Saturday, June 6, 2009

The Simpsons _ Foreclosure

The Simpsons _ Foreclosure
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Homer and Marge foreclose on their house.

Wednesday, June 3, 2009

President Obama has signed the "Protecting Tenants at Foreclosure Act."

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If you have invested in a property and have tenants, and your rentals are in foreclosure, or if you regularly purchase properties at foreclosure sale, or if you are a lender who forecloses on residential dwellings, there is a new federal law that will have a direct impact on your business.

On May 20, President Obama has signed the "Protecting Tenants at Foreclosure Act." Under the new law, if a federally-related mortgage loan (as defined in 12 U.S.C. 2602) is foreclosed or if the property being foreclosed is a dwelling or residential property, then the purchaser at the foreclosure sale takes the property subject to the pre-existing tenancy of a bona fide tenant. A "bona fide tenant" is one who is not related by blood or marriage to the foreclosed borrower and is a tenant under a lease negotiated in an arms-length transaction and the rent is not "substantially less than fair market value."

If the bona fide tenant is there, then the purchaser at the foreclosure sale must provide at least 90 days' notice to vacate to the tenant, and (if the tenant's lease pre-dates the notice of lis pendens) the tenant is permitted to remain in the property for the remaining term of the lease or for 90 days, whichever is later.

The tenant does not get the balance of the term of the lease (i.e. tenant only gets 90 days) if the purchaser at the foreclosure sale sells the property to someone who intends to live in the property as their primary residence. In that event, the lease terminates immediately upon closing to the new buyer (so long as the tenant has received 90 days' notice to vacate).

This should comfort tenants that are living in houses that are being foreclosed on. Hopefully it will help to convince them to keep paying rent while the investor-owner is trying to work things out with the bank. So far when tenants got served with the lis pendis, they decided to leave or worse, not to pay the owner. In doing so the tenant brought the homeowner/investor even more into trouble.

This new law "sunsets" and is no longer effective after December 31, 2012.

Below is a questionnaire that gives you a better view to interpret the new law:

Is this a foreclosure of a federally-related mortgage?
If yes, law applies;
If no, then:
Is this a foreclosure of a residential property or dwelling unit?
If no, then law does not apply;
If yes, then:
Is there a tenant in the property?
If no, then law does not apply.
If yes, then:
Is this a "bona fide" tenant (non-related to borrower, arm-length, fair market rent)?
If no, then law does not apply.
If yes, then:
Is this a month-to-month rental?
If yes, then provide 90-day notice to vacate.
If no, then:
Was the current lease dated effective prior to the date of the lis pendens?
If no, then provide 90-day notice to vacate.
If yes, then:
Does the lease expire in less than 90 days?
If yes, then provide 90-day notice to vacate
If no, then wait out term of lease and provide notice of non-renewal/termination at least 90 days prior to lease expiration date (if desired).
If lease expires in over 90 days:
Has the property been sold to a new purchaser who will occupy it as a primary residence?
If yes, then lease terminates at sale, but still must give 90-day notice to vacate;
If no, then new owner takes subject to current lease and must give 90 day notice prior to lease expiration date.

I hope this helps those who will face this scenario. I would not be surprised if the larger lenders and servicers attempt to attack the new law on constitutional grounds, but the arguments likely would not be heard by the U.S. Supreme Court until after the law sunsets anyway.

That's it, for the time being, we will have to learn our investors to work within these boundaries.

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