Wednesday, August 12, 2009

Foreclosure Rescue Operators Using New Tenant Protection Law, Bogus Sale Leaseback Arrangements To Gum Up Foreclosure Process???

The Florida Asset Protection Blog reports:
  • To better protect tenants victimized by foreclosures against their landlords Congress passed a law which required the non-occupant purchasers at foreclosure sales (such as banks) to honor existing leases on the foreclosed property provided that the lease was bona fide and the tenants were not in default.(1) Some "foreclosure defense" companies are using this new law to delay foreclosure lawsuits. These homeowners are creating bogus lease arrangements to prevent the lenders takeover of property and gain negotiating leverage for the homeowner.

  • Here’s how a typical defense scheme could work- I am omitting some details and issues for sake of the example. Assume Joe Homeowner has ceased making mortgage payments and the bank is threatening foreclosure. Joe creates a revocable trust which he calls "the Save My Home Trust"; Joe is the sole beneficiary of the trust, and Joe names a friend or business associate as trustee. Joe sells his home to the trust for nominal consideration over the mortgage balance. The trust leases the property to Joe for a below-market rent for a five year term - a sale and leaseback arrangement. When the bank sues for foreclosure the trust asserts typical foreclosure defenses, and Joe intervenes as the tenant arguing that the bank must honor his five year lease.

  • Obviously, a court will eventually rule that the lease is not bona fide and is not a valid defense. However, the additional defense frustrates the bank’s foreclosure suit and gives Joe more power to either live in his house for free or negotiate a favorable settlement. I have never defended a homeowner in a foreclosure suit. However, based on conversations with asset protection clients I have learned that mortgage defense attorneys and non-lawyer companies are using varieties of this lease defense which was designed to protect bona fide tenants in foreclosed properties.

Source: Mortgage Foreclosure Defenses Using New Tenant Protection Laws.

(1) The new federal law (see Protecting Tenants at Foreclosure Act of 2009, which is found at Title VII of the Helping Families Save Their Homes Act of 2009) requires banks or other buyers in foreclosure situations to allow tenants in the properties at least 90 days from the date of the foreclosure auction to move, if the tenants had month-to-month rental terms; and tenants with a bona fide lease (as opposed to a "sham" lease) can stay until the lease expires — six months or a year or longer — with a single exception. If the purchaser of the property intends to use the property as a primary residence, the renter must go after 90 days.