Thursday, August 11, 2011

Tenants and Foreclosure--An Update

I check my Sitemeter every day, sometimes twice a day, sometimes four times a day. That way, I have my ego fed. Oh, and I find out what the current problems are. What I've noticed this month is (a) that there are a lot more hits--more than 100 more a day, and (b) that people are less interested in cash for keys and more interested in procedure. I was curious about this, as foreclosure filings in general have gone down. But I think I have the answer.

Homeowners, it appears, are becoming more strategic in abandoning their underwater properties. This is, for homeowners, a good thing. If the property is worth $100K less than your mortgage, you're never going to be able to sell without bringing cash money to the table. Not in your wildest dreams. Walking away makes good economic sense.

But here's where something that makes good economic sense becomes bad behavior, tacky, and something that, in a rationally-ordered society, would be fraud. Our soon-to-be erstwhile homeowners decide to rent out the property and let the tenants deal with the foreclosure. In the early days of the foreclosure crisis, this was common. But the homeowners waited until the Notice of Default had been filed, and tenants learned, sometimes from sad experience, to check with the local government office where Notices of Default are filed, and passed on properties going through the foreclosure process.

Having learned from past history--a good thing for humanity in general--they are now renting out the property before the Notice of Default is filed with the local government. This means that tenants have no way of checking on the status of the property. Aside from being nervous about landlords who are renting houses they've just vacated, there's little tenants can do to protect themselves, absent government action. No, not drawing and quartering. But some way to allow tenants to sue their former landlords who rent the place out after they've quit paying the mortgage for fraud.

Update: There's more. A correspondent informs me that, in some cases, homeowners believe that renting the house out will give them some negotiating power with the lender. Instead of a defaulting homeowner, the lender will have to deal with a tenant who has at least 90 days to vacate the property. Uh, 90 days isn't that much time. The lenders don't care. Doing this won't help homeowners save their properties, but it will screw up the lives of their tenants. Still bad form.

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