As foreclosures of rental units jump, renters lose

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As foreclosures of rental units mount, renters find themselves caught between the bank and their landlord. They often suffer as much-needed repairs are left undone at units nearing foreclosure.

While the biggest hit to the rental sector may not happen until after 2013, when two-thirds of Fannie Mae's multifamily debt matures, renters are already beginning to feel the pain as multifamily units enter the foreclosure process.

Here are some recent examples:
  • In the Washington, DC area, 475 foreclosure proceedings were begun against multifamily or cooperative units in the first three quarters of 2009, according to Neighborhood Info.
  • In the Chicago area, 328 multifamily rental buildings were in foreclosure by the second quarter, according to a study by the Institute for Housing Studies at DePaul University.
  • In Los Angeles, 78 multifamily buildings with a total of 1,344 units were in foreclosure in the first three quarters of 2009.
  • In New York, housing analysts found that 50,000 to 100,000 apartment building units were at risk of default because their mortgages were underwater.

Renters Living in Foreclosed Units Have Some Options

What happens to the tenants of all these units? Most end up dealing with broken down units filled with bugs, rats and other problems until they finally get a notice that it's time for them to move. There are programs out there to help, but renters often aren't told about their options to stay in the units. If the units are in bad shape, the renters probably prefer to find other arrangements anyway.

Renters in single family homes often don't even know that the home is near foreclosure until an eviction notice is posted on their door. New laws are supposed to prevent this, but it's been left up to the real estate agents to let the tenants know they can continue to rent for at least 90 days (if they are on a month to month lease) or until the end of the lease term. Most agents, however, only tell renters about the cash-for-keys option, which means they'll get cash if they move out immediately. If you do have a Section 8 affordable housing voucher, you have the option to stay in your home under the provisions of the Helping Families Save their Homes Act.

Investors also may be eligible for the new "deed for lease" transaction, which allows them to avoid a lengthy foreclosure if the mortgage is held by Fannie Mae. If investors turn over their property to Fannie, their tenants then have the option to remain for at least a year, as long as they pay the rent.

Rental Market Hit Record-Setting Vacancy Rates

Harvard's Joint Center for Housing Studies discussed this dramatic downturn in the rental market in its State of the Nation's Housing 2009 report. It found that the rental market was reaching near record-setting vacancy rates in 2008 of 10%, just shy of the 10.2% record set in 2004. It blames the problem on new construction of nearly 200,000 units per year since 2005, plus the conversion of condo units that did not sell into rental units.

The report states, "The real price of multifamily properties dropped in 2008 for the first time in years as investors demanded a higher return for taking on greater risk. Falling valuations reduced the real volume of multifamily transactions from $103 billion in 2007 to $37 billion in 2008 with fewer buyers and sellers able to settle on prices. Lower valuations also made it more difficult for rental property owners to tap their equity or to refinance loans to make necessary repairs and improvements."

Fannie Mae and Freddie Mac took up the void and now have more than $300 billion in apartment building loans on the books. The firms financed 84% of all multifamily lending in 2008, up from 24% in 2006, according to the Federal Housing Finance Agency. While some units are defaulting now, the true crisis won't happen until 2013 or beyond when these loans start to mature. Hopefully by then, however, there will be a major improvement in economic conditions and these investors will be able to find refinancing.

Lita Epstein has written more than 25 books including The 250 Questions Everyone Should Ask About Buying Foreclosures.

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