Foreclosures put tenants at risk

Source : Business Times - 7 Apr 2009

California banks unwilling to be landlords are evicting tenants

Laura Hecox was baffled when an officer from the San Diego County sheriff’s department came to her home in February and said she was being evicted. She hadn’t missed a rent payment on her four-bedroom house since moving there a year-and-a-half earlier.

‘They told me to leave, to get a few things together,’ said Ms Hecox, 37, who lives with and supports her four kids and mother. ‘I got booted out just like that.’

Ms Hecox didn’t know the home she was renting in Chula Vista, California, about 10 miles north of the Mexican border, was in foreclosure because her landlord was a year behind on mortgage payments.

The new owner was a group of investors led by JPMorgan Chase, the third- biggest US home lender.

In California, home to the most foreclosures in the country last year and about 5 million renter households, residents who are current on rent payments face eviction by banks unwilling to be landlords. At least one-third of the state’s 267,000 foreclosure sales in 2008 were rental units, said Dean Preston, executive director of Tenants Together, a San Francisco- based non-profit group for renters’ rights.

While thousands of tenants search for places to live, banks are losing out on the potential to collect monthly rent cheques and flooding the market with empty houses that are declining in value. That’s because they don’t have the infrastructure or staff to deal with rental buildings, said William Acheson, an analyst at Benchmark Co LLC in New York.

‘Banks are notoriously bad property managers,’ said Mr Acheson, who tracks real estate investment trusts. ‘If they can sell them at a 60 per cent discount, they will.’

Bank of America, JPMorgan and Wells Fargo account for more than half of residential mortgages nationally, and are the biggest home lenders in California, according to Inside Mortgage Finance, a Bethesda, Maryland-based newsletter. All three are facing surging defaults from tumbling home prices and the highest unemployment in a quarter century.

‘We don’t have the capacity to be long-term landlords,’ said JPMorgan spokesman Gary Kishner in response to a question about Ms Hecox. ‘We work with tenants on their transition from a property and that may include cash for keys.’ The bank said it placed an eviction notice on Ms Hecox’s door in September. It was addressed to the landlord and ‘all others in possession,’ according a copy of the document.

More than 20 per cent of properties in the US facing foreclosure are rentals, according to a December report from the National Low Income Housing Coalition in Washington. Renters make up about 40 per cent of families facing eviction.

In California, more than 225,000 people in rental units lived in properties that went through foreclosure last year, according to a March 31 report from Tenants Together. The group estimates they occupied about 81,500 units.

Were banks to rent all those properties, they could collect more than US$1 billion in annual rent, based on the median California rent in 2007, according to the US Census Bureau.

Ms Hecox, who works the overnight shift at a job-referral service, was met at her front door in the early afternoon on Tuesday, Feb 24, by an officer from the sheriff’s department and a real estate agent. They told her the home had been sold at an auction and she needed to leave. Ms Hecox had been paying US$2,250 a month, half from government assistance.

The property was taken back by the lenders on Aug 29 at an appraised value of US$243,000, 60 per cent less than the outstanding balance on the mortgage, according to the trustee’s deed. JPMorgan’s Washington Mutual Inc unit serviced the loan, which had been wrapped up into a security, and now has the property in its name.

Officers serve eviction notices when ordered by the court and aren’t responsible for determining who occupies a property, said San Diego County Assistant Sheriff Kim Quaco. He said an eviction notice was posted on Ms Hecox’s door 11 days before she was forced to leave.

Fannie Mae and Freddie Mac, the mortgage-finance companies under federal control, have formal policies for renting to tenants. Starting in January, the companies hired property managers to reach out to renters and offer them new leases at market rates.

Management fees equal about 10 per cent of a renter’s monthly payments, said Norman Miller, professor of real estate at the University of San Diego.

The costs are outweighed by the economic benefits, which include the income stream from monthly cheques and the upkeep provided by renters, according to Freddie Mac spokesman Brad German, who said about 20 per cent of the 29,000 properties that they own nationwide are occupied by a former owner or renter.

‘Vacant properties can be magnets for vandalism and crime and also have a negative effect on property values in the immediate vicinity,’ said Mr German.

Rising delinquencies contributed to fourth-quarter losses at Charlotte, North Carolina-based Bank of America, which owns Countrywide Financial Corp, and at San Francisco- based Wells Fargo, owner of Wachovia Corp. JPMorgan, in New York, recorded a 76 per cent fall in profit.

Bank of America spokeswoman Jumana Bauwens said the company follows Freddie and Fannie policies on any of their loans it services and is examining the programmes to see if they are ‘viable for our organisation.’

Wells Fargo spokesman Kevin Waetke, referring to a document released by the bank in April 2008, said the bank deals with renters on a case-by-case basis. It doesn’t have a ’summary eviction’ policy, he said.

Most California cities require new owners give tenants 30-60 days to move, according to the state Department of Consumer Affairs.