By Benny L. Kass
Saturday, August 1, 2009
You home has just been foreclosed on. Where do you go?
And what happens to your house, which now stands vacant, lowering property values in the neighborhood? The foreclosure sale did not attract any real bidders, and your lender now owns the property. A proposal to allow the former homeowners to rent the house -- which first came up 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 District think tank, is recognized as the originator of this concept. According to an issue brief by 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.
Freddie Mac created the REO Rental Initiative in March. (REO means real estate owned, referring to lender-owned properties.) Under the initiative, 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. Furthermore, the occupants must allow the home to be shown to prospective buyers.
However, until Freddie determines how long the homeowner can remain in the house, 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 Baker, which are being seriously considered, will allow the foreclosed homeowner to remain in the property longer, perhaps up to four or five years. The program would be administered by a judge, similar to the way foreclosures are handled.
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 Labor Department'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, they would not receive the tax benefits available to homeowners. And they would have to deal with landlords, who may or may not be cooperative.
Clearly, there are many issues to be resolved before a universal plan can be adopted. Would all homeowners have this right to rent, or would dollar caps be imposed so that high-income homes are excluded from the plan? Would the plan work in areas where the landlord-tenant laws are favorable to tenants -- such as in the District? Would 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 on? In the District, the law is clear. If a homeowner is foreclosed on, he or 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 and tenants. The lease is automatically voided by virtue of the foreclosure order.
In Maryland, leases 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 face foreclosure, you must talk to your lender and to a lawyer who practices in this area.
CORRECTION: In last week's column, which discussed disclosure rules that became effective Thursday, I reported that if the annual percentage rate increases by an eighth of a percentage point, the lender has to provide a revised Truth in Lending statement and must wait three business days before settlement. In fact, the new disclosure statement must be provided regardless of whether the APR changes by that amount.
Benny L. Kass is a Washington lawyer. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed, stamped envelope to Benny L. Kass, 1050 17th St. NW, Suite 1100, Washington, D.C. 20036. Readers may also send questions to him at that address or contact him through his Web site, http://www.kmklawyers.com.