It’s every renter’s worst nightmare: To move into a home or condominium with affordable rent only to find out that the owner has lost the property in foreclosure. The rent money and security deposit are gone, and chances are good that the bank that now owns the property will evict the tenant even if the rent has been paid.

Such sudden evictions have been on the rise due to the dramatic increase in home foreclosures across the U.S. But some tenants will have other options now that Fannie Mae and Freddie Mac have introduced new programs that let renters (and in Freddie Mac’s case, former homeowners) continue to occupy the home after foreclosure.

These rental programs are managed locally by property management firms that Fannie Mae and Freddie Mac have hired to look after — and typically sell — their foreclosed properties, which are referred to as “real estate-owned,” or “REO.” The property managers have been instructed to try to determine whether a home is occupied and, if so, by whom. Once occupancy has been determined, the manager can present the renter (or former homeowner) with options that may include a rental agreement or so-called “cash-for-keys” relocation assistance.

Fannie Mae and Freddie Mac are two of the largest mortgage corporations in the country. Both are now operated under federal government conservatorships.

How Fannie Mae’s post-foreclosure rental program works

Fannie Mae’s National REO Rental Policy is intended to:

  • Mitigate the disruption of personal lives that foreclosures can cause.
  • Allow qualified renters to remain in Fannie Mae-owned properties, should they choose to do so.
  • Help bring a measure of stability to communities impacted by high foreclosure rates.

Details of Fannie Mae program

  • Renters must pay a reasonable market-rate rent based on local rents of comparable properties and other factors.
  • Rent control and Section 8 will be honored.
  • Renters who were paying less than the market-rate rent may be offered some accommodation.
  • Rental agreements are month-to-month only.
  • Renters who can’t afford the market-rate rent or prefer to move out will be offered relocation assistance, typically at least one-month’s rent.
  • Renters who live in high-cost housing markets may be offered higher sums to move out.
  • The program is open only to current renters, not new tenants or former owners of the property.
  • No security deposit is required.
  • The property must meet state and local rental property codes.
  • Renters may call (800) 732-6643 for more information.

How Freddie Mac’s post-foreclosure rental program works

Freddie Mac’s REO Rental Initiative is intended to:

Ease the impact of foreclosure on renters and former owners.

  • Give renters and former owners more time to consider their options.
  • Help stabilize property values by keeping homes occupied.
  • Help protect local communities by making homes less vulnerable to vandalism.

Since all rental agreements are month-to-month, tenants must be prepared to move out with little notice once the property has been sold. Tenants also are subjected to the typical disruptions of living in a home that’s for sale: Realtors and prospective buyers who want to see the home inside and out may appear with or without warning as may an assortment of home inspectors, appraisers, repair contractors and so on.

Details of Freddie Mac program

  • Renters must pay market-rate rent or the rent they’d been paying to the former homeowner, whichever is less.
  • Former owners must pay market-rate rent.
  • Renters must show they earn enough income to afford the rent.
  • Rent control and Section 8 will be honored, although additional documentation may be required.
  • Rental agreements are month-to-month only.
  • If the homeowner or property doesn’t qualify for the rental program, the occupant will be offered relocation assistance.
  • This program is open to current renters and former owners who occupy the property.
  • No security deposit is required.
  • The property must meet state and local rental property codes.
  • Renters must agree to allow a sales agent to show the home to potential buyers.

Tenants typically have little effective recourse to recoup the rent or deposits they paid to the former owner of the home. Neither Fannie Mae nor Freddie Mac is likely to help since they weren’t involved in the renter’s agreement with the homeowner. Small claims court may be an option if the former owner’s whereabouts are known; however, in most cases, such sums are simply lost.

Web site lets renters check up on foreclosure notices

Renters who want to find out whether a home has been the subject of a notice of default or foreclosure sale might want to try RentalForeclosure.com, a new Web site that offers this information.

Dave Madam, a Realtor with Prudential Americana Group in Las Vegas, founded the Web site with a partner to help renters avoid properties that are under a cloud of possible foreclosure. He says many people have moved out of one foreclosed property only to experience the same situation again due to lack of this information.

“It’s mind-boggling,” Madam says. “It doesn’t matter what part of the country it is, the stories are the same: I just moved in or I’ve been here awhile, and this is the fourth time this has happened to me.”

Madam applauds Fannie Mae’s and Freddie Mac’s new programs: “God bless them for trying to do something for these tenants!” he says.

But he still takes a dim view of the situation that renters face with respect to foreclosure. He says tenants should be allowed to void a lease and demand the immediate return of all deposits if a property is subject to a foreclosure notice, so they can move out without penalty. He also says renters should receive more notice prior to a foreclosure since they may not want to live in a home that’s for sale.

“If this happened to me — and it did 16 years ago — I would want to be notified as soon as there was a problem so I could move my family as quickly as possible and get them settled and get the kids into the new school,” he says. “I have to rent a truck. I have to get boxes. It’s a big ordeal.”

States, cities offer few renter protections

Some states and localities have enacted laws that offer tenants some protection from immediate eviction after a foreclosure. A useful state-by-state summary of these laws is presented in “Without Just Cause,” a 110-page report on foreclosure-related renter evictions prepared by the Washington, D.C.-based National Law Center on Homelessness and Poverty, or (NLCHP, and National Low-Income Housing Coalition.

The report found that 17 states require notice to tenants prior to a foreclosure-related eviction. Those states are: Alaska, California, Colorado, Idaho, Iowa, Louisiana, Maine, Maryland, Minnesota, Missouri, Montana, Nevada, New York, North Carolina, Oregon, Pennsylvania and Washington, according to the report. Twenty-three other states also offer some limited protections, according to the report, but only New Jersey and Washington, D.C., explicitly preserve tenant’s lease rights after foreclosure. A few cities — Los Angeles and San Francisco, for instance — also mandate some notice or other aid to tenants.

Still, NLCHP Executive Director Maria Foscarinis says too many states “leave renters vulnerable to homelessness” in such situations. This organization and others have called on Congress to pass legislation that would require notification to renters and protect their tenancies through the remainder of their lease term.

Meanwhile, renters are well-advised to consult an attorney, legal aid society or nonprofit housing counselor for further assistance and more information about tenants’ rights.

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