When developing a comprehensive foreclosure prevention policy during the foreclosure crisis, communities learned to consider how to minimize the ultimate impact on owners and renters when foreclosure could not be avoided. Many displaced families needed relocation assistance to move to new housing and avoid homelessness, and some needed more extensive social services.
Renters in foreclosed properties can be particularly vulnerable since they may have little warning of the foreclosure, face damage to their rental record and be unaware of protections that help renters prevent eviction. Former owners may also need assistance straightening out their finances and repairing their credit histories. Several policy options are available to help both renters and owners recover if their home is lost due to foreclosure.
Dealing with Displacement
Families displaced by foreclosure – whether owners or renters – may need assistance to regain housing stability and move on with their lives. Involuntary moves, such as displacement due to foreclosure or eviction, can strain families’ finances and lead to psychological distress and disruptions in parents’ work or children’s education.
Many communities offer services and assistance in the form of homelessness prevention programs to help displaced families get back on track, and they may wish to expand existing services to meet the rise in demand during future crises.
Families forced to move as a result of foreclosure — whether they are former homeowners or tenants living in foreclosed properties — may incur sudden, substantial costs for moving and providing security deposits that they may not be able to afford. The inability of such families to secure new housing leads to financial and psychological distress, overcrowding and other loss of housing quality and even homelessness.
There are limited examples of government agencies providing emergency assistance specifically for displaced families after foreclosures. Yet many communities do have emergency assistance (through federal and state welfare programs) or homelessness prevention and rapid rehousing programs (through HUD’s Continuum of Care) that offer precisely the kinds of emergency financial assistance that displaced families may need. In addition, the National Low Income Housing Coalition has created a database of state- and city-funded rental assistance programs.
Other policy recommendations worth considering include:
- Provide funding for housing counseling assistance to help families locate suitable alternative housing.
- Expand relocation assistance programs that help with first- and last-month’s rent, security deposits and the housing search process.
- Negotiate with landlords for more flexible screening processes for applicants who have been displaced by foreclosures.
Help families access a wide range of social services
Displaced families may need services that go beyond helping them find and pay for a new place to live. Communities with large numbers of foreclosures experienced greater demand for in-kind assistance, such as food and clothing, as well as counseling and advocacy to help families cope with the causes and/or effects of their displacement. Some families also needed access to job placement and training programs, and many required legal assistance to deal with bankruptcies and other consequences of foreclosure. Some schools developed or expanded programs to help children cope with family stress and the destabilizing effect of foreclosures.
Finally, some families needed help with mental health problems, abuse and addictions that often become worse with the stress of foreclosure. A survey of mortgage counselors suggests that it is fairly common for homeowners at risk of foreclosure to exhibit signs of depression and other health risks. Training and support for mortgage counselors can help them identify mental health problems in their clients and make appropriate referrals.
Foreclosure prevention efforts tend to focus on homeowners, yet many of the properties that faced foreclosure during the crisis – including both single-family homes and multifamily buildings – were occupied by renters, leaving those families at risk of eviction even if they were paying their rent on a timely and regular basis. According to the Mortgage Bankers Association, almost 20 percent of all foreclosures during the crisis involved likely rental properties (one- to four-unit properties that were not owner-occupied).
A 2012 report from the National Low Income Housing Coalition indicated that around 40 percent of families impacted by foreclosures are renters and rental properties could be involved in more than 20 percent of foreclosures nationwide. The report also cited statistics from places where other studies have been done, including findings that 65 percent of foreclosures in Hennepin County, Minn., and approximately half of foreclosures in New York involved properties likely occupied by renters. A study conducted in California found that rental units accounted for 38 percent of residences in foreclosure in 2010 based on data from ForeclosureRadar.com and the 2009 American Community Survey. In Rhode Island, more than 35 percent of foreclosures between 2009 and 2010 involved multifamily homes.
Adopt laws that prevent tenants from being evicted or having utilities shut off due to foreclosure
A wave of research released in 2008 and 2009 brought attention to the reality that renters were being displaced by foreclosure, whether or not they had paid their rent on time. At the time, most tenants were not protected from eviction once their home was foreclosed upon because of state “first in time, first in right” laws, which maintain that if the mortgage was recorded before the tenant signed the lease, then the lease becomes obsolete if the property enters foreclosure. One of the few exceptions was for housing choice (Section 8) voucher recipients and tenants living in rent-controlled units; both were often able to maintain their leases after foreclosure by law.
In response to renters’ vulnerability to foreclosure, laws were adopted at the federal, state and local levels to offer renters protection against foreclosure. At the federal level, the Protecting Tenants at Foreclosure Act (PTFA), part of the Helping Families Save Their Homes Act, was signed in to law on May 20, 2009. PTFA provided renters whose landlords had lost their properties due to foreclosure the right to stay in the home for 90 days after the foreclosure or through the term of their lease unless the property is sold to someone who will occupy the home. PTFA expired at the end of 2014, putting many renters at risk of eviction with little advance notice if their landlord loses the property to foreclosure.
Some states and localities enacted permanent protections for renters in the case of foreclosure. For example, Massachusetts enacted legislation that clarifies the rights of voucher recipients to remain in their homes after foreclosure. In addition, some states (including Massachusetts, New York, New Jersey, and New Hampshire), a number of cities, and the District of Columbia require “just cause” as a condition for eviction. “Just cause” laws protect renters by ensuring that landlords can only evict with proper cause, such as not paying rent on time. In general, foreclosure does not count as a cause for eviction in these locations.
Renters affected by foreclosure may also find that the property’s water, electricity or other utilities have been cut off. If utility services are being provided under the landlord’s name and the bills are delinquent, renters may feel they have no choice but to vacate the property. Some states adopted laws specifically to ensure renters were able to maintain utility service in foreclosed rental properties. For example, Minnesota tenants have the right to maintain or restore utility service when the landlord fails to pay the bill. In January 2010, a law went into effect in California that protects tenants from utility cutoff. The law requires that renters receive advance notification of a utility shutdown, allows renters to put accounts in their own names without liability for delinquent amounts and enables renters to deduct from their rent any costs incurred for utility services that were the responsibility of the landlord.
Adopt or increase notice requirements to tenants about pending foreclosures or displacement
Prior to the adoption of the Protecting Tenants at Foreclosure Act, the new owner (typically the mortgage servicer) of a foreclosed rental property could evict the occupants with as little as three days’ notice in some states. PTFA required 90 days advance notice before even month-to-month tenants can be asked to move out, allowing tenants some time to prepare for a move and plan accordingly. A number of states also developed policies to ensure that tenants receive a warning of a pending foreclosure, adequate notice before being asked to move due to foreclosure or both. Notice requirements allow tenants more control over their housing and may alleviate some stress by providing a more reasonable move-out schedule.
Some states and localities enacted permanent protections to provide notice to renters in the case of foreclosure. Because PTFA expired in 2014, renters again rely on the notice requirements provided by state and local laws, so even a law that provides less notice than PTFA may help to protect tenants in the future.
In Minnesota, a law that went into effect in 2008 required the new property owner after foreclosure to provide at least two months’ notice for tenants to vacate. In 2010, the law was amended to grant further protections to renters. The law now requires the foreclosing party to notify tenants that their lease is still valid during the foreclosure process. During the six-month following foreclosure sale, tenants cannot be evicted.
In November 2008, the City of Chicago passed an ordinance to require notification to tenants of a pending foreclosure within a week of the beginning of the foreclosure process. Since the full foreclosure process can be lengthy, this notice effectively gives tenants a few months or more to prepare for the property to be transferred to a new owner. In July 2008, lawmakers in California passed a law requiring owners to provide 60 days’ prior notice to tenants before being evicted from a foreclosed property.
Ensure that foreclosure-related evictions do not harm renters’ future housing options
Landlords commonly reject applicants who have been evicted from prior rental properties, even if the tenant paid their rent on time. Eviction can also damage a renter’s credit rating, making it difficult to obtain future housing or get approved for a loan. However, when evictions are due to rental property foreclosures, rather than a renter’s actions, this policy may exclude applicants unnecessarily.
A bill passed in Minnesota in 2007 eliminates evictions from renters’ legal records when the evictions are due to foreclosure. The state legislature in Illinois passed a similar law that seals the court records of evictions in cases of renters evicted due to foreclosure. In 2010, a law was signed in California to keep eviction records private unless the new owner obtains judgment within 60 days of the foreclosure that proves the renters were evicted on legitimate grounds.