If you purchase a property at a foreclosure sale or you are a lender that takes the property at a foreclosure sale and there are tenants in the property, you better start sweating.
Under the Helping Families Save Their Homes Act, a tenant has the right to stay in the property after a foreclosure sale for a minimum of 90 days. If the tenant has a lease, then THE LEASE STAYS IN EFFECT after the foreclosure sale.
Now let's review specific provisions of the relevant law under sections 701 to 704:
- The law applies to a federally related mortgage loan on any dwelling or residential real property.
- The new owner after foreclosure sale, which includes a lender who takes the property must give a "bona fide" tenant a 90 day notice before the tenant can be evicted.
- A tenant with a "bona fide" lease entered into before the notice of foreclosure has the right to stay until the lease ends. EXCEPT that the new owner after a foreclosure sale can terminate a lease, if the new owner intends to occupy the property as his/her primary residence. This is still subject to a 90 day notice delivered to the tenant.
- Section 8 Tenants are protected under this new law.
- Who is a "bona fide" tenant? It is an individual or individuals that are not the prior owner of the property and are not the child, spouse or parent the prior owner.
- What is a "bona fide" lease? the lease or tenancy is based upon an arms-length transaction and requires rent that is not substantially less that the fair market rent for the property, which includes any reduced rent or subsidy due to a Federal, State, or local subsidy.
- What is a "federally related mortgage loan" – a) It is secured by a first or subordinate lien on residential property (incl. condos and coops) of one to four families or, b) it is made in whole or in part by any lender the deposits or accounts of which are insured by any agency of the Federal Government or, c) it is made in whole or in part, or insured, guaranteed, supplemented, or assisted in any way, by the Secretary or any other officer or agency of the Federal Government or, d) it is intended to be sold by the originating lender to the Federal National Mortgage Association, the Government National Mortgage Association, the Federal Home Loan Mortgage Corporation, or a financial institution from which it is to be purchased by the Federal Home Loan Mortgage Corporation or, e) it is made in whole or in part by any "creditor"...who makes or invests in residential real estate loans aggregating more than $1,000,000 per year. For a complete definition of federally related mortgage loan" please review section 3 of the Real Estate Settlement Procedures Act of 1974 (12 U.S.C. 2602).
This law helps tenants stay in a property after foreclosure. Most important if a tenant has a "bona fide" lease, then the tenant gets to ride it out.
So the net effect is this. No one will bid for a property at a foreclosure sale that has tenants in it. The lender will end up taking the property back. More properties on the books of lenders. Not good for lenders. Lenders are in for it now. A big positive is that lenders will have an incentive to modify a mortgage loan or strike a deal before a foreclosure sale, if the property has tenants.
I must admit, I like this law because it tips the scales towards the people and away from the lenders.
We'll talk about this some more later on. Enjoy your day.