What Happens to a Tenant During a Foreclosure?
The Seattle Times, citing the estimate of a national tenant organization, reports that 40 percent of foreclosed homes are tenant occupied. With more than 11 million homes under water -- that is, worth less than their mortgages -- as of mid 2010, tenants will continue to be adversely affected by foreclosure for months and years to come.
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In a Rent-controlled City or Just Cause State
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Lenders follow a foreclosure of a rental property with an eviction notice if they are able. They are not in the business of property management and prefer to sell the foreclosed home without anyone living in it. A requirement of most cities, except for New Jersey and New Hampshire, and subject to rent control, prevent foreclosing lenders from evicting anyone but the borrower, also the former owner. This requirement, referred to as "just cause" eviction prevents eviction without a legislated reason, usually focused on failure to pay rent, selling drugs on the property or otherwise violating significant lease provisions.
With a Fixed-term Lease
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In the face of so many evictions resulting from foreclosure, Congress passed the Protecting Tenants at Foreclosure Act in 2009. Before this law was passed, a foreclosure wiped out an existing lease unless it was signed before the mortgage was taken out. The law mandates foreclosing lenders to honor an existing lease. If the lease has a fixed-rental term, the tenants cannot be evicted until after the term expires.
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Elsewhere with a Month-to-Month Tenancy
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Outside of cities with rent control, or states with just cause eviction, tenants can be evicted without cause by a foreclosing lender. The Protecting Tenants at Foreclosure Act requires lenders to give tenants a 90-day notice before taking court action to terminate tenancy. Prior to this law, underlying state and local law required between a 20- and 60-day notice for this action.
Cash for Keys
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Evictions are expensive. The notice is just the first step in a multi-stepped process leading to court action. While most tenants leave by the end of the notice period to avoid an eviction on their record, some banks have adopted a program called "cash for keys" to reduce going to court to complete the eviction. In this program, the lender gives the tenant some negotiated incentive -- often between $1,000 and $3,000, as of 2011 -- to move out of the home voluntarily. If you receive a notice terminating tenancy and you do intend to move, contact the lender and attempt to negotiate both the financial incentive and more time to move.
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References
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