If I Foreclose, Can I Rent?

If you think you can let your house foreclose, then look for a rental unit, you may be in for a surprise, according to Janet Merrill who is an attorney with the Massachusetts Justice Project. The mortgage mess is creating a new ripple in the rental market. And it only makes sense - people who own homes and rent them out are falling behind on mortgage payments.

These properties then go into foreclosure and foreclosure attorneys are telling us that many times the renters of these properties are being forced out. A letter from the bank holding the mortgage to the renters is often the first indication that something is wrong. The renters did nothing wrong - it's the owner of the property who can't pay the mortgage with the rental receipts because the mortgage has adjusted.

In Massachusetts alone, Janet Merrill says they get four or five calls each day of renters who have to leave their rental because the property is being foreclosed. Sick and tired of moving, some renters don't know where to turn.

But it's not just in Massachusetts. Judith Liben is a housing attorney at the Massachusetts Law Reform Institute. She thought she could get a better perspective on the situation because she had been told about the evictions in her state - so she called other lawyers across the country in the housing industry. What Judith Liben was told shocked her. From California, Nevada, New York and other areas - the same thing was happening.

Is there a way to rent my foreclosed house or property?

How did this mess happen? Well, we already know about the subprime mortgages and how when they adjust the holders simply can't get refinanced at a lower rate, or sell. Homes and apartments entering foreclosure were purchased by people as investments. And they were offered what is called a "teaser" low-rate mortgage designed to hold the properties a couple of years so the investor can then sell at a profit - before their "teaser rates" went up.

Of course, that never happened. The housing market is still depressed and investors can't sell. They can't afford the new adjusted mortgage payments, either. So the loans go into default.

What happens in many states - when the mortgage goes into foreclosure - the lease or rental agreement becomes void. Banks don't want renters in the property. It complicates matters for them. So they get between 3 and 30 days notice to get out. Few states have laws protecting renters in this situation - but it is few.

So what happens? Traditionally, banks have tried to evict renters. Then they try to sell the property as quickly as possible. But, as you know, nothing is selling. As a result, there are hundreds of homes and multifamily buildings in depressed areas sitting on the market - which are magnets for criminal activity. Abandoned homes - undesirables move right in a set up a place to sell drugs, etc. Not good.

With these homes now off the "rental" market, people have less inventory to choose from. There will be more renters than homes to rent so people begin to apply for subsidized housing. But those waiting lists are long and not likely soon. And then, even if you find a home to rent and move in - how will you know that won't be foreclose and you evicted, too?