Hawaii Supreme Court measures deficiency judgment by reference to fair market value rather than foreclosure price

The Hawai'i Supreme Court held that deficiency judgments should be measured by the difference between the unpaid debt and the property's fair market value rather than by reference to the difference between the unpaid debt and the foreclosure price. HawaiiUSA Federal Credit Union v. Monalim, 2020 WL 2079890 (Haw. 2020). The court cited the Restatement (Third) of Property, Mortgages §8.4 (Am. Law Inst. 1997), and found no language in the state mortgage foreclosure act that might have required a different result. This is the modern approach and has been adopted by statute or judicial decision in the majority of states.


The reasoning behind this modern approach is the mortgage statutes have an underlying policy designed to define and protect the legitimate interests of both the borrower and the lender. The lender is entitled to get back the loan with interest, as specified in the note, and the mortgage lien on the property is designed solely to ensure the repayment of that debt (along with costs). The borrower is entitled to the equity built up in the property as payments have been made over time; that means that if the property value is higher than the unpaid debt, foreclosure should give the lender the proceeds of the foreclosure sale necessary to pay off the debt while any excess belongs to the borrower. Conversely, if the market value of the property has decreased since the original sale (or grant of the mortgage), then the buyer owes the lender any deficiency between the foreclosure price and the remaining debt, on the assumption that the foreclosure price is near the fair market value of the property. The lender should not be able to buy the property as foreclosure for a pittance, sell it for its fair market value, and still go after the homeowner for the deficiency if there would have been no deficiency had the foreclosure sale price had approximated the property's fair market value. That would give the lender a windfall and subject the borrower to liability that the borrower had not in fact assumed.


States may set aside foreclosure sales if the price "shocks the conscience," but in practice, very few courts find foreclosure sale prices to be inadequate even if they are as low as twenty percent of fair market value. Denying deficiency judgments (as California does) or limiting them to the difference between outstanding debt and fair market value are ways of protecting homeowners from having to repay the debt plus a penalty that far exceeds the interest rate contained in the original agreement; it also makes it more likely the homeowner will benefit from the equity built up in the home over time.