Foreclosure risk: the writing's on the wall

Q: Our daughter found a notice of default on her front door last week, telling her that foreclosure was imminent. She called the owner, who straightened things out with the bank, but we're really worried that our daughter will eventually be displaced by a foreclosure. What can we do to protect her interests? If she moves, what can we do to make sure she won't end up with a home that gets foreclosed? --Peggy M.

A: Until recently, protecting the interests of in-place tenants when their rental is in foreclosure was strictly a matter of state law. In most situations, the mortgage predated the lease, and the tenants lost their leases when the bank foreclosed. Some states gave tenants a longer notice period than they'd otherwise receive, but the bottom line was that the lease was over.

Now, thanks to 2009 federal legislation that took effect in May, tenants have more protection, nationwide. In every state, a lease will survive if the bank takes over after a foreclosure. If a buyer at the foreclosure sale intends to occupy the unit, that buyer must give at least 90 days' notice before ousting the tenant.

Your daughter can hardly monitor the landlord to make sure he's current on his payments. No laws require banks to fill you in predefault. But some states have passed laws requiring a notice of default to be sent to any occupying tenants as well as the owner.

Getting one of these is not good news, but at least it gives tenants a heads up and the opportunity, for example, to forego renewing a lease if renewal is imminent. Tenants who fear the worst may even decide to break their leases and move out, taking the risk of being sued for the rent on the balance of the lease in exchange for the opportunity to move at their own pace.

Tenants who are in the process of looking for rentals may have better ways to avoid a foreclosure down the line. In many states, new laws require landlords to disclose to tenants whether the property is at risk.

In Minnesota, for example, once a landlord has received notice of a deed cancellation or notice of foreclosure, the landlord may not enter into a periodic tenancy where the tenancy term is more than two months, or a lease where the lease extends beyond the redemption period -- other restrictions may apply, too. (See Minnesota Statutes, Section 504B.151.)

In Oregon, a landlord must disclose in writing the existence of any notices of default or pending foreclosure suits before signing a rental agreement. (See Oregon Statutes, Section 90.310.)

You can also do some sleuthing on your own. Check out a potential landlord's financial situation by going to the local courthouse or its Web site and searching the records for evidence of any foreclosure judgments or actions against the landlord. How about records showing financial problems, like bankruptcies? Call your Better Business Bureau and find out if they have records of complaints against the owner.

Finally, don't neglect the obvious: a conversation with the current tenants, in which you can ask about any default notices these tenants may have received, and deferred or neglected maintenance (a sure sign of financial distress). If the property appears run-down, that's a red flag, too. ...CONTINUED

All rights reserved. This article may not be used or reproduced in any manner whatsoever, in part or in whole, without written permission of Inman News. Use of this article without permission is a violation of federal copyright law.