Foreclosures often lock out renters

Foreclosure doesn't always hurt only the person whose name is on the mortgage. More renters are turning to support agencies for help.

Kimberly Edwards found out the duplex she was renting was in foreclosure only when a notice written in legalese was taped to her door. But its meaning was crystal clear: She and her two sons had to vacate the premises the next day or go to court.

As it happened, the property had been in foreclosure when she moved in and the six-month grace period was up. Edwards, a 29-year-old single mother in school with plans to become a paralegal, was paying her portion of her subsidized rent to a man who wasn't making mortgage payments.

Edwards is one of a growing number of renters being displaced because their landlords are losing their investment properties to foreclosure.

While there is no estimate of the number of renters being forced to move because their buildings are in foreclosure, workers on the front lines -- from foreclosure prevention counselors to tenants organizations -- say that starting last year, they began hearing from significantly more people caught in the foreclosure crossfire. The problem has been getting worse.

The number of investment properties entering foreclosure suggests the problem is widespread, although it is unclear how many of those were vacant. Hennepin County estimates that in the first quarter, about 45 percent of foreclosed properties could have been rentals, up from about 33 percent in 2006. Ramsey County estimates 43 percent in the first quarter.

Beth Kodluboy, executive director of the Minneapolis tenant advocacy group Home Line, has seen a steady increase in foreclosure-related calls. Through early June, the group took 77 calls -- as many as it did in all of 2006.

Cheryl Peterson, senior mortgage foreclosure prevention counselor for Twin Cities Habitat for Humanity, said she's been getting more and more calls from renters in the past year. "They don't know what to do," she said. Neither does Peterson, who is set up to work with homeowners, not tenants.

When displaced renters call, she explains the complicated and lengthy foreclosure process. She does what she can to refer renters to organizations that may be able to help with legal matters or with new housing, such as Legal Aid or tenant advocacy groups. Peterson also gets "a lot of calls from people who own several properties in north and south Minneapolis." she said. "Juggling the financing of multiple mortgages ... is beyond the foreclosure counseling programs's area of expertise because it's a business venture."

She blames the increase of investment property delinquencies on a mixture of subprime lending and small-time landlords who "couldn't afford the properties to begin with," and were dreaming of making it rich in real estate. But many took on more debt than they could afford, their adjustable mortgage rates spiked, or they couldn't find renters. They stopped making repairs. Then utilities got shut off.

Some landlords continue to pocket rent long after they stop paying the mortgage, allowing a tenant to learn of the foreclosure only when a deputy knocks on the door to hand them a foreclosure notice.

Telltale signs

Tenants advocates say that clues of foreclosure typically show up long before that.

For Edwards, the first sign that something wasn't right at the duplex at 36th Avenue and Washburn Avenue N. came in August, when the water was shut off for a couple of days. Her landlord, who lives in Colorado, also was slow to have a handyman come and fix the radiators, which were blazing hot in summer.

There were other signs. "He couldn't rent the other half of the duplex and the house was on the market, too, the entire time," Edwards said.

The court granted her 30 days to vacate, which gave her until just before Christmas to leave. "My kids didn't have a Christmas," she said.

Happy with the neighborhood, where she said "it was OK for my kids to ride bikes up and down the street," and lacking money to move, she tried to convince the bank holding the mortgage to let her pay rent directly to it and stay. But she recalls being told "absolutely not, because they didn't want to be a landlord."

Foreclosure Stopping

You’ve just received a terrifying telephone call from your lender. He or she has threatened foreclosure on your beloved property and says there’s nothing you can do to stop the proceedings. But before you start to pack up your belongings, rest assured that there are several ways of foreclosure prevention, including those below. Some cost money and some are free.

1. Foreclosure Mediation - Probably the most popular and common with people who can't pay all the past due mortgage payments at once. This service negotiates with the lender to move those payments to the back of the loan (pending you have the proven income to make the current payments). It is essentially like getting a grace period.

2. Negotiate a Repayment Structure Yourself - This is definitely the cheapest way, but can be frustrating if your lender doesn't have a helpful "loss mitigation department" or a "hardship" program. It can be viewed the same as if you were going to fix your own car. First you have to learn about the car, then fix the car. As with car repair, most people would rather hire a specialist to handle their financial affairs.

3. Deed in lieu of foreclosure - This is where you realize that you can't pay for the house and you voluntarily give the house back to the lender. This still is subject to a deficiency judgment yet counts as a "less serious" foreclosure on your credit.

4. Sell your house - This is a great way if you feel you can get what you owe out of your house. Remember to include the standard 6% realtor fees when calculating your take home. You can negotiate the buyer to pay some of the realtor fees, but it is rare.

For assistance on stopping foreclosure with the mediation services mentioned above, click here.

Mortgage Industry Working on Foreclosure-Prevention Fixes

Congress and private lenders are looking to create new tools to help prevent mass foreclosures in the ailing subprime sector nationwide. Tomorrow on Capitol Hill, a House financial services subcommittee will discuss alternative programs to assist home owners who bought more than they could afford at the height of the housing boom, and who are now facing sharp payment increases they cannot afford.

Last week in the Senate, the Joint Economic Committee issued a report suggesting that the Federal Housing Administration (FHA) might play an important role in transitioning subprime borrowers out of high-cost, adjustable rate loans and into fixed rate government insured mortgages.

Private mortgage firms are also ratcheting up their own "loss-mitigation" efforts, reaching out to borrowers heading for-but not yet in-serious delinquency. EMC Mortgage Corp., a subsidiary of Wall Street bank Bear Stearns, announced creation of a roving 50-person "Mod Squad" team of loss-mitigation and workout specialists. Named after a popular TV program from the late 1960s-early 1970s, EMC's Mod Squad plans to work in dozens of cities with borrowers individually, and to reach out through community and credit counseling groups.

The squad's goal will be to modify the terms of mortgages to better fit borrowers' actual economic situations today. Among the optional forms of modification will be lowering interest rates, switching from floating-rate to fixed rate, restructuring payment schedules and deferring repayment of arrears. EMC is not offering the program solely out of the goodness of its heart, however. Foreclosures cost bond investors around $80,000 per case, whereas a loan modification may cost just a small fraction of that.

Tom Morano, global head of mortgages for Bear Stearns, said "proactively avoiding foreclosures can reduce the severity of losses, benefiting both homeowners and bondholders. (It's) a win-win proposition."

Meanwhile, attention is being focused on new foreclosure prevention concepts that go beyond loan modifications and do not require "short sales" of properties or deeds in lieu of foreclosure to satisfy the owner's debt. One idea is being discussed on Capitol Hill was proposed by a Virginia-based loss-mitigation firm, Lyons McCloskey LLC. The program is a variation of FHA's "partial claim" option, where money is advanced to bring a borrower's loan account current. The advance is structured as a second lien against the property, but carries no interest rate and must be paid from the proceeds of any future sale of the house.

In the Lyons McCloskey plan, seriously delinquent borrowers would be refinanced into fixed-rate mortgages insured or provided by FHA, the VA, Freddie Mac or Fannie Mae. The refi costs and any arrears on the previous mortgage would be treated as a "soft second" lien with no interest payments due. FHA would partially guarantee the second lien, and the bondholders or investors would assume the risks on the uninsured portion.

Full payment of the lien would not be due until the house sold or the homeowners had the financial wherewithal to pay off the debt.

The key to this program, according to Bob Lyons and Joe McCloskey of the loss-mitigation firm, is that it has the capacity to handle situations where borrowers are able to make mortgage payments at a lower interest rate, but are shackled with arrears that they can't afford to repay and mortgage balances in excess of the current home value.

Some legislation would likely be required for any FHA role in this or other new programs, but housing leaders in both the House and Senate appear ready to consider foreclosure-prevention remedies as part of pending FHA reform legislation.