Staving off the bank by 'renting'
The Protecting Tenants at Foreclosure Act keeps banks from tossing renters out of newly repossessed homes for at least 90 days -- longer, in many cases. But frequent commenter Josh Dowlut thinks homeowners who are about to be foreclosed on could use this law to their advantage, and he wants to spread the word.
Dowlut, who has worked in the mortgage business, ran for Congress last year as a Republican and is critical of the financial industry, called the law "a real weapon to fight the banks with" and laid out what he meant in an email interview:
"While you cannot stop the bank from taking legal ownership of your house, you can seriously delay their ability to take physical control of your house if you can get a signed lease with someone who is not your immediate family, for rent that is at least 70% of fair market value, and for a term not to exceed 2 years," he wrote. "Physical control and possession would remain with whoever is on the lease for the entire term of the lease, even after legal ownership transfers."
As long as the lease is "bona fide," the renter of record cannot legally be tossed out of the home until the term ends -- unless the property is sold to someone who intends to move in themselves, in which case the renter has 90 days to vacate. But it's usually the lender who buys back the property at foreclosure auction, and it sometimes takes a long while before the home is resold.
"My thought is homeowners could find a friend, or anyone who is sympathetic to their situation, perhaps even another homeowner facing foreclosure, to become the tenant of record," Dowlut said. Whether that tenant of record actually moves in or not doesn't seem to matter under the law, he added.
That would leave the homeowner paying the agreed-upon rent to the bank, which would likely be much less than the mortgage payment they couldn't afford, he said. A sort of do-it-yourself loan modification, except that the borrower would no longer own the home and would have to exit at the end of the lease.
I ran the idea past several attorneys. Matt Hill, a lawyer with the Public Justice Center in Baltimore who helps renters in foreclosure situations, said he has very occasionally run into people who seem to be trying something along these lines -- and he's not keen on it.
Of about 400 renters-facing-foreclosure cases Public Justice has handled, "I think the count is now at three as the number of situations where it seemed to us that there may have been some intent to sign a lease purely because the property is going into foreclosure. And we don't assist those people," Hill said. "If the sole purpose of the lease is to avoid the consequences of foreclosure, our opinion is it is not an arms-length transaction and thus not a bona fide lease."
Hill said he worries that if homeowners become last-minute landlords in large numbers, lawmakers would get rid of the protection for tenants. "And we don't want that to happen," he said. A sizable share of foreclosures proceedings in Baltimore affect honest-to-goodness renters because the properties are investor-owned.
When renters know their rights, the resolution is usually not a months-long wait for the lease to end but rather a cash-for-keys deal where they receive $2,000 to $4,000 to move out early, Hill added.
Here's the definition of "bona fide lease" from the federal law:
For purposes of this section, a lease or tenancy shall be considered bona fide only if—
(1) the mortgagor or the child, spouse, or parent of the mortgagor under the contract is not the tenant;
(2) the lease or tenancy was the result of an arms-length transaction; and
(3) the lease or tenancy requires the receipt of rent that is not substantially less than fair market rent for the property or the unit's rent is reduced or subsidized due to a Federal, State, or local subsidy.
So an arms-length transaction is key. But Dowlut wasn't deflated by Hill's argument.
"Even if the bank does convince a court that it is not a bona fide lease, something that would be difficult barring an admission of guilt by either the home owner or the tenant, the home owner has still kept physical control of the house away from the bank for the time of the legal proceedings and has thus gained something," Dowlut wrote me.
Homeowners could easily put a for-rent ad on craigslist to show that the property was in fact marketed, he said, and it wouldn't be surprising that a homeowner in financial trouble would want to bring in rental income.
He wonders how far this could be taken. "If you have a lease for the use of 1 bedroom at $400/mo, can that prevent the bank from taking physical possession of the house?"
There's a definite divide in public opinion these days when it comes to foreclosure, with some in favor of helping homeowners stay in their homes -- whether through loan modifications or other aid -- and others taking the stance that anyone who doesn't uphold their end of a contract (fair or otherwise) should get no assistance.
So I asked Dowlut why he felt so strongly about this possible leverage for borrowers.
"I understand the broader, big picture consequences of throwing a monkey wrench in the banks' quest to retake physical control of property," he answered. "It degrades the free market function of the housing market. But these are not normal times, and today's housing market is anything but free. Most public policy being enacted these days is for the purpose of redistributing wealth upwards, namely from the working class to the banker class. There is an extraordinary asymmetry of power and information when foreclosures happen. This idea ever so slightly helps to level a battle field that is very tilted in the banks' favor. The days of the Bailey Savings and Loan are gone. This is fighting Goliath National Bank by all available means."
When Wall Street "is raking in record bonuses while people get thrown out on the street, such action is morally justifiable and should be used to the fullest extent possible," he added.
What do you think, folks?