Foreclosure Crisis: What do you Know?

In the following article, NASW-MN continues its efforts to draw attention to allied professionals working in Minnesota. It was submitted by an attorney, who approached NASW-MN because of the significant increase in calls his organization was receiving from social workers who are assisting clients dealing with foreclosure. If you find this article helpful and would like further information or assistance, we encourage you to contact the author directly (see end of article).

Here is an alarming thought.  You are 4 months into your lease and things are going well.  You pay rent on time every month.  One day you come home and see a packet of papers at your door.  The papers tell you that your home entered foreclosure.  The sheriff will auction your home in less than a month.  This is the first you heard about your landlord’s fiscal problems.  You realize the money you paid the landlord went down the drain.  Now you might have to move.

As an attorney who represents renters, I advise tenants who are in this same situation.  They are outraged, panicked and confused because the foreclosure process is completely foreign to them.  The tenant never missed a mortgage payment.  The tenant never made a risky loan.  The only thing the tenant agreed to do was pay rent every month.  Many tenants worry they might have to move on short notice.  The reality is that most tenants can remain in their home for 6 to 7 months from the time the foreclosure proceeding commences. 

One need only open a newspaper or watch the nightly news to know home foreclosures are on the rise.  Minnesota can expect 30,000 foreclosures this year, up from about 6,000 in 2005.  This trickles down to tenants.  The National Low Income Housing Coalition estimates that 40% of all foreclosures nationwide are tenant occupied buildings.  Currently, almost half of all foreclosures in Hennepin and Ramsey County impact renters. 

Our tenant hotline call volume reflects the widening foreclosure crisis.  In 2005 we received 51 calls from tenants experiencing foreclosure.  In 2006 we received 86.  In 2007, the trend exploded.  From January 1, 2007 through March 31, 2008 we received 750 foreclosure calls.  For 2008, we are on pace to handle over 1,100 calls on the subject.  This is no small amount considering in a normal year, HOME Line receives about 10,000 calls.

Most of our calls come from the 7-county metro area.  Of the 750 calls received, 198 were from Hennepin County and 139 were from Ramsey County.  The other five metro counties account for 180 calls.  That leaves 233 calls from the rest of Minnesota. 

The foreclosure process begins when a property owner fails to pay the mortgage.  The mortgage company must serve notice at the foreclosed property.  That notice must contain the name of the mortgage company and the name of the attorney handling the foreclosure.  This notice is served on the tenant.  Often, this is the first sign a tenant has that anything is wrong.  Many tenants call us at this point.

Inside the foreclosure notice is the notice of a sheriff sale.  A sheriff sale is an auction conducted by the county’s sheriff department. Bidding starts at the amount owed on the property.  Usually, the mortgage lender wins the auction and buys title the property.  This way, the lender can resell the building and recoup a portion of its losses. 

After the sheriff sale, the home enters a “redemption” period.  This period lasts for six months.  During this period, the old owner retains possession of the property and can continue to rent the property to the tenants.  The redemption period offers the old owner a chance to buy the house back.   If the old owner pays the winning bid (not just what is owed) plus any legal fees then the owner keeps the house.

Tenants are often confused about to whom to pay rent.  During the redemption period, tenants may continue to live in the property and must pay rent to the old owner.  Both parties must abide by the terms of the lease.  When the redemption period ends, the tenant owes rent to the new owner, usually the lender.  The tenant should not pay the old landlord at this point.  At the same time, the new owner owes the tenants the duties of a landlord, if the new owner accepts the rent.

After the redemption period, the new owner takes possession of the home.  Any existing lease is voided when the buyer takes possession.  Currently, the new owner must give the tenant one month’s written notice to vacate the premises.  Under a newly approved law, the tenant is entitled to two month’s written notice.  This law goes into effect on August 1, 2008.  If the tenant does not leave after receiving the notice to vacate then the new owner can file an eviction proceeding.

More and more, we field questions regarding a proposed “cash for keys” deal.  Sometimes, the new owner will offer the tenants money in exchange for leaving early.  These numbers have ranged from $500 to $2,000.  The tenants can choose to forgo the extra months or weeks of occupancy for the money.  Tenants should always get the deal in writing and signed by both parties.

The security deposit is a thorny issue in foreclosures.  For one, the original owner is often in poor financial shape.  Other times, the landlord has vanished and will not respond to letters or phone calls.  Regardless, the tenants are entitled to their full deposit or a letter explaining any deductions.  The landlord must mail this letter within 21 days of the tenant vacating the rental property.

In the case of a sale, the old owner must alert the tenant of the sale, transfer the deposit plus any accrued interest to the new owner and give the tenant 20 days to object to the transfer.  If the landlord never did these things, then he is still responsible for the deposit.  If the deposit is never returned, the tenant may sue the landlord.  The tenant can collect damages equal to twice the wrongfully withheld amount plus $200 in punitive damages. 

Tenants should consider using their security deposit to pay the last month’s rent.  Typically, a landlord can penalize a tenant for doing this.  Under new legislation, a landlord cannot collect those penalties in a foreclosure situation.  If the tenant does not pay the rent, the landlord could still file an eviction.  However, the tenant is likely have vacated the premises by the time the case comes before a judge.  Additionally, most foreclosed landlords have “checked out” and are not willing to spend the time or the money to collect one month’s rent.

There are rarely winners in a foreclosure.  The homeowner is saddled with bad credit and financial losses.  The lender rarely recovers the value of the loan.  An unwitting tenant is forced move.  A neighborhood must deal with a boarded up house.  With the proper knowledge, tenants can cushion their fall.  Tenants cannot stop the foreclosure.  But, with planning and knowledge, tenants can find a new home of their choosing.  Tenants can take charge of their situation and plan their life with the six months following the sheriff’s sale.

If you would like more information, feel free to contact:

Matt Eichenlaub         
HOME Line             
3455 Bloomington Ave         
Minneapolis, MN 55477                 
1-866-866-3546                 
www.homelinemn.org