Confusion Expressed Over Law
Industry professionals in the REO market are trying to figure out how to deal with the new tenant protection law. Many believe it will be “trial by error” to learn the most efficient way to comply with the law.
The Helping Families Save Their Homes Act establishes protections for renters living in foreclosed homes. This legislation requires that existing leases for renters are honored except in the case of month-to-month leases or owner occupants foreclosing in which case a minimum of 90 days notice will be required.
“The new law is very confusing and everybody is waiting for the next shoe to drop,” said Cheryl Lang, president and CEO of Integrated Mortgage Solutions, a provider of asset management services, including property repair and preservation. “The first lawsuit that comes out of it is going to set a precedent.” Servicers are not property managers, she stresses. The difficulty in managing leases is going to be overwhelming for them, she says.
“You are counting on an occupant to take care of the property. If something happens and the water heater goes out, you have to have some type of company on board that can do that within the confines of the lease whether that’s within two hours or 24 hours, whatever is outlined in the lease,” she said. “Say you’ve got 100 REOs, 100 tenants, 100 different leases. How do you manage all that?” A servicer might have an occupied property, but that doesn’t mean they are reducing their costs.
“You still have to pay somebody to collect the rent, make sure the property is in good repair, manage the lease. Mold and asbestos, you are going to assume that liability. Some states require you to put that rental income into escrow. What do you do with that money then? It’s not going to be enough to offset your costs I don’t think.”
Some in the industry are talking about letting borrowers lease the property for as long as 10 years. “They can wait until the market turns around, sell the property, when everything has stabilized and the property values are coming back,” said Ms. Lang. “I was talking to an attorney yesterday, she said she thought servicers should put the property into receivership. Don’t go through foreclosure. Wait until the lease is up, then foreclose, then you minimize all your risk related to being a landlord. “Still, the lease will expire and you don’t have those problems, but you still have a vacant property at the end of the day. And is that the best thing for the neighborhood or not?” That was one way to skirt around being a landlord, the tenant is already in the property, and don’t foreclose.” As for what is happening now, she says, “one of the top three servicers has 20,000 properties that are not listed, all in REO. They will putting those on the market in a very controlled fashion because they don’t want to flood the market,” said Ms. Lang.
“I think we have a stockpile of properties that haven’t even hit the market yet. People have talked about it and you hear about it, but nobody discloses their numbers. Some haven’t even gone through because they don’t want to take a hit on their books. It’s hard to figure out where we really are at any point in time and what we are really dealing with.”
Going forward, it’s going to have to be a wait-and-see approach. “We’ll be cautious about it until the first lawsuit hits.”
Shelley Kaye, president of REOMAC, says a lot of the securitizations prohibit lenders from leasing REO properties and being landlords. “In many cases, their agreements with the owners of the investments say they can’t do it. It would say that’s a big problem.”
She also believes most lenders are not set up to be landlords. “It’s a whole other avenue. For asset managers, this is just a nightmare. How do they handle rentals? There has to be one place that will handle it for the lender.”
The industry can’t have asset managers collecting rent, Ms. Kaye added. “Are attorneys set up to do that? I don’t know. Some years ago, an attorney or REO agent would do it. It happened one in maybe a thousand cases. It made sense then to leave the person in the property. It was the exception rather than the rule. How are banks supposed to keep tenants in a property for a year or more? Are they really set up for this?”
This is a new process and everyone involved is learning how to handle it. “It was a shock to the banks when they opened up the paper to find out about this new regulation they have to abide by. What is a bona fide lease? It has to be dated prior to the notice of default. There are so many ways a tenant can make up a lease.”
Doug Licker, vice president of operations at Mortgage Contracting Services, a provider of property inspections and preservation, REO asset management, and valuation services, says this law has been a continual source of conversation since it came out in May.
“All of the industry calls have been about this because compliance was immediate. To an extent, it’s almost like you are saying, ‘Congratulations, servicers, you are now in the landlord-tenant business whether you wanted to be or not wanted to be.’ Part of what I have been saying consistently is while everyone is working on industry best practices, realize that real estate works differently in all 50 states.”
Landlord-tenant law, real estate and real property law are different in various jurisdictions, said Mr. Licker. That means, servicers need to get with their risk management department and make sure they have the appropriate loss mitigation processes in place and assurances in place, because servicers are now subject to the same liabilities as any landlord would be.