Affordable Housing Institute : US

Every time I think I understand the potential full public-policy and market ramifications of the subprime mess, another one pops up.

 

Stop reading the financial pages!

 

What happens when the subprime borrower isn’t an owner-occupant, but a landlord?  Not what I thought, as reported in this little tale from the Boston Globe:

 

The foreclosure crisis increasingly is claiming the homes of people who never made the mistake of taking out an unaffordable mortgage: renters.

 

Hundreds of tenants in foreclosed buildings have been evicted or are facing eviction by mortgage companies that do not want to be landlords.

 

 

Don’t they have leases?

 

In Boston Housing Court, about 20 eviction cases a week involve tenants who live in foreclosed properties, according to housing lawyers. Chief clerk Bob Lewis said the volume of such cases has increased “certainly more than 100% since last year.”

 

Through mid-August this year, 1,376 multifamily properties in Massachusetts had been foreclosed, according to new research by the Federal Reserve Bank of Boston. There were 750 multifamily foreclosures in Massachusetts in 2006.

 

Rafael Matos, 47, received an eviction notice in July from a company that represented the new owner of the three-decker off Dudley Street in Dorchester where he has lived for almost five years. The other two tenants in the building left quietly, Matos said. But Matos, a restaurant cook, is fighting the company in court.

 

“I pay my rent on time and I have to leave this place?” he said. “Come on. How am I going to find a new apartment?”

 

Rafael Matos, 47, is fighting eviction from his home of almost five years after a bank took possession of the house in Dorchester that his former landlord once owned.

 

Doesn’t Mr. Matos have the protection of a lease?  Well, no …

 

Matos is a tenant at will. 

 

Like every genuine negotiated bargain, a lease is a double-edged sword.  For the landlord, the resident can be expelled at any time. 

 

He can be evicted on short notice.

 

Technically, it’s not an eviction; rather it’s a refusal to extend the occupancy agreement. 

 

I love being released on a technicality

 

For the resident, Mr. Matos probably put up no more than a minimal security deposit, and he can leave any time he wants.  Both sides have optionality.

 

Like so many hard-luck stories, Mr. Matos doesn’t exactly have a fact pattern to inspire sympathy. 

 

We had a handshake deal on the rent

 

But he could have, through a legal provision that I at least didn’t know:

 

But even having a lease is no protection against a post-foreclosure eviction. Under Massachusetts law, foreclosing owners are not required to honor leases signed by the former owner.

 

That’s remarkable — not that landlords would want it, but that the legislators deferred to their desires.

 

The mortgage industry says its members are not equipped to act as landlords.

 

Hire one. 

 

 

There are plenty of management companies.

 

“Why, yes, we’ll happily evict your tenants for you!”

 

The companies that are the new owners of these houses are typically investment vehicles that were set up to hold pools of mortgages. They have Wall Street firms that act as trust agents for them, and servicing companies that collect loan payments and do related administrative work. They do not have local agents to handle calls about broken plumbing.

 

Get me another handkerchief!

 

“I weep for you,” the Walrus said

“I deeply sympathize.”

With sobs and tears he sorted out

Those of the largest size

Holding his pocket handkerchief

Before his streaming eyes

 

The firms say that it is also easier to sell a building vacant.

 

Well, of course it is.  It may not be better for the selling owner, though, since in the interval between vacation and resale, income is lost.

 

The industry said that the new owners are also the victims of landlords who didn’t pay their loans.

 

They are — so what?

 

The situation is lose-lose.

 

 

Several of the housing lawyers contend that many of the new property owners are specialized investment trusts that buy troubled loans with the intention of foreclosing, evicting, and then reselling the property.

 

Unfortunately, here too I say, “so what?”  Owners have the right to do with their property what they wish.

 

Thursday is eviction day at Boston’s Housing Court, a day devoted to cases brought by landlords seeking eviction orders against tenants.

 

Last week, Judge Jeffrey M. Winik pressed the companies seeking evictions to give tenants as much time as possible to find new housing.

 

Both compassionate and economically sensible, I should think.

 

Marie Nicole Metayer, a mother of three, was given until the end of February to find a new home for her family.  William Auton, a lawyer representing the Bank of New York, said the bank was “showing a heart” by giving her a few extra months to move out.  The judge said Metayer would barely have enough time to find a new apartment, because she must find a landlord that accepts federal Section 8 housing vouchers.

 

“And here is your testimonial!”

 

Most tenants do not get the benefit of judicial intervention. The new owners of foreclosed properties routinely send notices to tenants ordering them to vacate within 90 days, said lawyers involved in housing issues. Often the order is sweetened with a cash incentive for leaving quickly, known as “Cash for Keys,” generally $500 to $1,500. Many tenants take the money and go.

 

This isn’t surprising, and it’s a practical outcome for both sides.

 

Let’s go back to those subprime landlords.  Some people are eager to buy income-producing property, which has always been a potential road to wealth for the aspiring and diligent entrepreneur.  But when credit is unusually cheap, the buyers can become owners with little or no hard equity in the transaction.  That reduces their motivation to stay the course. 

 

I’ve lost my mojo

 

Further, they may have minimal personal financial resources.  Both things mean that investment-oriented owners who have put down minimal cash are more likely to fail than occupant owners.  The statistics bear this out:

 

The Boston Fed found that 29% of the 4,756 foreclosures in Massachusetts through mid-August this year involved multifamily buildings, although only 10% of the state’s residential properties are multifamily.

 

Three times the failure rate?

 

The number of foreclosures, and the number of multifamily foreclosures, both are on pace to double last year’s totals.

 

While the proposed state and federal legislation would provide more protection for tenants with leases, tenant advocates want greater protections for at-will tenants, too. They would like to see a prohibition on “no fault” evictions, meaning landlords would have to demonstrate a reason, such as failure to pay rent.

 

As I said above, a lease is a two-way bargain — each of us gives up some optionality.  For residents to gain protection without giving owners a similar benefit would clearly shift the equities in their favor.

 

In the meantime, these advocates fight eviction orders with procedural delays, such as contending that tenants cannot be evicted if landlords have failed to repair code violations.

Such violations are common with foreclosed properties. Landlords who fall behind on mortgage payments often stop spending on maintenance well before the actual foreclosure. And utilities paid by the landlord are sometimes cut off after the foreclosure, either because the new owner is not aware the bills need to be paid or, advocates contend, to encourage tenants to leave.

Matos, for example, lost power for two days. His former landlord stopped paying the electricity bill. Matos had to get his own account.

 

Still, that might be the right thing to do in the limited case of foreclosures. 

 

[Continued tomorrow in Part 2.]

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