Tenants Maintain Homes

Northbrook, IL"There is a glut of REO properties on the market not selling fast enough and inventory is quickly rising. With these homes staying unoccupied on the market for 10 to 16 months it’s easy for them to deteriorate fast and many see deferred maintenance issues.

Bank-owned properties popping up in different towns and cities are maintained by property preservation companies or are inspected on a routine basis by REO brokers. Most professionals in the REO world seem to agree that the industry cannot afford to let more of these homes remain vacant for extended periods of time, especially when city governments are going after lenders with strict fines.

Fannie Mae and Freddie Mac have created programs to deal with the influx of vacant homes. The GSEs have instructed foreclosure counsel to leave tenants in the property rather than having them boarded up and vacant. The separate programs allow tenants to stay in real estate-owned or foreclosed properties owned by the agencies and lease them on a month-by-month basis at market rents until they can be sold again. Fannie’s program covers renters of foreclosed properties, while both former owners and renters can qualify for Freddie’s program.

Indeed, renters of single-family or one- to four-unit residential properties are being affected by the rise in foreclosures and REO. While the rights of tenants depend on the state they live in, some who receive notices to be evicted from foreclosed properties are contacting attorneys or the mortgage lender to work out an extension of the stay until the lender can resell the property, according to Gerald Alt, president and CEO of Heart Financial Services here, a provider of home retention services for borrowers and loss mitigation for lenders. He is an attorney with more than 28 years of experience in the mortgage field.

“One of the problems not just because of today’s economy but something that has been going on for years is the issue of a homeowner who bought the house for himself and put renters in it. Or there were those who simply bought the property, typically an urban property, and then always intended for it to be for rental,” said Mr. Alt.

In Las Vegas during the housing boom, property values shot up, and borrowers were able to take enough equity out of their first home and make a downpayment for another one, a move-up home, he says. They did not want to sell the original home if they could afford both and as long as they got a tenant into the property they could make it work. “An influx of people moved into the area. Dealers who worked in the casinos who owned two homes, they lived in the second home and rented out the starter home.”

Then the economy turned and jobs were lost, he adds. A number of those people in the starter homes lost their jobs and could not pay the rent. “Folks were overextended. You didn’t sell your house. You bought another one. Then we saw a domino effect. The loss of a tenant on the original homes now deprived the borrower of the cash needed on the other home. They were stuck with two payments and one income and the risk of losing the other house as well.”

Typically, the leases a residential renter signs do not have subordination clauses, which are more common provisions among commercial leases. Consumers who sign a month-to-month lease or a long-term lease are finding out that the landlord has collected the rent and failed to make the mortgage payments to the bank.

Financial institutions are required under law to give renters prior notice to eviction, which could be as little as seven to 30 days. “Imagine a family living in a home with two kids in school " they have taken care of the property and painted it, and pictures of the family line the walls inside. They are told they have 30 days to move out. It’s very disrupting. They don’t own it,” says Mr. Alt, who is also president and chief operating officer of LOGS Network, which designs legal and outsourcing solutions for the mortgage industry.

In most states, when the foreclosure occurs, the legal title goes back to the name of the financial institution and the tenant does not have “privity of contract.” Even though the tenant believes they have a five-year lease, that agreement is with the landlord and not the bank, which is the actual owner of the property.

In Chicago, for instance, all the redemption time happens before the foreclosure sale. Once that sale occurs, the sheriff can come out and evict whoever is in the house as long as they had notice. “If they didn’t know about the foreclosure at all, they weren’t served, no kind of notice, then state law " which are all a bit different " most will require the lender to bring a separate landlord tenant type of eviction proceeding. The notice can be anywhere from seven to 30 days depending on the state. To the people living in the house, they say, 'You don’t own it, you have no rights, I’m telling you to leave.’”

In Mr. Alt’s home state of Michigan there is a redemption period after the foreclosure sale when the bank cannot take possession of the property. They have already foreclosed on the legal title but cannot take it back for six months. “We’ve seen cases where squatters have taken over the property during that redemption period. The homeowner has said, 'I got foreclosed on. I have to move.’ They have found another place and left. Now, there is a vacant property. Squatters have moved in, claimed it as their own,” he said.

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