Tenants of single family homes had been facing sudden eviction when the homes they rented were sold to a mortgage lender at a foreclosure sale. After the foreclosure sale the mortgage lender evicted the tenants even though the tenants’ lease payments were current. 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. Some "foreclosure defense" companies are using this new law to delay foreclosure law suits. 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 .
posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida