to increase in the summer of 2007, and by 2008 an average of 31.3 bankruptcies were filed each month in Maui County.

Maui had the highest number of bankruptcies of any Neighbor Island county in May, with 53 bankruptcy filings, compared to 24 for Hawaii County and 17 for Kauai. Honolulu had 177 bankruptcies.

Andersen said the number of foreclosures has also steadily increased.

He said a majority of the Maui County foreclosures are single-family homes valued between $400,000 to $700,000, owned by working families.

"There have been a couple of million-dollar foreclosures in Lahaina," he said. "Pretty rare, though."

North Kihei has seen the highest concentration of foreclosures so far, but there have also been "pockets" in Kahului, Wailuku and Lahaina, he said.

Dream City may be the next hot spot of foreclosures in the coming months, however, according to a study by the Federal Reserve.

"Kahului is a red zone of seriously delinquent loans," Andersen said.

In addition to foreclosures, credit card debt is a major reason for bankruptcy, Barbin said, and medical bills continue to be a frequent cause.

Cain said he's also seeing a big increase in commercial bankruptcies, where business owners who need to shut down need help in covering all their debts. Cain said he usually tallies up all the people the business owes money to, then offers them a settlement for whatever the business owner can pay. Many of the lenders are "very willing" to take a fraction of the debt as settlement, he said.

Cain said one of the most surprising trends he's seen has been a rise in nonbankruptcy cases handled by his firm, including consolidating debts, renegotiating mortgages and making private deals with credit card companies to settle outstanding balances. It's surprising because just a few years ago, credit card companies and other lenders were simply not interested in negotiating debt payments. But today they can be very willing to modify payment schedules or even accept lower amounts to settle a debt, if it means they'll collect some kind of payment.

"It used to be that bankruptcy was the only way to get a lender's attention. Now that's not the case," Cain said. "We're seeing lenders who are very flexible."

Wendy Burkholder, Maui County branch manager for the Consumer Credit Counseling Service of Hawaii, said two years ago most of her clients were low-income. Today, "we've definitely moved into the moderate sector," she said.

The number of people coming to her office for pre-bankruptcy counseling has also increased, from 24 percent of the agency's clients in 2007 to 44 percent today.

The increase started with the mass layoffs seen last year, especially with the shutdown of Aloha Airlines, which "went off like a sonic boom," she said.

Even for people who weren't directly affected, the layoffs were a big reality check after years of living a little too close to the edge financially. People realized that they could be next.

"That shook people," she said. "Our phones went nuts for the next 30 days."

Burkholder said she felt the current crunch was directly due to a period of "spending like drunken sailors," where banks, mortgage companies and credit card companies lent out money so freely that people took on more debts than they could handle.

Overall, the total amount of unsecured debt held by Burkholder's clients increased from $7 million to $10 million in just the last year, she said.

"They were given a lot of rope," she said. "Clearly, it's been used."

* Ilima Loomis can be reached at iloomis@mauinews.com.