Federal Protection for Tenants in Foreclosed Homes
On May 20, 2009, President Obama signed a bill requiring a 90-day pre-eviction notice for tenants in foreclosed properties nationwide. The Protecting Tenants at Foreclosure Act now requires that in the event of foreclosure, existing leases for renters are honored, except in the case of month-to-month leases or owner occupant foreclosing. If so, a minimum of 90 days notice is required. Parallel protections are put in place for Section 8 tenants.
Part I: What is mortgage foreclosure and how it works
When a tenant fails to pay rent on their home, the landlord can start eviction proceedings to regain possession of their property. Likewise, when a landlord fails to make their mortgage payments, the bank or mortgage company can start the foreclosure process to gain ownership of the property and satisfy the landlord's debt. Almost all mortgages are foreclosed by advertisement. The mortgage contains a power of sale clause that allows the lender to foreclose using this method. After the landlord has failed to make their mortgage payments for two to three months, the lender will begin the foreclosure process.
Part II: What is mortgage foreclosure and how it works
The lender will schedule a Sheriff's Sale and must publish notice of the foreclosure for four consecutive weeks in a local legal newspaper. At the Sheriff's Sale, your landlord's home will be auctioned to the highest bidder, which is typically the bank that holds the loan. After the home is sold, your landlord is entitled to a redemption period during which they may still buy back their home. This period is usually six months. Only after the redemption period has ended is the property transferred to the new owner.
Figuring out if your landlord is being foreclosed on
Your landlord is not required to notify you of foreclosure. However, you may receive mail regarding the situation addressed to "Occupant." According to Michigan law, the mortgage company must post a notice on the property within 15 days of advertising the foreclosure sale. This is not a move-out date! Remember, the foreclosure process takes about six weeks and is followed by a redemption period of about six months. Your landlord can reclaim their home at any time during this process. Only after the redemption period has ended does your landlord cease to be the property owner
What happens to the lease when the landlord is in foreclosure?
Your lease is valid until the redemption period has ended. Once the redemption period ends, the new owner (usually a bank) is encouraged, but not obligated, to honor the terms of a lease. If the new owner does not honor the lease, he or she (or the bank) must provide 90 days notice before an eviction can take place
Paying rent during the redemption period
Your landlord still owns the property during the redemption and is therefore entitled to the rent. Often, a landlord that is losing their property will not always be concerned about the rent. If you decide to not pay, you should place your rent funds into an escrow account at a bank and make sure to keep the money intact until after you move, because your landlord could still file an eviction case for non-payment of rent. If you decide to stay past the redemption period, you will probably not need to pay rent for that time. But, it is a good idea to reserve that money until after you have moved out
What happens to your security deposit?
Foreclosure may invalidate your lease before the end of the original fixed term. However, Michigan security deposit law still applies to this situation and you should get a refund form the landlord. Manage your expectations, because if the landlord is insolvent you may have to file an action in small claims court if the security deposit is $3,000 or less or you might become one of your landlord's creditors in bankruptcy court, which means you have to stand in line with other creditors to get paid.