When Renters Get Snared in Foreclosure's Web

When homeowners fall into foreclosure, the consequences are dire. But when landlords run afoul of their lenders, it can be the tenants who suffer most.

For New Yorker Ingrid Soto, her apartment building in the Bronx (pictured above) has been in and out of foreclosure since 2007, and it's pushed this mother to the brink.

When the landlord, Ocelot Capital Group, walked away from its mortgage obligations -- and subsequently stopped paying for utilities -- Soto (shown below) and dozens of other tenants were literally left in the cold.

"We had to boil water to take showers," she says matter of factly, relating a story she's told many times before. "We've got children and we're freezing.... A lot of tenants got sick, and a lot of children [came down with] pneumonia."

Having to choose between the risks of freezing and carbon monoxide poisoning, many tenants in Soto's 42-unit building used ovens to warm their apartments during the winter, despite repeated warnings from the fire department about the dangers.

Basic services were nonexistent. Drug vials littered the halls, walls succumbed to mold and rot, and the on-premises super couldn't afford even the most essential cleaning supplies, she says. "We had to deal with rats, roach infestations, building violations, bedbugs -- you name it."

In 2008, Ocelot Capital Group, which made headlines for over-leveraging a number of rent-stabilized investment properties and falling behind on mortgage payments, owned multiple buildings on a list of the worst-maintained apartments in New York City.

"With tenants, it's not like when you have a home that's foreclosed and then you're not there anymore," she says. "We were still living in those conditions, under all those building violations."

A Flimsy Safety Net

In any given year, there are an estimated 34 million households that rent, according to the Joint Center for Housing Studies of Harvard University -- a number that's positioned to grow as more homeowners get priced out -- or forced out -- of single-family homes.

The numbers paint a stark picture. In a 2010 study by the National Low Income Housing Coalition, 40 percent of families facing eviction due to foreclosure were renters, including those who were current on their rent.

But much to the dismay of tenants who suddenly find themselves in foreclosure limbo, there are precious few protections when the landlord defaults, says Eloisa Rodriguez-Dod, a professor of law at Nova Southeastern University in Fort Lauderdale, Fla.

The only federal law that addresses even some of the problems faced by renters in these circumstances is the Protecting Tenants at Foreclosure Act of 2009. Essentially, the law provides, in the case of foreclosure, a minimum 90 days notice to tenants prior to eviction. The law also states that tenants have the right to live in the property until the end of their lease.

But there are several loopholes and shortcomings, Rodriguez-Dod says. For one, while the law states that tenants can stay until the end of their lease, a qualifier in the act permits a new purchaser to evict a tenant with 90 days notice if they claim that they'll personally occupy the unit. Since there are no explicit penalties for abusing this provision, an unethical purchaser could invoke it as a strategy to evict an unwanted tenant.

More important, the law does little to protect tenants in Soto's scenario, in which a landlord's negligence can effectively force most renters to move.

"The tenants are entitled to clean buildings and all the services, but there just isn't any enforcement," says Ian Davie, an attorney in the Bronx office of Legal Services NYC, which brought the Ocelot Capital Group case to court.

When a large multifamily property like Soto's falls into foreclosure, a court-appointed "receiver" is chosen to steward the property until a new buyer is found. But in reality, he says, it's the mortgage-holder's responsibility to fund any necessary repairs. That's typically when the finger-pointing begins.

"The argument we face is that 'there's no money,' " says Sateesh Nori, director of housing litigation at BedStuy Legal Services in Brooklyn. "And it's hard to force someone to do something when they claim they're broke."

A National Problem

The shortcomings of tenant protections against foreclosure affect people from all walks of life and every corner of the nation -- even the savviest renters. Gracee Arthur, a Malibu real estate agent with 20 years of experience, found herself in the same position as Soto: Unbeknownst to her, the landlord had stopped paying his mortgage.

He did not, however, stop collecting rent, she says.

Arthur (pictured at right) moved into the ocean-view architectural home, which rents for around $3,800 a month for a two-bedroom apartment, at the end of April. By the middle of June, a Notice of Default was placed on the home -- a fact that she'd come to learn only after reading about a "trustee's sale" on the building in the local paper some months later.

She now suspects that her landlord -- who is also a real estate agent -- stopped paying the mortgage before she moved in.

"It didn't show up in any documentation yet," she says, referring to the impending foreclosure. But Arthur believes that she's a victim of "basically, fraud and rent-skimming." (Hear Arthur tell the tale in her own words here.)

Fortunately, in Arthur's case, utilities were covered by individual tenants. But the indignity of waking to a foreclosure notice was more than enough to spur her to action.

She immediately confronted the landlord about the notice. He told her not to tell the other tenants, Arthur says. But not only did she share the news with the others, she also contacted a real estate attorney about possibly filing suit for landlord fraud. And because federal law does not guarantee a refund on renters' security deposits, she recommended to tenants that they work out a deal in which their deposits be used toward their last two months of rent.

As for her landlord, Arthur says that she's been advised to file a complaint against him with the California Department of Real Estate.

"You at least have compassion for someone who's leasing their own home," Arthur says. "But for this guy, it's just a bad investment. Don't feel bad for him."

No Solution in Sight?

In Soto's case, the battle to stay in her home has been a long and tortuous tale. After months of uncertainty, years of neglect, and even having the apartment complex listed on an online auction site, renters in the erstwhile Ocelot building finally have a stable landlord.

After a lengthy court battle, the tenants convinced Fannie Mae, which held the mortgage, to take a significant loss on the outstanding debt -- from $29 million down to $5 million, says New York attorney Davie -- which demonstrates just how rampant property speculation was at the height of the bubble. Since then, a new buyer has taken the reins and has been making significant repairs to the building, Soto says.

Unfortunately, says New York attorney Nori, there wasn't much the tenants of Ocelot could have done to prevent their protracted legal battle.

"There's nothing a tenant can do to protect themselves," he said. "Even if your landlord is good now, five years from now, if they get into trouble, there isn't anything you can do other than hope things work out."