When hard times cause a landlord to default on his or her loan, the bank becomes the new landlord. As the bank will make clear to you, banks aren't in the rental business. The bank will typically move to sell the foreclosed property as soon as it can. This results in quickly evicting anyone living on the property -- usually with little warning. Here's how it happens and what renters-in-foreclosure can do about it.
Sometimes, landlords can't cover the mortgage payments on the property that they are renting out to tenants. This can happen for many reasons such as:
Whatever the cause, if the bank begins foreclosure proceedings on the property, it is very likely that the bank will eventually attempt an eviction of any tenant renting there.
Banks are not in the business of renting to consumers. This will become immediately apparent when they become your new landlord. The bank has two potential decisions it can make:
This is likely a smarter long-term decision for banks. A bank could manage the property until better times. Then they could recover any potential losses if the value of the property drops below the amount the bank initially loaned for its purchase. Holding onto the property also prevents further rental property value deterioration by preventing hard-hit areas from becoming ghost towns because of foreclosures.Â
As smart as it may be in the long run, however, this is unlikely. Especially during a crisis, banks want certainty, and they want cash in hand. If the landlord was unable to cover costs through rent, the bank probably considers itself even less likely to.
If this does happen, expect poor service. Â The bank is mostly concerned with money, not happy tenants.
Often, a tenant will have no idea that the property has been taken to a foreclosure sale. This means that overnight, you'll get a notice of a new owner and potentially an eviction notice. Some banks will even offer "cash for keys" programs, designed to get you out of the property as quickly as possible. This may not be a good decision to accept if you're a protected tenant, such as:
When the property is foreclosed, in most circumstances, it also ends your lease. If the mortgage was signed before your lease, the foreclosure wipes out your lease. Sadly, it doesn't matter if you still had 10 months left on your lease. It's done.
Fortunately, that doesn't necessarily mean you have to leave immediately. The new owner is still required to give you proper written notice of the lease termination.
In 2009, Congress passed the Mortgage Reform and Anti-Predatory Lending Act in the wake of the sub-prime mortgage crisis. Federal law now typically requires a 90-day notice to tenants.Â
Before, tenants had 30 days' notice at most, with some tenants receiving far less notice.
The Protecting Tenants at Foreclosure Act (PFTA) was signed in 2009 and revived on June 23, 2018. It may also add some protection to your lease, but state laws always take precedence. The Act requires:
If you refuse to leave after the expiration of the notice period, it will force eviction proceedings. Expect a lawsuit that you likely can't win and isn't worth the risk. Having an eviction on your record can seriously harm your ability to find future housing, regardless of whose fault the situation was.
The only real exception to eviction is Section 8 tenants, who are:
Such tenants often cannot be evicted by the new owners unless they fail to pay rent or violate a material term of their lease.
You can't prevent the foreclosure process from wiping out your rental agreement. However, that lease was a contract, and as such, the landlord who signed it is still bound by its terms. If you sue the former owner, they can be held accountable for taking away the place where you live.
Almost all leases contain a "covenant of quiet enjoyment," which is a material term of the contract. A landlord who causes a tenant eviction by defaulting on his mortgage is in violation of the tenant's rights. Small claims court is the best place to get a court order, and you can try to recoup economic losses such as:
Be aware the landlord is not likely to be bursting with available cash. A judgment against your landlord is good for a long time, however, and if you pursue it diligently, you may eventually be able to recover your costs.
Your home is where your heart is, but what if the property owner goes into default? The bank clearly isn't interested in where your heart lies.
You can learn about the law by seeking out the legal services of an experienced landlord-tenant lawyer in your area. They can help you understand what legal protections are available to you.
