Evicting the Blameless Tenant
One of the most pernicious effects of the mortgage crisis has been the eviction of blameless tenants. Leases are usually terminated by foreclosure. Tenants who have never missed a rent payment, and who have no idea that their landlord has not been applying rent payments to their mortgage obligations, suddenly face eviction — often with no notice.
It is difficult to overstate the trauma of the eviction. Tenants are not only turned out into the streets. Often their personal property is put on the curb or thrown into dumpsters. They don’t just lose their homes — they can lose everything they own. Passing rainstorms or scavengers can turn a lifetime’s worth of work into nothing. Children in particular can be traumitized by seeing parents rendered powerless, by losing their possessions, and by the fear of the unknown. Violence is a constant threat.
The problem is so pervasive, and so normatively objectionable, that county sheriffs upon whom the burden of eviction falls have been refusing to carry out the evictions under some circumstances. Most famously, Thomas Dart, the sheriff of Cook County, Illinois, unilaterally imposed a moratorium on the eviction of renters in foreclosed properties, over the howling objections of the banks.
I have written previously, and am writing still, about what happens when legal institutions face a divergence between the legality and social acceptability of behavior. Generally, institutions of enforcement don’t enforce the law; they enforce the limits of acceptable deviance around the law (think speed limits). When they are called upon to enforce the law in a manner that conflicts with standards of social acceptability, it is often the institutions that give way rather than the standards.
It is heartening, therefore, but not entirely surprising, to see that the now re-nationalized Fannie Mae has decided to stop evicting tenants in foreclosed properties.
Fannie Mae has urged private mortgage holders to follow suit, but has met with little enthusiasm. Banks don’t want to become property managers. They want to sell foreclosed properties as quickly and cleanly as possible.
But the question we should be asking is, between the lender and the tenant, who should bear the risk that a rental property will be foreclosed upon?
To answer that question, we need to answer two others: between the lender and the tenant, who is better informed about the risk of foreclosure? And, between the lender and the tenant, who will suffer greater harm in the event of foreclosure?
Obviously the lender is in a better position to assess the risk of foreclosure. The lender, presumably, is making that risk assessment before lending. Since the lender is better placed to assess the risk that a rental property might be foreclosed upon, it seems both efficient and fair that the lender should bear that risk.
The second question might simply be re-phrased as: risk of what? For the bank, the risk is that it is saddled with the responsibility of property management, and that it might be more difficult to sell the property. For the tenant, the risk is eviction and, possibly, loss of personal property and homlessness. It seems the relative harm to the tenant is higher, and it may well be true that the absolute economic harm to society in general is greater when blameless tenants are evicted because of foreclosure, because eviction of blameless tenants has significant negative externalities for neighborhoods and cities.
It is true that the costs of risk allocated to lenders will be passed on to mortgagees and, ultimately, renters, but that may eliminate low quality mortgagees. In short, it seems to me, that lenders should accept the risk that they may end up managing the rental properties they finance, if they do so unwisely.