In Depth Analysis: CalculatedRisk Newsletter on Real Estate (Ad Free) Read it here.

Monday, November 19, 2007

Protections for Renters in Foreclosures

by Tanta on 11/19/2007 10:10:00 AM

From the New York Times (thanks, jm!):

The House on Thursday passed a broad mortgage act that includes protections for renters. The House act, which the lending industry has opposed, would require new owners to continue the leases of tenants for up to six months after foreclosure.
There are few bigger indictments of the lending practices of the last few years than the apparent fact that people mortgaged investment properties, found a creditworthy renter who never failed to make the monthly rental payment, and still ended up in foreclosure.

As the Times notes, it is hard to say how many renters and properties are affected here; we have seen quite a bit of reporting suggesting that many if not most of these foreclosed "investment" properties are vacant. The real impact of this legislation should be on lender guidelines and practices (and pricing) for making investment property loans in the residential mortgage portfolio (instead of the commercial or small business loan portfolio, where some of us think they belong).

If you know that you face an automatic six months between foreclosure and REO marketing (assuming you don't list and market the house until it is vacant), you just might get serious about operating income analysis and evaluating the seriousness and plausibility of a first-time landlord's ability to manage a property. You might also get more diligent about catching implausible claims of owner-occpancy before you close loans.

On the other hand, I suspect this will put a screeching halt to "workout" arrangements that allow an owner some time to find a tenant for a property that isn't cash-flowing. Any servicer who knows that there isn't a lease today would obviously elect to file the FC before one materializes. Since my sympathy for amateur "investors" who basically already get a better deal (the rate on a residential mortgage loan instead of a commercial loan) than they deserve is limited, I'm not sure this problem should concern anyone unduly.

I do hope it opens up some discussion of the whole issue of the GSEs and FHA and depository lenders, specifically, being allowed to buy/insure/originate investment loans in the single-family residential programs. Insofar as there are always some kind of taxpayer subsidies involved here--either in the insurance of these loans or the tax breaks for the investor or both--you have programs supposed to stimulate or provide capital for homeownership being used to goose the profits of RE investors. If there is some social or economic benefit to doing that, then I think those loans should run through something like the Small Business Administration or another kind of program explicitly designed to support entrepreneurship. Including them in programs that are supposed to be about owner-occupied housing distorts incentives and creates the kind of servicing problems we see here: it is, after all, true that residential mortgage servicers aren't exactly set up to be emergency substitute landlords. A specialized rental property lender/servicer might be. And might charge the true cost of that in the interest rate. Which might make speculation in single-family housing less attractive. Which doesn't strike me at least as a big bummer.