The list of multifamily properties facing foreclosure due to the credit crunch might be growing—particularly among D class and smaller distressed properties. In some instances, operators there who opted for exotic ARMs can no longer afford mortgage payments, regardless of how much rent can be squeezed from their cash-starved residents.
In response, U.S. Reps. Barney Frank (D-Mass.), Brad Miller (D-N.C.), and Mel Watt (D-N.C.) introduced legislation that contains several protections for renters during the foreclosure process. On Nov. 6, H.R. 3915, “The Mortgage Reform and Anti-Predatory Lending Act of 2007,” was referred to the full House for debate and includes language that would require any successor that takes over a foreclosed property to honor pre-existing leases. And tenants without a lease would be guaranteed 90 days before being required to vacate.
“The renter protections are so people on Congress can beat their chest and say they are protecting the little guy,” says Bruce Bronster, partner at New York law firm Dreier, which specializes in residential property foreclosures. “Do I think that multifamily properties are going to be foreclosed upon? Yes. Will there be an increase in the number of those foreclosures? Absolutely. But the language in this bill is vague.”
According to Bronster, eviction proceedings often stretch beyond 90 days anyway—longer if a resident obtains counsel. “In reality, banks don't want to foreclose on properties in the first place,” Bronster says. “Every foreclosure costs an average of $58,000, and successor owners are looking for as many leases and residual income they can get” as they begin to reposition the property.
At press time, the U.S. Senate had yet to introduce companion legislation, and the House had yet to debate the proposed bill.