by Attorney Janet Portman

The sub-prime mortgage industry meltdown is now affecting renters whose landlords have lost their rental properties through foreclosure.

The mortgage industry crisis that started in 2006 has resulted in thousands -- no, make that millions -- of foreclosed homes. Most of the occupants are the homeowners themselves, who must scramble to find alternate housing with very little notice. They're being joined by scores of renters who discover, often with no warning, that their rented house or apartment is now owned by a bank, which wants them out in a matter of days. For most of these renters, their options are bleak.

Who Are the Renters?

Renters who lose their homes to foreclosures don't fit a single profile. Many of them live in smaller buildings, condos, and single-family homes. They're located in cities and surrounding suburbs, in low-income and upscale neighborhoods. In short, foreclosed homes are everywhere, and they're rented by people with widely varying incomes, including some with "Section 8" (federal housing assistance) vouchers.

Who Are the Defaulting Owners?

The typical foreclosed home may have originally been owner-occupied, but more often it's owned by investors and speculators who were hoping to profit from the rents. During the heyday of sub-prime mortgages -- when practically anyone who breathed and could sign their name could get a loan, usually with an adjustable rate -- these owners easily bought-up rental properties. They counted on rising rents and low interest rates to cover their mortgage payments. Caught between the slump in housing values and the rise of their mortgage interest rates, these owners could not feasibly sell nor extract enough rent to cover their monthly costs. In droves, they lost their investments. For example, in Minneapolis and its surrounding suburbs, 38% of the 2006 foreclosures involved rental properties; in Minneapolis alone, 65% were rentals.

Who Are the New Landlords?

When an owner defaults on a mortgage, the mortgage holder, often a bank, either becomes the new owner or sells the property at a public sale. If the bank becomes the owner, it may pay a servicing company to handle the property. But don't expect close attention -- these companies are focused on financial matters, not mundane things like maintenance.

Some renters find themselves with a new owner even before the foreclosure. Lawyers in Massachusetts, for example, contend that many new rental property owners are investment trusts that specialize in purchasing troubled loans directly from banks, then foreclosing, evicting, and selling.

Renters in Foreclosed Properties Lose Their Leases

Most renters will lose their leases upon foreclosure. The rule in most states is that if the mortgage was recorded before the lease was signed, a foreclosure will wipe out the lease (this rule is known as "first in time, first in right"). Because most leases last no longer than a year, it's all too common for the mortgage to predate the lease and destroy it upon foreclosure.

That doesn't always mean the lease-holding tenants have to leave immediately -- but those who remain join the ranks of month-to-month renters, all of whom can be terminated with proper notice, usually 30 days. And the new owners tend to move quickly to terminate, giving as little notice as is legally possible (sometimes no more than three days).

Tenants who refuse to leave face an eviction lawsuit, for which they usually have no legal defense. The impact of an eviction on a tenant's ability to find future housing can be devastating. No law prevents a future landlord from automatically rejecting tenants with evictions on their record, even when those tenants were the innocent victims of a foreclosing bank.

There are some notable exceptions, however, to this grim scenario. Tenants who participate in the federally financed Section 8 program will see their leases survive, as will tenants in New Jersey, New Hampshire, the District of Columbia, and, as of the end of November 2007, Massachusetts. In these states, new owners cannot evict lease-holding tenants unless the tenants have failed to pay the rent or violated any other important lease term or law. Tenants in other states who live in cities with rent control "just cause" eviction protection may also be protected.