On May 20, the Helping Families Save Their Homes Act of 2009 (Pub. L. 111-22) was signed into law. Its intent is to serve as yet another method to help alleviate the nation's growing foreclosures.
The act amends the federal Truth in Lending Act (TILA), changes the existing Hope for Homeowners program and enacts new protections for tenants when a secured creditor has foreclosed upon their residence. Then, on Aug. 18, the Office of the Comptroller of Currency (OCC) announced it will monitor compliance with the act in the ordinary course of its supervisory process.
‘In the case of any foreclosure on a federally related mortgage loan or on any dwelling or residential property after the date of enactment,’ the act reads, 90 days' notice must be given to tenants to vacate the premises. In the case of a bona fide tenant, the tenant must be allowed to remain in the property until the end of the lease term. The term ‘federally related’ brings an all-encompassing element to the statute, as it duplicates the Real Estate Settlement Procedures Act of 1974's definition, bringing all federally regulated lending institutions under its umbrella and not only those that deal directly with the government.
The law leaves much to interpretation. Its new requirements affect changes in the eviction and foreclosure processes of both the servicers and the legal counsel who conduct the foreclosure and evictions. New potential liability issues that come with acting as a landlord make a servicer's communication with local attorneys – as well as with their vendor partners – critical, as they are forced to make decisions based on the law itself.
Additionally, liability can exist with respect to interpreting the various provisions, if and when errors are made and when opposing counsel defends the foreclosure or eviction actions.
Title VII of the law, the Protecting Tenants at Foreclosure Act of 2009, attempts to define just how the foreclosure plays out for existing occupants, but fails to outline the many complications that are faced by servicers, attorneys and field service companies.
To determine applicability of the law to an eviction case after a foreclosure sale, servicers must ascertain whether the lease is bona fide, meaning the lessee is not a mortgagor/trustor nor the child, spouse, parent of the mortgagor/trustor; the lease is the result of a good-faith, arm's-length transaction; and the rent is not substantially less than the property's fair market value. These three factors already present challenges, one of which is to decide what constitutes fair market value and find a standard practice to reach it. The same ambiguity exists as to whether a lease was executed in good faith.
Previously, landlord-tenant law as we know it had been a state-by-state affair. Property law differs from one state to the next, and attorneys are licensed to practice in individual states because of these jurisdictional differences. Foreclosure law is also determined state by state, as filings, documentation processes and notice provisions vary. This being the case, because there are 50 states, there also are numerous opportunities for local variances in respect just to how tenancy is defined.
Even if a lease is present and meets all the terms to qualify it as bona fide, there is still a carve-out provision for individuals foreclosing who intend to make the property a place of primary residence. The law states that if the new owner is to make the property the principal residence and a proper 90-day notice is provided to the tenant, the lease terms do not have to be extended.
What it all means for REO
Though the Helping Families Save Their Homes Act of 2009 intends to help reduce foreclosures and the rate of homes falling into real estate owned (REO) inventory, it means confusion with regard to compliance, as well as lengthened times for properties to remain in a servicer's inventory and enhanced maintenance requirements. For a vacated property, it is one thing to conduct routine preservation procedures, such as mowing the lawn and keeping a property in marketable condition for sale to a third party; however, it is another to have someone actually live in the home, performing his or her daily routine.
Any homeowner understands that there are more maintenance requirements when living in a home – the wear and tear is greater. So naturally, having tenant-occupied homes will increase the amount of attention a servicer needs to pay a property regarding its maintenance, as well as the timeliness and responsiveness in fulfilling the necessary upkeep. Various landlord/tenant responsibilities in different states add to potential maintenance requirements in areas such as heating, cooling and municipal code compliance regarding habitability.
The above requirements are more intensive than those of a vacant property. For example, there is a heightened need for the care of and scrutiny paid to safety and liability issues. Protecting occupants from harm and injury is now servicers' responsibility, as they fill the shoes of the new property owner/landlord.
More intensive record-keeping of specific preservation procedures on the property is also advisable. The servicer must be able to produce sufficient documentation of a timely repair and its completion in the event of litigation by a tenant. This is important for general bookkeeping purposes, but also because a servicer (and now de facto landlord) must be prepared to provide a service record in the event that an investigation shows responsiveness to the tenant's needs, or lack thereof, is alleged to have caused injury.
Intensive fact-gathering is critical. Servicers should make early contact with the tenant to gather as much information as possible, including a copy of the lease, so that both parties are in complete understanding and agreement of its terms.
What is confusing is that leases spell out who is responsible for various aspects of a property's upkeep, and these tasks will vary – both in regard to state-specific requirements, which may not be contained in the lease, and to individually negotiated variations between the former owner and the tenant. This includes everything from landscaping to plumbing to changing air filters. It is important to have a copy of the lease to understand the responsibilities the servicer has just inherited, which is key to the success of a servicer limiting its exposure.
But what happens when the tenant does not have a copy of the lease? Is a verbal lease sufficient? What if the original written lease is misplaced? These are all practical concerns.
As for the law's effect on the marketing of REO properties, the time it takes to sell the property will be lengthened, but whether this is good or bad depends on the perspective of the buyer. Investors, who generally buy properties for the purpose of renting, most commonly prefer to have someone living in the place in order to produce an income stream. Not only are they acquiring a new asset, but that asset also has an occupant.
For servicers, however, these situations have potential to substantially lengthen the transaction time. In having to honor the 90-day notice of eviction to bona fide tenants, REOs' marketability to viable purchasers is prolonged, extending the period they occupy servicers' books.
Aiming for a moving target
Servicers have been working to establish best practices in identifying, notifying and complying with this legislation since the spring. But in truth, the chance of successfully doing so is close to that of hitting the bull's-eye on a moving target. What is acceptable in one state may not even apply in another.
Though they are now faced with new responsibilities as potential rent collectors and property managers, servicers are not the only ones struggling to find direction. Field service companies also must establish best practices to obtain more thorough tenant information from sometimes unwilling occupants. Foreclosure and eviction attorneys need to know when and how to properly notify these tenants.
The quick-fix solution is to take advantage of the resources already at your disposal. It presents a perfect opportunity to partner with other default servicing professionals. Partnering, communicating and collaborating with all of the interested stakeholders will produce the best results.
Servicers must talk to legal counsel early in the process and often throughout it, relying on counsel as a resource and legal business partner to offer advice and guidance on a jurisdictional basis. Servicers have ready access to local foreclosure attorneys, who should be familiar with the unique circumstances of these managed properties and their respective requirements for landlords.
A keen attention to detail is required on a jurisdiction-by-jurisdiction basis, and servicers should not handle it alone. The law opens the potential for a compliance minefield for the unwary, especially in states that tend to be pro-tenant. In Massachusetts, for example, several jurisdictions require that if there are any code issues regarding the property, all deficiencies be repaired prior to the eviction. Some states permit tenants to withhold rent. These tenant-friendly provisions can stall the eviction process and create delays.
Additionally, servicers might consider leveraging field service companies to provide the preservation and inspection services in a more expeditious manner, benefiting tenant satisfaction and landlord responsiveness. Field service providers can act as on-site property managers to gather tenant information, collect documentation, assess the property's condition and respond to repairs around the clock. The need for "eyes and ears" on the ground is more needed than ever with respect to a servicer's inventory.
For tenant-occupied homes, immediate means now. Turn times for repairs must shorten from days to literally hours. What happens when the heat goes out on a property during the winter if state law requires that tenants be provided heat at all times? The only way to effectively manage these properties is to engage field service providers early and often.
Servicers must also regularly touch base with their risk management department to confirm, from an in-house risk management perspective, that all their ducks are in a row. It is prudent for servicers to review with their risk management departments their insurance coverage and the like, because they have just taken on the risk that any landlord would have with respect to the property and its condition. If a property comes into inventory and the stair railing breaks – causing injury – the servicer may be exposed to liability if steps to maintain the property in safe condition were not performed and documented.
An end in sight?
The Protecting Tenants at Foreclosure Act of 2009 is unique in that, for the first time, the federal government has stepped in to intervene with landlord-tenant/property law on a nationwide basis. Yes, this legislation is vague and leaves too many questions unanswered. Servicers have the legal and field service resources available to take on their new responsibilities. Partnership, communication and collaboration will be the cornerstones of prudent property management and best practices designed to help the industry comply with the new legislation.
Doug E. Licker is vice president of Tampa, Fla.-based Mortgage Contracting Services LLC, a property preservation and inspection services provider. He can be reached at email@example.com.