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  1. 1. Renters: Collateral Victims of Foreclosure Crisis 2009 Personal Finance Seminar for Professionals Judith Liben, Senior Housing Attorney, Massachusetts Law Reform Institute Boston, MA May 13, 2009
  2. 2. Renters: Collateral Victims of Foreclosure Crisis <ul><li>Thank you to National Low Income Housing Coalition & National Law Center on Homelessness & Poverty for use of selected slides in this presentation </li></ul>
  3. 3. Renters in America <ul><li>In 2008, 35 million households rented. </li></ul><ul><li>This was 32% of American households. </li></ul><ul><li>Renting tends to serve younger Americans and those with lower incomes. </li></ul><ul><li>Most Americans rent in their lives. </li></ul><ul><li>Historically, renting has provided a safety net for households. </li></ul>
  4. 4. Nearly half of all renters now pay over 30% of income for housing
  5. 5. How “housers” talk about income <ul><li>AMI = Area median income </li></ul><ul><li>ELI = Extremely Low Income = 0 -30% of AMI </li></ul><ul><li>VLI = Very Low Income = 31-50% of AMI </li></ul><ul><li>LI = Low Income = 51-80% of AMI </li></ul><ul><li>MI = Moderate Income = 81%-120% of AMI </li></ul>
  6. 6. Lowest income households face severe housing cost burdens NLIHC tabulations of 2007 ACS data 24% Total 1% Not Low Income 7% Low Income 31% Very Low Income 70% Extremely Low Income 2007 Income Category Percent of Renter Households Spending >50% of Income on Gross Rent (2007)
  7. 7. Supply is the problem There is a 2.8 million absolute deficit of ELI rentals
  8. 8. The gap exists nationwide No state has more than 63 affordable homes for every 100 ELI renters
  9. 9. Outlook for renters <ul><li>Nationally, the number of renters will increase. </li></ul><ul><ul><li>Even if more households avoid foreclosure </li></ul></ul><ul><li>Demand for lower rent homes will increase. </li></ul><ul><ul><li>Incomes are falling. </li></ul></ul><ul><ul><li>Poorer job prospects (not everyone can live with mom and dad). </li></ul></ul><ul><ul><li>Households falling out of ownership will rent. </li></ul></ul><ul><li>“ Shadow market” of unsold for-sale homes grows. </li></ul><ul><ul><li>Provides more options for higher income renters but will likely not affect low or even “median” rents. </li></ul></ul><ul><li>Commercial apartment loans look fragile </li></ul><ul><ul><li>Large building have maintained low foreclosure rates but with falling property values, tight credit, imminent refinancing, this may change. </li></ul></ul><ul><ul><li>Large local impacts as thousands of units foreclose at once. </li></ul></ul>
  10. 10. Foreclosures affect renters <ul><li>In 2008, a fifth of properties in foreclosure were rentals. </li></ul><ul><li>Many foreclosures have multiple units. </li></ul><ul><ul><li>NLIHC estimates 40% of the families that face eviction due to foreclosure are renters. </li></ul></ul><ul><ul><ul><li>56% in New England (NLIHC) </li></ul></ul></ul><ul><ul><ul><li>Over 50% in New York (Furman Center) </li></ul></ul></ul><ul><ul><ul><li>etc. see ( www.nlihc.org/template/page.cfm?id=159 ) </li></ul></ul></ul><ul><li>NLIHC estimates that 7 million Very Low Income households in small rental properties are at risk of foreclosure. </li></ul>
  11. 11. What happens to tenants in foreclosed property? <ul><li>State law governs foreclosures and renters’ treatment in and after foreclosure. </li></ul><ul><li>Different provisions in different states. </li></ul><ul><li>Some municipalities have special ordinances </li></ul>
  12. 12. 29 states use judicial foreclosure procedure <ul><li>Mortgagee must go to court to foreclose. </li></ul><ul><li>Laws generally require tenant be notified of foreclosure proceeding – but in practice, often no notice is given. </li></ul><ul><li>If tenant not notified of foreclosure case, generally post-foreclosure owner must file separate eviction action against tenant </li></ul>
  13. 13. 21 states use non-judicial foreclosure <ul><li>Foreclosures conducted by power of sale under mortgage. </li></ul><ul><li>No court action required to foreclose. </li></ul><ul><li>Post-foreclosure owners, typically lenders that take back property, must file separate eviction actions against tenants and homeowners. </li></ul><ul><li>In practice, tenants often are told to leave and never go to court. </li></ul>
  14. 14. Cash for keys <ul><li>When mortgagee repossesses property after foreclosure - sends out agent or broker to attempt to get tenant out. </li></ul><ul><li>Usually offer “cash for keys” </li></ul><ul><li>Almost always an insufficient amount and almost never a good deal for tenant. </li></ul>
  15. 15. What happens to tenants after foreclosure? The law <ul><ul><li>Generally, leases executed after mortgage are terminated by foreclosure. </li></ul></ul><ul><ul><li>In most states month-to-month tenancies also terminated by foreclosure. </li></ul></ul><ul><ul><li>Exceptions: N.J., N.H., D.C., & some CA cities – can’t evict without good cause and foreclosure alone not good cause. </li></ul></ul>
  16. 16. What happens to tenants after foreclosure? The law (cont.) <ul><li>In Massachusetts – new law: tenancies not terminated by foreclosure. </li></ul><ul><li>Nationally, tenants with federal Section 8 leases can’t be evicted without good cause as required by federal law. </li></ul><ul><li>Gap between law and practice on the street is wide. </li></ul>
  17. 17. Tenants: The last to know about foreclosure <ul><li>In most states tenants receive short notice of foreclosure and eviction. </li></ul><ul><li>As little as 3 days in many states. </li></ul><ul><li>Some recent state laws allow more notice – but evictions go on. </li></ul>
  18. 18. Renters subject to scams <ul><li>Rent new home paying first, last and security deposit. </li></ul><ul><li>Only to find out landlord in foreclosure or had actually been foreclosed on and no longer owned house. </li></ul><ul><li>Tenant loses rent and security deposit, and bank evicts. </li></ul><ul><li>Serial foreclosure evictions. </li></ul>
  19. 19. Makes good sense to lease REO properties to eligible tenants <ul><li>Fannie Mae and Freddie Mac unrolled nationwide REO rental policies in winter 2009. </li></ul><ul><li>Offer renters (Fannie) and homeowners (Freddie) opportunity to stay in homes at market rents. </li></ul><ul><li>Hire brokers or property management companies and offer month-to-month leases </li></ul><ul><li>Avoids vacancies - supports property values - curbs vandalism and arson - saves $ for localities - and curbs family displacement </li></ul>
  20. 20. Banks lose millions by evicting residents of foreclosed housing <ul><li>Foreclosed vacant properties destroy not just displaced families but neighborhoods. </li></ul><ul><li>Abandoned homes subject to vandalism & crime </li></ul><ul><li>quickly lose value. </li></ul><ul><li>depress worth of nearby properties. </li></ul><ul><li>Costly for cash-strapped municipalities </li></ul><ul><li>. </li></ul>
  21. 21. Banks lose millions by evicting residents of foreclosed housing (cont.) <ul><li>Foreclosure alone not what ravages communities. </li></ul><ul><li>Much of the damage results from the post-foreclosure DISCRETIONARY eviction policies of the lending industry. </li></ul><ul><li>What do banks and servicers do with the “real estate owned” (REO) properties they repossess after foreclosure? </li></ul><ul><li>Quickly evict tenants and former owner-occupants, leaving families displaced, perhaps homeless, and buildings vacant and vulnerable. </li></ul>
  22. 22. Banks lose millions by evicting residents of foreclosed housing (cont.) <ul><li>Tragedy of abandonment and neighborhood despair could be avoided, at no cost to the public , if banks allowed eligible, rent-paying tenants and former home­owners to remain in their homes until they were sold to new owners. </li></ul>
  23. 23. Banks lose millions by evicting residents of foreclosed housing (cont.) <ul><li>Recent article in Bloomberg.com showed that in California banks could collect more than $1 billion annually if they allowed tenants to remain and pay rent in REO properties. </li></ul><ul><li>Even taking into account management fees and other expenses, a Freddie Mac spokesman asserts that “[t]he costs are outweighed by the economic benefits, which include the income stream from monthly checks and the upkeep provided by renters. . .” </li></ul>
  24. 24. Banks lose millions by evicting residents of foreclosed housing (cont.) <ul><li>Adapting the Bloomberg methodology to Massachusetts, we estimate that banks could take in between $86 and $102 million annually if they rented REO property to former owners and tenants. </li></ul><ul><li>If rented only to tenants in REO rental property they would earn between $34 and $40 million each year. </li></ul><ul><li>Keeping homes occupied will save taxpayers cost of municipal services like police and fire, and the increasing state costs of sheltering families made homeless by foreclosure evictions. </li></ul>
  25. 25. Banks lose millions by evicting residents of foreclosed housing (cont.) <ul><li>Giving tenants and former owners in foreclosed homes the right to pay rent until properties are sold is a winning proposition for families, for the public and for the banks themselves. </li></ul><ul><li>It’s a great opportunity for the banks to do well while doing good. </li></ul>
  26. 26. Recent State Legislative Initiatives <ul><li>Since 2007, some 15 states have or are considering legislation to address foreclosure evictions ( e.g ., Illinois, Indiana, Massachusetts, Nevada): </li></ul><ul><ul><li>enact or extend notice requirements for renters of an impending foreclosure sale or eviction. </li></ul></ul><ul><ul><li>allow tenants to terminate leases when notified of impending foreclosure or convert leases to tenancies-at-will. </li></ul></ul><ul><ul><li>require “just cause” for eviction of tenants in foreclosed properties. </li></ul></ul><ul><ul><li>require mortgagees to maintain foreclosed and soon-to-be foreclosed properties up to state code. </li></ul></ul><ul><ul><li>Require foreclosing purchasers to return security deposits </li></ul></ul>
  27. 27. Federal response thus far <ul><li>Troubled Asset Relief Program </li></ul><ul><ul><li>Agencies required to “coordinate” to keep renters in place for the term of the lease. </li></ul></ul><ul><ul><li>Protections for Federal, state and local rental subsidies and requirement to restructure multifamily mortgages to ensure financial viability. </li></ul></ul><ul><ul><li>Fannie, Freddie and FDIC must develop rental protections </li></ul></ul>
  28. 28. Federal response thus far (cont.) <ul><li>Neighborhood Stabilization Program (NSP) </li></ul><ul><ul><li>Tenants in foreclosed properties acquired with NSP dollars entitled to 90 days notice and right to remain for term of lease </li></ul></ul><ul><ul><li>Protections for Section 8 tenants </li></ul></ul><ul><ul><li>No discrimination against holder of Section 8 voucher </li></ul></ul><ul><li>Emergency Shelter Grant program (ESG) </li></ul><ul><ul><li>$1.5 billion for homelessness prevention in the Economic Recovery Act. </li></ul></ul>
  29. 29. <ul><li>For more information: </li></ul><ul><li>Judith Liben </li></ul><ul><li>Massachusetts Law Reform Institute </li></ul><ul><li>99 Chauncy St., Boston MA 02111 </li></ul><ul><li>617-357-0700 X327 </li></ul><ul><li>[email_address] </li></ul><ul><li>National Low Income Housing Coalition, 202-662-1530 </li></ul><ul><li>www.nlihc.org </li></ul><ul><li>The Renters in Foreclosure Project </li></ul><ul><li>www.nlihc.org/template/page.cfm?id=159 </li></ul><ul><li>or </li></ul>