The Never-Mentioned Victims of Foreclosure

Unless you’ve been under a rock for the past couple of years, the news is chock-full of home owners being foreclosed on.

But did you know that only sixty percent of those being turned out of their homes are the home owners that failed to pay their mortgages?

What really hasn’t been talked about — what a lot of people think that they are safe from this mess — are the people who are renting homes.

Up until now, most renters have looked at this foreclosure mess from a distance. After all, they aren’t home owners, the bank isn’t going to foreclose on them. Foreclosures only happen to home owners.

Guess what: Forty percent of the people who find themselves turned out of their homes are renters, who suddenly find out that their house is now owned by a bank, or has been auctioned off to someone else who now wants to take possession of it — NOW.

There are currently only three states and the District of Columbia that have laws that protect the rights of renters when their homes have been foreclosed on. New Jersey, New Hampshire, Massachusetts and the District of Columbia. In these states, new owners cannot evict lease-holding tenants unless the tenants have failed to pay the rent or violated any other important lease term or law. Tenants in other states who live in cities with rent control just cause eviction protection may also be protected.

In most states, the bank or new owner can simply tack a three-day notice up on the front door and tell you to get out, or be forced out by the sheriff. With no more warning than that.

The home owner is under no obligation to tell the tenant that their home is entering into the foreclosure process. They will continue to collect the rent check and act as if nothing is wrong. The only time the tenant finds out is when the bank/new owner shows up on their doorstep with the eviction notice.

A lot of these home owners who go into default on their homes will move out, and then rent the house out without telling the new prospective tenant that their house or apartment is soon going into the foreclosure process. That process, which could take months — even as much as eighteen months — means that the home owner can collect a rent check that they don’t have to turn over to the bank to pay their mortgage.

Most renters will lose their leases upon foreclosure. The rule in most states is that if the mortgage was recorded before the lease was signed, a foreclosure will wipe out the lease (this rule is known as first in time, first in right). Because most leases last no longer than a year, it’s all too common for the mortgage to predate the lease and destroy it upon foreclosure. When the property is foreclosed, the chances of the tenant receiving any deposits or “last month’s pre-paid rent” is almost nil. They might be able to sue the previous owner for it, but might never see a penny on the judgment.

Banks will try to pay a small pittance to the tenant to vacate the house immediately. They call it “Pay for Keys”. It is usually a couple of hundred dollars — substantially less than the cost of moving or having to put up First, Last and Deposit on a new place. The idea of the bank is to not have to go through the cost of going to court for the certain eviction. Most tenants are forced to accept the “Pay for Keys” payment because they don’t want to have an eviction on their record. Evictions make it difficult, if not impossible, to find another place to rent, so the tenant is caught between a rock and a hard spot when having to settle for a few bucks from the bank to get out.

Why would the banks evict a tenant who is paying rent money?

Common sense would tell you that if a bank is holding a property, it is much better to be getting some cash coming in on it than to sit there and hold an asset not doing anything at the moment. After all, it is revenue coming in on a house or property that they wouldn’t have if it were sitting empty.

But the banks don’t want to have to play the role of being a “landlord” and all of the responsibilities involved with that. They also feel that it would be easier to sell the house if it were empty and not cluttered with the belongings of a tenant.

So if you are a renter, how do you proactively find out if your home is in the process of foreclosure?

Up until now, it hasn’t been easy. But like everything in our capitalist system, there is always going to be someone who can find a way to make lemonade out of lemons and then make money at it. RealityTrac recently launched a program for an annual fee of $24.95 that will notify you if the property or house you are renting is starting to go into the foreclosure process. While it isn’t a good thing to find out that the home you reside in is going into foreclosure, at least finding out about it when the process is starting will give you ample warning that you need to start making other plans. It also gives you the opportunity to go after your current landlord in small claims court for any and all rent, deposits, and fees that you have paid to him for breach of contract.

But this doesn’t really solve the problem of renters losing their rights due to the silence of their landlords and the surprise of the new owners. While the landlord had the benefit of at least twelve to eighteen months of knowledge of the foreclosure proceedings, their tenants know nothing until it is time to be booted out. Many times, these landlords will rent to a tenant knowing that they will never get through the lease period before the foreclosure becomes final. Currently, there are no laws that require the landlord or the bank to notify the tenants that the house or property is going into some stage of the foreclosure process.

In most states, there are no laws that will protect tenants from having the terms of their lease vaporize when the house is foreclosed and sold.

Because banks are national organizations, there needs to be federal laws that protect tenants against losing their rights under the contract of a lease. If a bank forecloses, the terms of the existing lease, and the value of any deposits paid should transfer over to the bank or new owner to assume. If the bank or new owner wishes to take possession of the house or property from the tenant, then there should be a 90-day notification period where the bank buys out the remainder of the terms of the lease along with any deposits paid by the tenant. The alternative is to wait until the term of the lease expires and then the bank or the new owner returns the amount of the deposit they paid.

Additionally, criminal penalties should apply to a property owner who knowingly rents a house or property to someone without notifying them in writing that the house is about to enter or is currently in a stage of the foreclosure proceedings. This should also include the owner informing a current tenant that the property they are occupying is about to go into the foreclosure process.

Furthermore, if a property is going into the foreclosure process, the bank themselves should notify any and all persons occupying that property on a monthly basis of the status of the foreclosure proceedings. A landlord should also be required to return to the tenant any and all deposits pre-paid at the time they notify the tenant that their home is about to enter into foreclosure preceedings. I would even go as far as to require the owner — should the tenant decide to break the lease and move — to pay up to three months of the rent for moving expenses and breach of contract.