Hawai'i mortgage delinquencies ratcheted up last year and show no indication of slowing this year as economic growth weakens, inflation remains strong and home values flatten.

Mortgage industry data show an increase in mortgage defaults — a troubling trend that's prompting more lenders to adjust loan terms or force borrowers to sell their homes.

The trend, if it significantly escalates, would be worrisome because many foreclosures result in homes selling for below market value, which can drag down surrounding property values, sap equity and put more people in a situation that could result in foreclosure.

"My gut feeling is people got in over their heads," said Georgia Roberson, an agent with Coldwell Banker Pacific Properties who sells homes for mortgage holders if no one buys the properties at foreclosure auction.

Local mortgage industry officials and debt counselors said mortgage defaults in Hawai'i are largely coming from people who borrowed 100 percent of their home's purchase price and are encountering an income loss brought on by a divorce, health problem, job loss or some other factor.

To be sure, Hawai'i home foreclosures pale in comparison with some Mainland markets where a flood of foreclosures have forced municipalities to cut public services because of lost property tax revenue. Hawai'i foreclosures also remain much lower than they were in the mid- to late-1990s when single-family home prices dropped nearly 20 percent.

In the first quarter of last year, there were 1,605 Hawai'i mortgages (1,100 prime loans and 505 subprime) more than 60 days delinquent, which increased to 2,398 (1,526 prime and 872 subprime) in the fourth quarter, according to a February report by an alliance of the country's largest mortgage servicers.

The Hawai'i mortgage delinquencies represented less than 2 percent of loans, but rose from 1 percent in the first quarter to 1.5 percent in the fourth quarter, the report showed.

"It's slowly building," Roberson said.

Roberson said she and a staff of six sold 411 post-foreclosure homes in 2001 at the end of Hawai'i's decadelong housing market slump. By 2006, she had no staff and sold one home. Last year, Roberson sold 15 homes, and this year so far she's sold 15 and has 39 more property assignments.

"I don't see it as being anywhere as bad as 2001, because (home) prices haven't dropped," she said.

In addition, the big driver of foreclosures on the Mainland — interest payments shooting higher on exotic adjustable-rate loans — has not been a big factor so far locally, according to mortgage industry officials who say Hawai'i borrowers largely were more conservative than many on the Mainland when it came to taking out risky loans.

OUTREACH PROGRAM

One reason risky loans may not be triggering more foreclosure sales is that the federal government has organized and promoted an outreach program to stave off such loan failures. The program, called Hope Now, is an alliance of debt counselors and mortgage companies helping consumers keep their homes.

Hope Now has contacted at-risk borrowers through a direct-mail campaign and toll-free hot line (888-995-HOPE). It connects borrowers with certified nonprofit counselors and mortgage company representatives to pursue foreclosure avoidance options.

The alliance, comprising about 35 major lenders that handle about half of all mortgages nationally, has mailed 1 million letters to at-risk borrowers since late last year.

The foreclosure prevention hot line reported taking 247,000 calls and initiating 84,000 counseling sessions last year. Calls from Hawai'i to the hot line totaled 749 last year, and 495 in the first two months of this year. Counseling sessions for Hawai'i borrowers totaled 142 last year, and 98 in the first two months of this year.

Foreclosure prevention efforts through Hope Now resulted in 1 million repayment plans and loan term modifications between July 2007 and March 2008 nationally, according to the alliance. That compared with 350,000 foreclosure sales.

LOAN WORKOUTS

In Hawai'i, Hope Now estimated there were 916 repayment plans established and 320 loan modifications made last year based on preliminary data.

By comparison, there were 617 foreclosure initiations and 78 foreclosure sales last year, Hope Now data showed.

Though foreclosure initiations rose in each quarter last year, there were few sales. A growing number of loan workouts indicate that most mortgage defaults aren't resulting in troubled borrowers losing their homes.

Last week, one local foreclosure attorney had 16 foreclosure auctions scheduled, but four were postponed and six were canceled, indicating borrowers are avoiding foreclosure in many cases.

One big reason is short sales, or selling a home for less than what's owed on the mortgage. Short sales must be approved by the mortgage holder, and if successful, result in less damage to a borrower's credit than foreclosure.

According to oahure.com, a compilation of O'ahu Multiple Listing Service data from broker Bryn Kaufman of Realty Executives Oahu, there were 70 homes for sale in January and February as short sales, compared with 13 in the same two months last year.

Francis Mahe was forced into a short sale recently after his wife was severely injured in a car accident and couldn't work.

Initially, the Kalama Valley resident, who moved to Hawai'i seven years ago from Canada, contacted a counselor through Hope Now who arranged two months of reduced mortgage payments. But when Mahe's wife suffered surgery complications that slowed her recovery, a short sale was recommended. Also, Mahe's insurance company is contesting a claim on the accident, a hit-and-run, which has prevented any insurance payment from saving the home.

"We tried our best, used up all our savings," Mahe said. "There was nothing I could do. I don't know when my wife will be back to work."

Mahe's house was listed for sale at an estimated fair market value of $750,000 that's $40,000 less than he and his wife paid in August 2006. But after no offers, the price was dropped to $690,000. That attracted one offer — at $625,000. There's another open house today. It's up to the lender to accept any offer, or the home will go to public foreclosure auction April 4 outside the state Circuit Court building.

FEDERAL RULES MODIFIED

Under federal rules modified recently, if a lender accepts a short sale in a nonjudicial foreclosure — the kind used about 90 percent of the time in Hawai'i — the borrower has no obligation or incentive to pay the deficiency. But the borrower's credit is damaged, though to a lesser extent than under foreclosure.

Sheri Kagimoto, a local mortgage counselor, said losing a home in foreclosure will severely damage a person's credit score — similar to how bankruptcy mars credit for seven to 10 years.

But negotiating an alternative to foreclosure can be daunting for the average homeowner, especially in Hawai'i where the shame factor in some cultures can discourage struggling borrowers from contacting their lenders.

"A lot of people are afraid," said Kagimoto, a former mortgage agent who in October formed the counseling business Mortgage Assistance & Mitigation Group in Waipahu.

Kagimoto formed the company because home sales are falling and foreclosures are rising. But she also has firsthand experience dealing with foreclosure in the late 1990s after being injured on the job.

As a young single mother at the time, Kagimoto said she felt fearful and overwhelmed. "I didn't want to contact my lender," she said. But then the foreclosure notice came after three missed monthly payments. Kagimoto also had racked up debts on seven credit cards and was five months behind on maintenance fees.

"I thought bankruptcy was my only option," she recalled. After bringing herself to contact her lender, she said she got a nasty response from someone in the collections division, but later made headway after talking to the lender's loss mitigation department. "That made a big difference," she said.

Kagimoto received a workers' comp settlement and restructured other debts, then she arranged to stretch out her mortgage delinquency over 16 months and saved her home. "I was shocked that they even offered that," she said.

FINANCIAL JAM

Maimun Yusuf finds herself in a financial jam because she tried to help out some friends.

She lives sparingly with no cable TV, no cell phone and no Internet service. But she owns a home in Ma'ili and makes the mortgage payment every month.

But Yusuf, like a growing number of residents pressed by Hawai'i's extreme housing costs, has been sucked into the foreclosure danger zone where she is unsure of what to do.

"I have no idea what will happen," said Yusuf, an employee with nonprofit youth intervention services provider Hale Kipa.

She has yet to seek help with her foreclosure case, which involves a loan she assisted friends in obtaining. Yusuf said she helped a married couple buy a Hau'ula home because they had previously helped her through a divorce.

But Yusuf said she wasn't aware she would be listed on the mortgage as a borrower and a one-third owner of the house bought for $520,000.

"I was told this wouldn't have anything to do with my credit," she said, adding that she didn't submit wage or tax records but was asked to value her assets. "I have no idea what's on the paperwork."

Yusuf said she hasn't spoken to her friends in more than a year, and that a real estate agent had suggested a short sale.

According to listing data, the house was listed for sale March 25 for $429,500. But a foreclosure auction was held two days later, and the lender acquired the property after no bids were made.