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07/28/09: Foreclosed upon? Do you have the right to rent

HOUSING COUNSEL

By: Benny L. Kass

You home has just been foreclosed? Where do you go? Some people have started living in their cars, or with  parents or friends? But what about your house which now stands vacant, and is lowering property values in the neighborhood? The foreclosure sale did not attract any real bidders, and your lender now owns the property. This is referred to in the financial world as REO – real estate owned.

A proposal to allow homeowners to rent the house - which was first proposed two years ago - is now being seriously proposed at all levels of the federal government.
Dean Baker, co-director of the Center for Economic and Policy Research – a Washington “think-tank” – is recognized as the originator of this concept. According to Baker, “by allowing families to remain in their homes, Right to Rent would alleviate neighborhood blight and preserve family and community stability. Right to Rent is simple, it can take effect immediately, it requires no taxpayer dollars and it creates no new bureaucracy.”

If it is so attractive, why are so many homes empty? Government inertia and fear of the unknown may be the answer.  Ralph Nader many years ago suggested that new ideas are initially fought by industry, but when it appears that the idea is sound and workable, that same industry enthusiastically embraces the concept.

Freddie Mac created the REO Rental Initiative back in March of this year. If the former homeowners  want to remain in the property as  tenants,  they must demonstrate that they have adequate income to pay the monthly rental. This rent is set by a property management company based on market rents in the area where the home is located. Furthermore, the occupants must allow the home to be shown to prospective buyers, since the home will be sold during the rental period.

However, until Freddie makes a determination as to how long time the homeowner can remain in the house, at the present time, the lease is only month-to-month. That means that in most cases, when the house is sold, the tenants will be required to vacate – unless of course the buyer is an investor and willing to allow the lease to remain in effect.

The proposals presented by Mr. Baker, which are being seriously considered here in Washington, will allow the foreclosed homeowner to remain in the property for a longer period of time, perhaps up to four or five years.

Under the Baker plan, the program would be administered by a Judge, similar to the way foreclosures are handled. It should be noted, however, that in the District of Columbia and Virginia, consumers have very little recourse to the Courts if their home is about to be (or in fact has been) foreclosed.

The mortgage holder is permitted to resell the house after foreclosure, but any buyer must honor the existing lease. Rents can be increased yearly, according to the Department of Labor’s Consumer Price Index for rents in the area.

According to Baker, this does not provide a windfall for homeowners. Although they have the right to remain in the house, since they no longer own the home they would not receive the tax benefits currently available to homeowners. And they have to deal with landlords, who may or may not be cooperative.

Clearly, there are many issues that have to be resolved before a universal plan is adopted. Will all homeowners have this right to rent, or will  dollar caps be imposed, so that high income homes may be excluded from this plan?  Will the plan work in areas where the landlord-tenant laws are favorable to tenants – such as in the District of Columbia? Will potential buyers want to be a landlord over tenants who previously could not afford to pay their mortgage?

And what about tenants who live in a home that has been foreclosed? In the District of Columbia, the law is clear. If a homeowner is foreclosed upon, he/she has no tenant rights. But if a tenanted property goes to foreclosure, all of the existing tenant rights apply, even to the new property owner.

In Virginia, a foreclosure will terminate all rights to possession for both former owners as well as tenants. The lease is automatically voided by virtue of the foreclosure order.

In Maryland, leases which are entered into after the homeowner obtains a mortgage (which is the usual case) are terminated by a foreclosure sale. Many commercial leases will include a non-disturbance clause, whereby the lender who forecloses agrees not to “disturb” the existing tenant. To my knowledge, I have never seen such a clause in residential leases.

If, however, the lease was entered into before the mortgage was issued, and if the lender was on notice that there is an existing lease, the lease does not terminate upon foreclosure.

This is only general information. If you are facing foreclosure, you must talk not only to your lender but to an attorney who practices law in this area.

– Boilerplate –

CORRECTION: In last weeks column which discussed  the new disclosure rules that became effective this past Thursday (July 30th), it was reported that if the Annual Percentage Rate (APR) increases by 1/8 of a percentage, the lender has to provide a revised Truth in Lending statement and must wait three additional business days before settlement can take place. In fact, the new disclosure statement must be provided regardless of whether the APR increases or decreases by that amount.

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