The Case for Allowing Tenants and Owners to Remain in Their Homes Post-Foreclosure

by Rachel Bratt
Senior Research Fellow

Although federal guidelines allow foreclosed homes to be sold with occupants, in a recently published article in Housing Policy Debate, I report that the guidelines are largely irrelevant in practice. In fact, data obtained from HUD through a Freedom of Information Act request shows that in Fiscal Years 2010-2014, there were a total of 23,746 requests for FHA-insured foreclosed properties to be conveyed while occupied. However, only 87 of those requests—much less than one percent—were approved by the U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA), which is part of HUD.

The data—along with interviews done with key stakeholders in Greater Boston—raise troubling questions about the extent to which HUD/FHA as well as the Federal Housing Finance Agency (FHFA) and housing-related Government Sponsored Enterprises (GSEs)—specifically, Fannie Mae and Freddie Mac—are continuing to view foreclosed homes more as financial assets, whose value they seek to maximize by requiring that they be vacant when they are sold. In doing so, they ignore the fact that the buildings also are dwellings for financially strained households who, if evicted, may need additional housing subsidies as well as the fact that continued occupancy by prior owners and tenants can be part of an effective strategy to preemptively stabilize neighborhoods. 

While there have been some changes in an FHFA policy that could soften the GSEs’ “no occupants at conveyance” practice, it is not yet clear whether this will result in former owners and tenants being allowed to remain in their homes following foreclosure. More generally, several other recent policies pertaining both to the GSEs and to HUD/FHA provide reasons for optimism. However, the extent to which these translate into pro-consumer and pro-neighborhood practices is not yet known.

To enable former homeowners and tenants to continue living in their homes following a foreclosure, greater public resources and commitment are needed. Programs and financial assistance that would enable nonprofits to purchase foreclosed dwellings, then rent them back to the prior owners and tenants, and to successive low-income households, would result in a long-term source of affordable housing. Key to such a policy shift would be more detailed assessments of the ways in which HUD, FHA, FHFA and the GSEs approach their pre- and post-foreclosure mortgage relief and property disposition policies, and the various costs involved in allowing occupied conveyance vs. requiring forced displacement. It seems likely that when vulnerable, low-income households are facing the loss of their homes, other units of government may need to step in to help them find and pay for their new housing.

The long-term costs under this scenario—both financial and otherwise—are virtually certain to far outweigh a short-term, up-front investment in keeping these households in place. Absent these changes, the various agencies will continue to implement a highly problematic set of procedures that promote family instability, potentially increase homelessness, and result in vacant homes, which have adverse neighborhood impacts.

Rachel Bratt is a Senior Research Fellow of the Joint Center for Housing Studies at Harvard, and Professor Emerita, Department of Urban and Environmental Policy and Planning, at Tufts University.