Bank Foreclosures & Tenants

Landlords get repeated notices from their lenders during the foreclosure process: late notices, notices of default and notices of sale. But, with the exception of a few states, like Michigan and California, and very few cities, like Chicago, in most places neither the landlord nor the foreclosing lender are required to provide any notice to the tenant. That is, of course, until the lender evicts her.

Eviction

The chief effect of a foreclosure on tenants is eviction. Not every lender evicts tenants from properties that fall back into their control after foreclosure but, according to "The New York Times," a number of them do. Fortunately for tenants, some states have just-cause eviction statutes, and some cities and town have rent-control laws, both of which prevent evictions without just cause -- that is, without a good reason, like the failure to pay rent. Foreclosure is not a just cause.

Building Condition

When an owner understands he is going to lose a building to foreclosure, he has no incentive to maintain it. If foreclosures occurred in a quick time frame, this wouldn't be too much of a problem. But with an average time lag of over a year and a half between the time a landlord misses his first payment to the date title is transferred to the lender, according to the loan and title servicing firm LPS, this problem magnifies. Cities like New York, according to both the "The Huffington Post" and the non-profit housing advocacy group Urban Homesteading Assistance Board, have begun taking delinquent owners to court for housing and building code violations left unaddressed during the foreclosure process.

More Time to Move

The only good news for tenants caught in the middle of the foreclosure debacle is the 2009 passage of the Protecting Tenants at Foreclosure Act. This law requires foreclosing lenders to honor leases and to provide tenants, who are not protected by rent control and just-cause eviction laws, with 90-day notices before evictions. If a lease is for a fixed term, the tenant will have until the term expires before a 90-day notice can be sent. Tenants on month-to-month leases and tenants without leases are entitled to 90 days' notice.

Ability to Negotiate

Any tenant receiving an eviction notice for any reason has a right to contact the owner to try to negotiate more time, a cash settlement or both. Many foreclosing lenders, however, have adopted policies to allow occupants -- both tenants and owners -- to do just that: negotiate for more time and a cash incentive to move voluntarily. Evictions are costly and carry a risk of adverse publicity for lenders.

References

• "The Wall Street Journal"; What Your Landlord Isn't Telling You; Kelli B. Grant; November 2010
• National Housing Law Project: State and Local Tenant Protections
• "The New York Times"; Fannie Mae Lets Renters Stay Despite Foreclosures; Charles Duhigg; December 2008
• "The Huffington Post"; Housing Nightmare -- Tenants In Defaulted Buildings Have No One to Turn To; Samantha Gross; April 2010
• Urban Homesteading Assistance Board; Bronx Supreme Court Judge Holds Mortgage Holder Responsible for Repairs to Distressed Buildings; September 2010
• LPS Mortgage Monitor: November 2010 Mortgage Performance Observations