Tenants in turmoil

Renters Donald Houck and Michael Newton are scrambling to find a new home after discovering a foreclosure sale notice taped to the front door of their Santa Rosa residence.

Their landlord has already lost one Sonoma County property to foreclosure and the roommates aren't waiting for a bank or new owner to take over the home they have rented the past four years.

"We've already started looking. I assume we're going to have to move, and we have dogs so it's kind of hard to find a place," said Donald Houck. "We, too, are hit by the foreclosure crisis, but we're renters."

These are the innocent victims of the housing downturn, and they are growing in number across Sonoma County. Today, rentals account for about 4 in 10 of the region's homes in foreclosure, according to RealtyTrac, an online real estate research company.

Nationwide, renters also occupy about 40 percent of the homes in foreclosure, according to a new report by RealtyTrac.

The problem is attracting attention in Sacramento and Washington. Last year, California lawmakers extended eviction deadlines in response to reports of renters being forced out of their homes with little warning. And this year, national mortgage giants Freddie Mac and Fannie Mae -- who own nearly two-thirds of all home loans -- launched efforts to keep renters in foreclosed homes until they can be sold.

"They're in the crossfire," said Brad German, spokesman for Freddie Mac.

Renters in the midst of a home going through foreclosure are bewildered about how long they can stay in a home, where to send the rent check, and who to call when the sink clogs and the roof leaks.

Mostly there is anger -- anger that their lives have been thrown into upheaval because the landlord stopped paying the mortgage while continuing to collect the rent.

"They feel they are tenants being unfairly penalized by property owners who did not make their loan payments to the bank. They're indignant about that. They want to stay in place. They don't want to move," said Toni Novak, director for the Sonoma County Legal Services Foundation, a nonprofit group that provides legal referrals and advice.

With the housing downturn showing only faint signs of stabilizing, more rental homes could go into foreclosure as owners struggle to refinance or sell the properties, according to Irvine-based RealtyTrac.

"In Sonoma County you're seeing more investment homes going into foreclosure. So more renters are in jeopardy," said RealtyTrac spokesman Daren Blomquist.

About 40 percent of homes in foreclosure in Sonoma County this month are owned by people who didn't live on the property, up from 17 percent a year ago, according to a study by RealtyTrac.

The vast majority of these homes are rentals, although some may be vacation homes, Blomquist said.

The seeds of the problem were planted in the housing boom during the first half of this decade.

Soaring home values seduced some buyers into purchasing properties, speculating they could sell in a year or two for much more. Lax lending standards attracted others to move up to newer or larger homes and rent their former residences.

These investment scenarios unraveled, however, as home sales sank and prices tumbled. Some investors may no longer be able to refinance, and selling is more difficult in a market crowded with lower-priced homes. Others see no reason to hold onto homes if rents don't cover mortgages and the properties are worth less than they paid.

"Ultimately, they either run out of money or the will to keep paying," said Clay Clement, a Santa Rosa real estate attorney.

When the landlord stops paying their mortgage, the home is eventually put up for sale at a public auction. If no one buys the home, it is reclaimed by the bank which issued the mortgage.

Lenders have little interest in renting out foreclosure homes. Typically, they want tenants out quickly so they can fix up and sell the property.

"Lenders generally want to get the place vacant," Clement said. "Most single-family homes get sold to people who are going to live in them. They think if they offer a home for sale with tenants, they're going to discourage a lot of potential buyers."

Tenants in California must be given 60 days notice to leave, up from 30 days under a change in state law approved last year to increase protections for renters in foreclosure properties.

To accelerate the process, lenders typically offer tenants a "cash for keys" agreement. The amount might range from $500 to $3,000 depending on how soon they can move, often in two to three weeks, said James Madison, a foreclosure specialist at Coldwell Banker in Santa Rosa.

"We try to cut the cash for keys deals immediately. That helps get them somewhere," he said.

By entering the agreements, the tenants waive all legal rights, allow lender agents to show the property, and promise to remove all belongings, Madison said.

Freddie Mac and Fannie Mae began making similar offers earlier this year. Existing tenants are eligible for month-to-month leases at typical rents for the area, or they can take cash and move out.

The move came as the national mortgage companies foreclose on more rental homes and find tenants stunned that landlords are losing homes.

"They may have been paying their rent in good faith and landlords were going into foreclosure and not notifying tenants," said German, with Freddie Mac.

To avoid the surprise of finding an auction notice on the front door, renters should do a little homework before signing a lease agreement, Madison said.

"Nobody should be renting a property unless they go to the county recorder's office first and check to see if that property is in default," he said. "That would prevent them from being burned by a dishonest landlord."

You can reach Staff Writer Michael Coit at 521-5470 or mike.coit@pressdemocrat.com.