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Confusion Mounts Over Protecting Tenants

Numerous lender liabilities have been created as a result of the Protecting Tenants at Foreclosure Act.

Confusion is being expressed over whether or not there is a bona fide tenant in the property and if the lender has an oral lease with the borrower. The statute provides no guidance over what to ask for in order to prove occupancy. Lenders can take an aggressive or conservative approach to have borrowers produce evidence of occupancy. They can hire third-party vendors, attorneys or use general counsel to collect documentation.

Speakers at the "Default Super Session" at the MBA's National Mortgage Servicing Conference in San Diego contemplated the best business decision for the lender when it comes to collecting rent. If the tenant is in the property for only 90 days then some of the panelists said it might not be worth it.

"But if the borrower is in the property for two years, then it might be a good decision especially if you cannot get rid of that property or find an investor to take the property off of your hands," said Cynthia Nierer, a partner with Rosicki, Rosicki & Associates.

The choice may also depend on what state you are in. In liberal states like New York, a landlord is defined as someone who owns the property, so the lender may as well collect the rent.

"If you want to remove the tenant, the act of collecting the rent is against you," said Lawrence Garfinkel, managing real estate attorney, Bendett & McHugh PC. "What is your ultimate goal with the property? It also depends a lot on the condition of the home."

Lendera and foreclosure attorneys might worry that the tenant will call at 2 a.m. to fix a problem in the home like a broken toilet. Numerous property preservation companies already have 800 numbers in place so tenants can make calls 24/7. So far, under the law, Robert Klein, founder CEO of Safeguard Properties, said not many tenants are calling, making requests for repairs, and there has not been a significant change in call volume.

Lenders are not set up to collect rents, the speakers agreed. As part of some legal proceedings, a court-appointed receiver might be put in place to collect rents and interview tenants. If property inspections are done earlier to check on non-owner-occupancy status, this is a good idea because it is an independent, third party who is collecting rents, they said.

Fannie Mae has a whole new lease with tenant program that keeps the property inhabitable. This formal agreement helps with neighborhood stabilization. It has not experienced any lawsuits yet, said Miquel Gutierrez, director of alternative REO disposition at FNMA.

"There are no evictions and the agreement turns that possible vacant property and foreclosure into a positive situation with a paying tenant. With the tenant in place, we can market and sell the properties. If it's lived in, the home shows better," he said.

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