Renters and tenants are now being affected by foreclosures almost as often as homeowners. The financial downturn resulted in thousands -- no, make that millions -- of foreclosed homes. Most of the occupants are the homeowners themselves, who must scramble to find alternate housing with very little notice. Theyre being joined by scores of renters who discover, often with no warning, that their rented house or apartment is now owned by a bank, which wants them out.
Renters who lose their homes to foreclosures dont fit a single profile. Many of them live in smaller buildings, condos, and single-family homes. Theyre located in cities and surrounding suburbs, in low-income and upscale neighborhoods. In short, foreclosed homes are everywhere, and theyre rented by people with widely varying incomes, including some with "Section 8" (federal housing assistance) vouchers.
When an owner defaults on a mortgage, the mortgage holder, often a bank, either becomes the new owner or sells the property at a public sale. If the bank becomes the owner, it may pay a servicing company to handle the property. But dont expect close attention -- these companies are focused on financial matters, not mundane things like maintenance.
Some renters find themselves with a new owner even before the foreclosure. Lawyers in Massachusetts, for example, contend that many new rental property owners are investment trusts that specialize in purchasing troubled loans directly from banks, then foreclosing, evicting, and selling.
Many tenants have no idea that their building has been taken at foreclosure. They continue to pay rent to the former owner, who often pockets the money but is hardly inclined to maintain the building it no longer owns. In the meantime, the new owners simply refuse to be landlords, never making repairs or even paying utility bills. Because the banks are stuck with increasing numbers of foreclosed properties that they cant sell, they remain non-landlords for some time, making life impossible for their tenants until those tenants are evicted.
Before President Obama signed the "Protecting Tenants at Foreclosure Act of 2009," most renters lost their leases upon foreclosure. But this legislation provided that leases would survive a foreclosure. The tenant could stay at least until the end of the lease, and month-to-month tenants would be entitled to 90 days notice before having to move out (this notice period is longer than any states non-foreclosure notice period, a real boon to tenants).
An exception was carved out for the buyer who intends to live on the property -- this buyer may terminate a lease with 90 days notice. Importantly, the law provides that any state legislation that is more generous to tenants will not be preempted by the federal law. These protections apply to Section 8 tenants, too.
Importantly, tenants who live in cities with rent control "just cause" eviction protection are also protected from terminations at the hands of an acquiring bank or new owner. These tenants can rely on their ordinances list of allowable, or "just causes," for termination. Because a change of ownership, without more, does not justify a termination, the fact that the change occurred through foreclosure will not justify a termination.
New owners may want to terminate existing tenants because they believe that vacant properties are easier to sell. Common sense suggests otherwise. In many situations a building full of stable, rent-paying tenants will be more valuable (and command a higher price) than an empty building. Emptied buildings are also prone to vandalism and other deterioration -- after all, no one is on site to monitor their condition. When entire neighborhoods become a wasteland of empty foreclosed multifamily buildings, their value drops even further. Its hard to understand why new owners choose to pay lawyers to start eviction procedures instead of paying a modest fee to a management company to collect rent and manage the property while they wait to sell.
Cash for keys. To encourage tenants to leave quickly and save on the court costs associated with an eviction, banks offer tenants a cash payout in exchange for their rapid departure. Thinking that they have little choice, many tenants -- even Section 8, protected tenants -- take the deal. It doesnt help them much as they join the swelling ranks of newly displaced tenants (and former homeowners) who are competing to find an affordable new rental.
Thanks to the 2009 federal legislation, most tenants with leases will keep their leases, and month-to-month tenants will have at least 90 days to relocate. Tenants with leases have no legal recourse against their former landlords, because they are in the same position vis a vis the new owner as they were with the old: The lease survives and ends as it would had there been no foreclosure. Similarly, month-to-month tenants always know that they can be terminated with proper notice, and 90 days is longer than any states termination period.
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