The Washington Post, this morning, fronts a story about the troubles facing renters when their landlords are foreclosed upon. It’s much longer on anecdote than it is on data, but even so it puzzles me.
The clear feeling one gets from the piece is that when a bank forecloses on a property, the first thing it’s likely to do is try to evict any renters. But the writer, Dina ElBoghdady, never asks why banks should behave in such a seemingly self-destructive manner. Given that it’s incredibly difficult to sell houses in this market, wouldn’t any bank want a tenant who was not only looking after the house and preventing it from falling into disrepair but even paying rent for the privilege?
ElBoghdady is one of those journalists who’s better at telling stories than she is at numbers, so I’ll throw this out as more general question: is this a real problem, and if so, are the banks behaving rationally?
I can think of three things which might explain ElBoghdady’s story. The first would be if houses with tenants sell for significantly lower prices than houses without tenants. If that were true, it’s conceivable that the increase in value from selling an empty house would more than make up for the loss in rental income. But I have no reason to believe that to be the case.
The second would be that banks simply don’t have the ability or infrastructure to be landlords, and they don’t want to outsource rental-management operations given that what they really want to do is sell the property outright. This seems more likely, but at a bare minimum one would expect the bank to try to sell the property with its tenants first, to a property-management company which will make money from day one so long as the current rent covers the mortgage.
There’s also the question of why the banks would seemingly rather evict their renters rather than sell the property to them outright. Long-term renters, in particular, are often very interested in buying their property, especially if they can get a cheap price out of foreclosure. You’d think the bank would at least ask if they had any interest in such a thing: it would save a lot of money in sale costs.
Finally, this could just be a case of misunderstanding. ElBoghdady explains that many tenants do have the right to stay:
"But a lot of renters don’t know that," Becker said. "They get a notice in the mail, usually addressed to the owner, saying they have to move out within 30 days, and they just pack up and leave."
This is the kind of thing which should be addressable with education and outreach. If you get a letter addressed to someone else, you have no right or obligation to even open it, let alone act on its contents. Insofar as these rental problems are the result of an inchoate feeling among urban renters that if a house enters foreclosure then they’ll have to leave, then the magnitude of the problem does seem to diminish somewhat. We don’t need an end to the housing crisis in order to solve it, we just need to tell renters that they don’t need to flee the minute an official-looking notice appears on their door.
Update: Ironman, in the comments, provides an invaluable link for any renter finding themselves in this situation.
Update 2: Tanta, as ever, is one step ahead.