April 6 (Bloomberg) -- Laura Hecox was baffled when an officer from the San Diego County sheriff's department came to her home in February and said she was being evicted. She hadn't missed a rent payment on her four-bedroom house since moving there a year-and-a-half earlier.
"They told me to leave, to get a few things together," said Hecox, 37, who lives with and supports her four kids and mother. "I got booted out just like that."
Hecox didn't know the home she was renting in Chula Vista, California, about 10 miles north of the Mexican border, was in foreclosure because her landlord was a year behind on mortgage payments. The new owner was a group of investors led by JPMorgan Chase & Co., the third-biggest U.S. home lender.
In California, home to the most foreclosures in the country last year and about 5 million renter households, residents who are current on rent payments face eviction by banks unwilling to be landlords. At least one-third of the state's 267,000 foreclosure sales in 2008 were rental units, said Dean Preston, executive director of Tenants Together, a San Francisco-based non-profit group for renters' rights.
While thousands of tenants search for places to live, banks are losing out on the potential to collect monthly rent checks and flooding the market with empty houses that are declining in value. That's because they don't have the infrastructure or staff to deal with rental buildings, said William Acheson, an analyst at Benchmark Co. LLC in New York.
"Banks are notoriously bad property managers," said Acheson, who tracks real estate investment trusts. "If they can sell them at a 60 percent discount, they will," he said.
Biggest Home Lenders
Bank of America Corp., JPMorgan and Wells Fargo & Co. account for more than half of residential mortgages nationally, and are the biggest home lenders in California, according to Inside Mortgage Finance, a Bethesda, Maryland-based newsletter. All three are facing surging defaults from tumbling home prices and the highest unemployment in a quarter century.
"We don't have the capacity to be long-term landlords," said JPMorgan spokesman Gary Kishner in response to a question about Hecox. "We work with tenants on their transition from a property and that may include cash for keys."
The bank said it placed an eviction notice on Hecox's door in September. It was addressed to the landlord and "all others in possession," according a copy of the document.
More than 20 percent of properties in the U.S. facing foreclosure are rentals, according to a December report from the National Low Income Housing Coalition in Washington. Renters make up about 40 percent of families facing eviction.
$1 Billion in Rent
In California, more than 225,000 people in rental units lived in properties that went through foreclosure last year, according to a March 31 report from Tenants Together. The group estimates they occupied about 81,500 units.
Were banks to rent all those properties, they could collect more than $1 billion in annual rent, based on the median California rent in 2007, according to the U.S. Census Bureau.
Hecox, who works the overnight shift at a job-referral service, was met at her front door in the early afternoon on Tuesday, Feb. 24, by an officer from the sheriff's department and a real estate agent. They told her the home had been sold at an auction and she needed to leave. Hecox had been paying $2,250 a month, half from government assistance.
Eviction Notices
The property was taken back by the lenders on Aug. 29 at an appraised value of $243,000, 60 percent less than the outstanding balance on the mortgage, according to the trustee's deed. JPMorgan's Washington Mutual Inc. unit serviced the loan, which had been wrapped up into a security, and now has the property in its name.
Officers serve eviction notices when ordered by the court and aren't responsible for determining who occupies a property, said San Diego County Assistant Sheriff Kim Quaco. He said an eviction notice was posted on Hecox's door 11 days before she was forced to leave.
Fannie Mae and Freddie Mac, the mortgage-finance companies under federal control, have formal policies for renting to tenants. Starting in January, the companies hired property managers to reach out to renters and offer them new leases at market rates.
Management fees equal about 10 percent of a renter's monthly payments, said Norman Miller, professor of real estate at the University of San Diego.
The costs are outweighed by the economic benefits, which include the income stream from monthly checks and the upkeep provided by renters, according to Freddie Mac spokesman Brad German, who said about 20 percent of the 29,000 properties that they own nationwide are occupied by a former owner or renter.
Vacant Properties
"Vacant properties can be magnets for vandalism and crime and also have a negative effect on property values in the immediate vicinity," said German, in an interview from McLean, Virginia.
Rising delinquencies contributed to fourth-quarter losses at Charlotte, North Carolina-based Bank of America, which owns Countrywide Financial Corp., and at San Francisco-based Wells Fargo, owner of Wachovia Corp. JPMorgan, in New York, recorded a 76 percent decline in profit.
Bank of America spokeswoman Jumana Bauwens said the company follows Freddie and Fannie policies on any of their loans it services and is examining the programs to see if they are "viable for our organization."
Wells Fargo spokesman Kevin Waetke, referring to a document released by the bank in April 2008, said the bank deals with renters on a case-by-case basis. It doesn't have a "summary eviction" policy, he said.
'Adequate Notice'
"We make every effort to work with the current tenants and provide them adequate notice to make other housing arrangements," Wells Fargo said in the statement.
Banks should be following the lead of Fannie and Freddie, said Kevin Stein, associate director of the California Reinvestment Coalition, which works on behalf of low-income communities. He's proposing solutions, including re-renting to tenants, keeping utility companies from shutting off power and hiring brokers to ensure local and state laws are followed.
Most California cities require new owners give tenants 30- 60 days to move, according to the state Department of Consumer Affairs.
In the San Francisco area, where 70 percent of units are renter-occupied, and in Los Angeles, local ordinances forbid owners of most buildings from evicting without "just cause," such as missed payments. Six other states and Washington D.C. offer tenants some protection, according to the National Low Income Housing Commission.
Laws Ineffective
Lenders, grappling with surging defaults, are either ignoring or are unaware of the laws and are punishing renters who have done nothing wrong, said Preston of Tenants Together.
"A common thing after foreclosure are efforts to get tenants to move out without going ahead and serving them the legally required notice," said Preston, who started a hotline in February to help tenants in foreclosure. "They're under no legal obligation to move out just because someone tells them they need to."
Renters occupy about a quarter of all San Francisco buildings that receive default notices, the first stage of the foreclosure process, said Phil Ting, the city's assessor- recorder. Trustee sales, the last stage of the process in which foreclosed properties are sold to new owners, increased 133 percent to 667 last year and could double again in 2009 as unemployment rises, he said.
Ting and other San Francisco officials began sending letters last year to tenants in buildings that got default notices, advising them of names and phone numbers of housing- assistance groups.
Padlocked
"We were hearing horror stories where the owner was either totally checked out or had been foreclosed on," Ting said in an interview at his City Hall office. "Tenants came home, their building was padlocked and the power was turned off."
Genevieve Hilpert, a 35-year-old nursing student from Cameroon, said her San Francisco landlord left the U.S. in June last year and asked her to send $550 rent checks to a relative in Fairfield, California.
In December, Hilpert received a letter from a lawyer in Davis, California, representing Bank of America's LaSalle Bank NA, the owner of the house following a Nov. 19 foreclosure sale. The letter demanded details of Hilpert's lease agreement, which she had made orally with the old landlord, and threatened to evict her if she didn't respond.
Hilpert refused a cash offer from Bank of America to leave. She wrote to the lawyer with the help of Housing Rights Committee of San Francisco, asking where to pay her rent, and said she hasn't gotten a reply. Bank of America's Bauwens said the bank is working on the case.
"They made me feel like I don't deserve to live here," Hilpert said.
To contact the reporters on this story: Ari Levy in San Francisco at alevy5@bloomberg.net; Dan Levy in San Francisco at dlevy13@bloomberg.net
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