Understanding the Protecting Tenants at Foreclosure Act of 2009

As the economic, social and political pressures of a significant recessionary cycle continue to impact the nation, the foreclosure process has, perhaps inevitably, come under greater scrutiny.

Judges and legislators around the country have re-evaluated existing policies and procedures in light of this new context, and the default servicing industry has had to adapt accordingly.

One recent piece of landmark federal legislation has had a particularly significant impact not only on the homeowners and property owners that it is intended to protect, but also upon the lenders, servicers and attorneys that routinely handle mortgage defaults and foreclosures: the Protecting Tenants at Foreclosure Act of 2009. The new legislation — that formally went into effect on May 20, 2009 — essentially creates and guarantees a new set of rights for tenants in foreclosed upon properties. The default servicing industry is still grappling with the short- and long-term logistical, legislative and procedural ramifications of this act. But one thing is certain, the passage of the Protecting Tenants at Foreclosure Act of 2009 promises to significantly alter the foreclosure landscape for years to come.

Taking a closer look at the some of the key provisions of the Protecting Tenants at Foreclosure Act of 2009, evaluating the motivations behind its passage and examining some of the ways in which the act has the potential for both positive and negative results is the first step toward understanding the bill’s context and its implications. The act has been in effect for less than a year, and many questions remain. Reviewing this legislation and a engaging in a brief overview of some of the issues highlighted by its passage might help to make some of those questions a bit more clear.

The key provision of the Protecting Tenants at Foreclosure Act of 2009 is time. The legislation mandates that the new owner of a foreclosed upon property must allow legitimate residential tenants to remain in the property for the duration of a valid lease. The terms and conditions of an existing lease must be honored by the new owner. For tenants living with a month-to-month lease will be provided with a 90-day grace period, a timeline that officially begins once the new owner takes title to the property. Tenants now essentially have “immunity” to eviction for a minimum of 90 days.

During this 90-day period, tenants can determine whether or not they have a bona fide written lease. If they do, they can submit a copy of the lease and any other supporting materials and documentation to the new owner for verification. If the lease is judged to be legitimate (with a reasonable time frame and reasonable market-appropriate rental terms) the tenant is entitled to serve out the duration of the lease; making subsequent rental payments to the new owner.

The act does contain exceptions: the former owner of the property and immediate family members of the former owner, including that individual’s children, spouse or parents, are ineligible for protection under the act and are potentially subject to ejectment or eviction proceedings without any undue delay.

One of the motivating factors behind the Protecting Tenants at Foreclosure Act of 2009 was the need to provide residents with some protection in the event that they were not aware of the default and had not been able to make subsequent living arrangements. It was an unfortunately all-too-common occurrence for an owner or landlord to not let tenants know that the property had been foreclosed upon — even, in some extreme cases, actually removing foreclosures notices from tenant mailboxes in order to keep them in the dark and keep the rent checks coming in.

But rent scamming and irresponsible landlords is only part of the picture. The legislation is also intended to encourage loss mitigation initiatives, particularly post-sale loss mitigation. The additional time may also facilitate other successful mutually satisfactory resolutions between owners and tenants. “Cash for keys” offers, where renters or borrowers are given a one-time cash settlement to vacate a foreclosed property, are an example of one such solution that remains quite popular.

While there are potential benefits for all parties under the terms of the new legislation, the act does leave a number of potentially thorny issues unresolved, and offers only vague or incomplete answers to a number of significant questions that are already posing challenging new obstacles for default servicing professionals.

The new property owners become the landlords and as such are responsible to repair and maintain the property, deal with code violations and follow the state landlord and tenant laws. Enforcement is obviously a key concern. While, in the absence of a valid lease, occupants are still responsible for making rental payments for their remaining 90 days in residence, as a practical matter, this is unlikely to happen in many cases.

Section 8 leases are afforded greater protections. Many pooling and servicing agreements prohibit the trust from acting as a landlord. The act also poses potentially formidable new clerical challenges for servicing professionals; adding what is essentially several additional layers of correspondence and paperwork and, more importantly, placing the burden of responsibility for determining occupant status and evaluating lease legitimacy on a cases by case basis on the shoulders of those same professionals.

While many law firms and servicers have incorporated new language into their notice to vacate correspondence, the precise legal and logistical details of how to determine the validity of individual leases is still a work in progress. Complicating matters, the act itself has inevitably inspired a host of bogus leases, as unscrupulous residents see an opportunity to delay or avoid not just eviction, but even reasonable rental payments.

If nothing else, arguing the point buys more time, and time is a costly resource that servicers can ill afford to waste unnecessarily. Without an established and consistent set of standards for determining legitimate leases, at the moment determinations are still being made on a case-by-case basis by the foreclosing attorney.

As the industry evolves and adapts to this new and still uncertain legislative landscape, responsible lenders and servicers are finding that the only constant is change. It is quickly becoming clear that to remain successful in such an environment, default servicing professionals must be flexible — willing and able to embrace change.

Accuracy and efficiency when it comes to correspondence, documentation and reporting is more important than ever, and as the ink dries on the Protecting Tenants at Foreclosure Act of 2009 and new standards solidify, those firms who are able to strike a productive and effective balance between flexibility and consistency are those most likely to continue to succeed going forward. Sean Sweeney is an attorney at Hartford, Conn.-based, Hunt Leibert. The firm provides legal representation in finance, foreclosure, bankruptcy and mortgage related litigation in both state and federal courts. Sean can be reached at 860-240-9168 or at ssweeney@huntleibert.com.