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Evicting the Blameless Tenant

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23 Responses

  1. A.J. Sutter says:

    Thanks for highlighting this, and I agree with your conclusions; though I think it should be sufficient to base them on arguments from fairness (based on who has more information about the risk, etc.) and possible harm to the tenant, without necessity of bringing efficiency and other microeconomics notions into what is clearly a question of justice.

  2. Patrick S. O'Donnell says:

    Any analogies between the situation of these tenants (and their relation with other parties) and what happened with the workers at the Republic Windows and Doors plant in Chicago? I would prefer to see this in extra-legal and, strictly speaking, non-economic terms (i.e., outside the narrative frame of neo-classical economics, law and economics, or Kaplow and Shavell’s ‘welfare economics’), i.e., in terms of fairness and justice, but I’m sure there’s more than one Scrooge out there among us (cf. http://prawfsblawg.blogs.com/prawfsblawg/2008/12/i-am-not-the-right-guy-to-play-scrooge-this-time-of-the-year-but-why-is-the-resolution-of-the-republic-sit-down-strike-somet.html#comments). On the other hand, what salutary economic end is served by throwing these folks out onto the streets?

  3. Is your conclusion limited to the facts presented: a tenant, current on the rent, who has no knowledge that the landlord is behind on the mortgage and the mortgagee is aware that the property involved is being used as a rental property and not as a primary residence by the borrower.

    Your scenario is most sympathetic to reach what I’m guessing is your desired conclusion but if the bank lent the money to purchase what was to be a primary residence then it may not know there is instead a tenant paying rent…or what happens in the case of sub-tenants paying to a live-in landlord who simply pockets the money…or the family of four that doesn’t know that the breadwinner is spending the rent-money elsewhere. All these instances have the same component of innocent tenants – does your policy preference still put the onus on the banks to pay for the sins of others?

  4. dobe gulia says:

    I don’t understand what the problem is. You are paying your rent. You get the notice to move out. Well, if you can pay the rent for a house X, you can surely pay the rent for an otherwise similar house Y. So, just move to another house! Is it all about the costs of moving? If so, move to a smaller house and save on rent, which would pay for the move. Or borrow against your future income. Or drag out at your current house without paying rent for a couple of weeks, which will save you enough money to pay for the move. Why are people acting as if trivial matters were somehow life-shattering? It’s a rented place! You knew you could have been told to move out. If you had a lease that was terminated before its end, you can sue your landlord for the breach of contract. If you had a month-to-month arrangement, I don’t even understand why you are complaining.

  5. Patrick S. O'Donnell says:

    “Well, if you can pay the rent for a house X, you can surely pay the rent for an otherwise similar house Y.”

    Well, you must live in fairyland: it’s not always easy to find places to rent, sometimes vacancy rates are quite low and this gives landlords an opportunity to raise rents, so the rental market may be drastically different from the time you moved in your place. What is more, you often have to pay first and last month’s rent, plus often exorbitant security deposits: it’s not always easy to come up with that much money if you are a renter, especially if you have a family, have lost your job or taken a pay cut or been forced into new employment at a lower wage, and so forth and so on. Renters cannot easily borrow, and typically they can’t afford to borrow. And clearly you’ve never tried to stay in an apartment well past the last month’s rent: continual harrassment from the landlord and/or management company, including turning off utilities or otherwise making your life miserable; sending law enforcement officials with 3-day eviction notices (that’s a great one to have to explain to the kids), etc., etc. It costs money to take landlords to court, and even small claims courts can be expensive on a tight budget, etc., etc.

    Scrooge IS alive and flourishing no less: shameless, unrepentant, ignorant, and cruel. Sweet dreams dear Scrooge.

  6. JP says:

    Since Prof. Edwards is getting criticism from all sides, I’ll jump in and note that I think his analysis is exactly right. Unlike A.J. and Patrick, I don’t think pointing to unfairness is a sufficient basis for policy-making, and I appreciate the post’s consideration of the broader consequences.

    This, however, seems to be one of the (many) areas where “efficiency” and superficial fairness are aligned. The lender has better information both ex ante and ex post. The lender is the least-cost avoider and is in the best position to determine the value of having an empty home to sell. There certainly seems to be a compelling case that the default rule should be in favor of the renter.

    I hope more states (or the feds, if they co-opt this area of property law) adopt laws that automatically extend leases on a temporary basis after a foreclosure, while leaving room for (or better, encouraging) Coasean bargaining.

  7. Patrick S. O'Donnell says:

    Scrooge,

    As you won’t be giving gifts to others, might I suggest these stocking stuffers to give yourself for Christmas:

    Alexander, Gregory S. and Eduardo M. Penalver. “Properties of Community” (October 29, 2007). Cornell Legal Studies Research Paper No. 07-020. Available at SSRN: http://ssrn.com/abstract=1025569.

    Capek, Stella and John I. Gilderbloom. Community Versus Commodity: Tenants and the American City. Albany, NY: State University of New York Press, 1992.

    Gilderbloom, John I. and Richard Appelbaum. Rethinking Rental Housing. Philadelphia, PA: Temple University Press, 1988.

    Gilderbloom, John I. Promise and Betrayal: The University and the Battle for Sustainable Urban Neighborhoods. Albany, NY: State University New York Press, 2005.

    Katz, Michael B. In the Shadow of the Poorhouse: A Social History of Welfare in America. New York: Basic Books, 1986.

    Logan, John R. and Harvey L. Molotch. Urban Fortunes: The Political Economy of Place. Berkeley, CA: University of California Press, 1987.

    Before you get too immersed in the reading, pretend you’re on a reality show for a couple of months and live the life of a typical tenant experiencing what has been termed “shelter poverty.” Make sure you can just cover the rent payments month-to-month, with no opportunity to save for a rainy day or any of the things that help define middle class existence in this country. Make sure you speak with your fellow tenants: endeavor to learn up-close-and-personal what it’s like to live as they do. Empathy is good for the soul.

  8. A.J. Sutter says:

    JP, I agree with you that the efficiency and fairness analyses are aligned here. That may make Prof. Edwards’s conclusions more politically palatable to those who believe that Coasean analysis actually has any value, so I’d also agree that an efficiency argument has some rhetorical benefit.

  9. Veracitor says:

    Perhaps you would impose a bright-line rule, something like “a tenant whose rent is not in arrears may retain possession until his lease expires.” Good luck with that– under such a rule, if I planned to default on a mortgage the first thing I would do is accept a large bribe to give someone a ten-year lease at 50% off market rent. The bank would end up like one of those hotels in New York which had sojourners in rooms in 1943 when rent control was imposed– some of those guests never moved out, they just kept paying $5/night for suites with pianos and full maid service until they died of old age in the 1990′s.

    “Oh, alright,” you say: “we’ll have some kind of fact-based balancing test. The bank/landlord can sue to evict any tenant whose lease seems fishy enough.”

    Yeah, well, that’d be a lawyers full-employment act, wouldn’t it?

    I see no real objection to a rule against evicting tenants in good standing with less than a month’s notice (some jurisdictions already have such rules)– that would transfer some risk to lenders, but not more than I think they could bear. I’m sure it would be a good idea for a lender to notify actual occupants of any property subject to a mortgage about any delinquency (lenders could do this now, if they wished– and we could probably compel them to do so).

    However, upsetting the well-honed common law rules so that a tenant could thumb his nose at a lender with a clear prior right to possession seems like a bad idea to me, because it would be an open invitation to fraud.

  10. Quidpro says:

    As Maryland Conservatarian states, one must distinguish among the types of properties that are the subject of foreclosure. Where the loan was made to purchase an owner occupied single family residence, the bank should be free to foreclose the tenant’s interests as well.

    Where it is clearly rental property different considerations apply. In many cases, banks do not want to evict the tenants. Indeed their mortgages contain “assignment of rent” clauses so that they can collect rents during the pendency of the foreclosure proceeding.

    Ultimately, I suspect that this is a problem only in selected jurisdictions. States that permit non-judicial foreclosures, for example.

  11. Mark Edwards says:

    Wow! Quite a firestorm this post provoked (say that aloud, and you’ll sound like Yoda).

    A few responses: There are those who are more persuaded by normative ideas of fairness, and those more persuaded by economic efficiency (which, after all, is its own type of fairness). But when the stars align and both normative fairness and economic efficiency are on the same side, you know you’ve got a good argument. I think that’s where we are here.

    “but if the bank lent the money to purchase what was to be a primary residence then it may not know there is instead a tenant paying rent…or what happens in the case of sub-tenants paying to a live-in landlord who simply pockets the money…or the family of four that doesn’t know that the breadwinner is spending the rent-money elsewhere. All these instances have the same component of innocent tenants – does your policy preference still put the onus on the banks to pay for the sins of others?”

    The last scenario is clearly outside of the scope of the issue here. We could limit a rule to multi-family dwellings, leaving tenants in single family dwellings unprotected, or we could create some burden on the lender and borrower to certify that a single family dwelling either is or is not being used as a rental. I’m n ot sure how; it’s a good question. Another possibility would be to require the lender to insure against the risk that a single-family home is being rented, and the borrower might default, and the bank may end up with a tenant for some period of time. Seems like it wouldn’t be very expensive insurance, given the low probability and relatively small economic harm if the risk is actually realized. Undoubtedly that cost would be passed onto homebuyers.

    “I don’t understand what the problem is.”

    Understate much? It’s -6F here in Minnesota today, without the windchill. Whole neighborhoods in Minneapolis are boarded up because of foreclosures, and rentals are becoming increasingly scarce. Every major employer is laying off workers by the hundreds. It’s the middle of the school year. Those are the conditions blameless families are being sent into.

    “I see no real objection to a rule against evicting tenants in good standing with less than a month’s notice (some jurisdictions already have such rules)– that would transfer some risk to lenders, but not more than I think they could bear. I’m sure it would be a good idea for a lender to notify actual occupants of any property subject to a mortgage about any delinquency (lenders could do this now, if they wished– and we could probably compel them to do so).”

    I agree, but I’d make it six months. That would be a better balance between fairness to the tenant and lender.

    “Ultimately, I suspect that this is a problem only in selected jurisdictions”

    The problem is jurisdiction-dependent, but quite widespread. The links in the post reference Cook County, IL, Cuyahoga County, OH, and parts of MD. I could have added many more, including my state of Minnesota.

  12. Nate Oman says:

    I am curious as to the underlying economics of these foreclosures. I can understand why the banks don’t want to go into the property management business, but I don’t see why avoiding that business requires evicting the tenants. Why can’t the banks simply sell the properties along with the leases, which if the tenants really are blameless are a valuable income stream after all?

    It seems to me that there are two possible issues. First, banks can’t sell occupied property. Second, the leases lock in rental rates that no longer pay for the landlord. Niether of these seem intuitively plausible to me. The first possiblity is certainly belied by the routine sale of occupied commercial real estate. The second seems odd to me as well. If rent was somehow tied to the land lord’s costs, then we would expect leases written at the height of the bubble to actually have very attractive terms given the current real estate market.

    In short, I am confused as to exactly why this is happening. I suspect that there is some important part of the story that we are missing, and I’d like to understand what it is before signing off on any particular policy response.

  13. Mark Edwards says:

    Nate — I’ve been wondering the same thing. As far as I can understand, it is simply standard practice for the bank to evict tenants following foreclosure. They may be carrying a standard operating procedure from another time — when foreclosures were uncommon enough that there was no economy of scale in contracting with property management companies — into a new situation. I would think that the benefit of the income stream would be greater than the cost of less saleability, but apparently banks have concluded otherwise, if they’ve concluded anything at all.

  14. Veracitor says:

    Uh, guys, a single-family home with tenants in it will sell for much less if it sells at all. Tenants make a house or condo hard to show (they don’t want agents bringing in prospective buyers without notice, they leave their dirty laundry and kids’ toys lying around, their cars block the garage…). Worse, only a fraction of SFR buyers want to be landlords– most intend to occupy whatever home they buy (especially 20% down buyers, now that the NINJA 100% LTV speculators have been driven out by the bubble bursting). A buyer planning to occupy a home will rarely bid on one with tenants in possession. A bank trying to sell an SFR with tenants in it couldn’t even accept an offer without either demanding a 30-day delay to evict the tenants or trying to make the sale subject to the lease!

    Believe me, evicting tenants from a foreclosed SFR isn’t something a lender does out of the wickedness in its heart, it’s a simple business necessity.

    Note as well that the “blameless tenant” isn’t really morally superior to the lender– the lender is equally blameless: it was the borrower who brought in tenants before foreclosure, and the borrower is the one who broke a contract with the tenants, not the lender. Indeed, in most cases the borrower first broke his contractual promise to the lender to occupy the property himself (mortgages for rental property cost more, they are mostly ineligible for FHA or GSE guarantees).

    I really think all of you who want to confiscate all lenders’ interests in mortgaged property for the convenience of some hard-luck tenants* seem ready to burn down the barn to roast the pig. Today you see a few tenants you want to save. If you save them by privileging all tenants over mortgage holders with prior and superior rights to possession, the cost of the fraud and waste you induce will greatly exceed the value of succoring the original hard-luck tenants. Tax lenders to open a shelter or something, but leave the law of real property alone.

    *Please note that in these cases the tenant does not have any business relationship with the lender. The “who can bear the risk” analysis above does not consider the possibility of collusion (explicit or tacit) between tenants and flakey borrowers. You are not merely asking each lender to bear the risk of default by a borrower who regards the property as his home– that risk is one lenders already bear and have some basis to value. Rather, you want a lender to bear the very different risk that a borrower will take a bribe to set an unworthy tenant up in a home at the lender’s expense. That is not a risk a lender is in a good position to price or assume.

  15. Nate Oman says:

    Veracitor: That makes good sense to me. I was thinking in terms of foreclosures on muti-unit properties, but what you say makes sense with regard to single family homes.

  16. JP says:

    Rather, you want a lender to bear the very different risk that a borrower will take a bribe to set an unworthy tenant up in a home at the lender’s expense.

    Based on this comment and your 12/15/08 comment, I think you are arguing against something that hasn’t been proposed. I think everyone accepts that foreclosure terminates the lease. The proposal is simply that the basic terms of the lease be extended for a short period of time with the lender (I would think 45 or 60 days). Your 12/15 comment suggests you have no objection to this, and recognizes that some jurisdictions already do this.

    Those jurisdictions extend the leases only for “bona fide” renters, and the risk of collusion is pretty small. It certainly isn’t a full employment act for lawyers to determine whether or not a lease is bona fide. If the renter paid $1,000 on a month-to-month lease up until a few weeks before foreclosure, at which point the agreement was “renegotiated” to be a 10 year lease at $50/month, it’s pretty clear the lease isn’t bona fide.

    Your point about the difficulty of selling an occupied SFR is right, but that simply reflects a moderate increase in the risk associated with default. And, as you note, the lender is already in the position of valuing the risk of default. The renter typically is not.

  17. Mark Edwards says:

    I certainly agree that we don’t need to allocate moral superiority between the lender and the tenant. All we need to do is re-allocate some of the risk of foreclosure between the lender and the tenant.

    That’s not burning down the barn to roast the pig. It’s — to extend a colorful metaphor — making the farmer liable for a pig marauding onto his neighbor’s property. Classic neoclassical (forgive the oxymoron) law & economics tells us to allocate risk to the least cost avoider. Between the lender and the tenant, that’s the lender. That doesn’t mean the lender can never get rid of the tenant. It means the lender assumes the risk that it will have to manage a rental property for some short period of time if it lends unwisely.

  18. ohwilleke says:

    At the very least, a tenancy ought to be recognized as an encumbrance on the property, and hence entitled to notice (and accordingly early warning and a right to redeem) in the mortgage process.

    State law already affords HOA dues, property tax obligations, and mechanic’s liens for projects pre-dating the funding of a mortgage with a non-waivable priority over first mortgage liens in some states, so it wouldn’t be unprecedented to give the encumbrance of a tenancy priority as well.

    The problem, of course, is that one reason that a loan might default is that the investment property owner of the property subject to the mortgage entered into leases on terms too favorable to support the mortgage payment, property taxes and other associated obligations. This is particularly problematic if the tenants have long term leases.

    Indeed, if those lease terms are the best that the market can support at the time, it might be rational for the owner to do that, while supplementing mortgage payments from other funds for as long as possible.

    It would certainly be appropriate, at the very least, to entitle tenants who are not in default to a longer notice period than tenants who are in default.

  19. A.J. Sutter says:

    “Believe me, evicting tenants from a foreclosed SFR isn’t something a lender does out of the wickedness in its heart, it’s a simple business necessity.” Now I understand; that changes everything.

  20. Patrick S. O'Donnell says:

    A.J.,

    Surely you’ve learned by now that “business necessity” trumps all ethical principles and values, intrinsic and otherwise, indeed, Truth, Beauty, and the Good humbly bow down before its altar. Justice, empathy and compassion can’t hold a candle to such necessity. Surely you realize that business necessity necessarily excuses, rationalizes, justifies all such behavior. Your failure to appreciate this betrays your disavowal of the facts, of reality, of the bottom line. What are you? Some pie-in-the-sky idealist? Some ivory-tower academic? Some naive, out-of-date Liberal? Socialist? Communist? Betrayer-of-all-things American? Hey, it’s a dog-eat-dog world, and the quicker you get on board the better off you’ll be.

    May the collected works of Ayn Rand be your stocking stuffer and may all your dreams be of Malthusian Social Darwinism.

  21. Keith Mullen says:

    This topic deserves discussion and public scrutiny. Note that the commercial (apartment) lenders who I repesent in workouts and foreclosures often involve their community and local governmental relationship people in these situations – for many of the reasons discussed here.

  22. A.J. Sutter says:

    No, I really mean it. Patrick, you’re criticizing the wrong person. Far from being “blameless” tenants, I think they are really “clueless.” How can they expect the lender to recover on the debt if they’re still occupying the property? It’s totally unreasonable, to say the least. If they wind up out on the street in the cold, with the rain destroying all their stuff or passers-by removing it, maybe they should quit whining and just consider it a big lesson from Somebody about the true meaning of “necessity”. Or else read an economics textbook and gain a deeper understanding of life.

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