By Todd Knode 

If a homeowner defaults on their mortgage the lender usually forecloses on the home and the homeowner loses it.  What happens to the renters who pay their rent every month but live in homes whose owner has not been paying the mortgage?

If you are a renter in a home or apartment building that is being foreclosed upon you are likely to be evicted.  Do you have the right to stay?  Not likely.  Will the lender who holds the mortgage be able to evict you if you choose to stay?  Yes.

If you have a lease how can that lease be thrown out?  It’s a contract; shouldn’t the new owner be required to fulfill the contract?

Each state may vary but it is likely your lease can be cancelled for two reasons.  The first may be due to a clause in most leases that cancels it in the event of a foreclosure. The second is a part of property law called “first in time is first in right.”  That means that if you rent a residence which is subject to a mortgage, the mortgage holder’s interest in the property is senior to your interest because it was entered into first.

Apartment building owners are usually required by their lender to include the foreclosure clause in their leases.  Lenders require this clause because it helps protect from an unnecessary risk.  If a building is foreclosed on, the lender must sell it to recoup the loan.  Lenders believe that at a foreclosure sale an empty building will sell for more than one that is occupied by tenants. If the value of a foreclosed property drops it may hinder the restorative effect a foreclosure is supposed to provide. This may leave the borrower “under water,” still owing even though the property has been sold.

Because many tenants of foreclosed buildings are helpless during a foreclosure, Congress may soon change the law.  The Mortgage Reform and Anti-Predatory Lending Act of 2007 will force new owners of foreclosed properties to honor existing leases.  The bill has been passed by the House of Representatives and is currently being discussed in the Senate Banking Committee.