The federal government has introduced a number of regulations to address the fallout of the housing downturn, such as situations where tenants reside in foreclosed properties.
Enacted on May 20, 2009, the Protecting Tenants at Foreclosure Act provides rights to any bona fide tenant in the case of any foreclosure on a federally related (e.g., FHA) mortgage.
The purpose of the law is to protect tenants from leases that are immediately invalidated when the landlord allows the mortgage to become delinquent, resulting in a foreclosure.
One year later, what are the consequences of the Tenant Protection Act?
In the past, when a property became real estate owned the tenant lost his deposit and no longer had a right to occupy the home unless the new owner wanted to create a new lease. Typically mortgage servicers do not want to be landlords, so the tenant would be required to move.
The Tenant Protection Act creates different tenancy categories, and if the resident is a bona fide tenant with a written, legal lease for the market rent for the area, the new owner must honor the original lease through the full term. The owner may be able to persuade them to leave with a relocation assistance offer, but cannot force the tenant out.
While the act has great intentions, it forces mortgage servicers to do something they have never done before: become landlords. This is true even in the case of residents who cannot show proof of being a legal tenant, because they are granted a 90-day grace period before the eviction proceeding can begin. This adds to the mortgage servicer's losses because the tenant is not required to pay rent during the grace period, and the owner is required to maintain the property.Also, while the eviction is being delayed the property could lose additional value.
Overall, the government has taken all of the risk and shifted it from the occupant to the investor, because whether or not the resident is a bona fide tenant, if the borrower defaults on the payments the investor must become a landlord for at least 90 days.
While this is not affecting the foreclosure decisions of mortgage servicers, it is increasing the cost of servicing, and extending the timetable for taking possession of a property.
A few creative investors/servicers have taken the initiative to use in-person outreach providers, contacting occupants in an attempt to determine their tenancy intentions and where applicable, negotiating tenant agreements and/or cash for keys alternatives.
The long-term impact of the Tenant Protection Act is still uncertain. Many industry professionals agree that the act does not provide dates or guidelines for the majority of the requirements. Who determines what market rent is? How much time is allotted for making that decision?
The act will become more defined as court cases clear up the gray areas. In the meantime, we will see how owners and investors respond to the additional burden of adding rental property management to their list of responsibilities.