Evicting Defaulting Landlords' Tenants


There is an interesting story on cnn.com about how the Cook County, IL sheriff is refusing to evict tenants when their landlord's mortgage is in default. He is mad because the banks are evicting tenants that are themselves are not in default of their leases, but that the banks don't care about people and just want their money.

The story is curious for me, not only for the tragedy of seeing people evicted from their homes when they've done nothing wrong. My issue is why the banks would evict tenants that are paying? The real estate market is in a tailspin, and the market for rental property is probably as bad as that for residential real estate. So do the banks really expect to get paid off by selling at the bottom of the market? Most loans have a clause called an "Assignment of Leases and Rents," which allows the bank to take over the leases and collect the rent should the borrower, here the landlord, is in default. If the sheriff is correct, the banks are evicting tenants that are paying their rent, which the bank could claim. Why would they turn an asset generating income into a non-performing asset?

The problem in this story is that banks are not in the rental business. They are not skilled at property management, and would be overwhelmed if they had to manage all of the rental properties for the real estate loans that are in default. Also, most buyers of distressed property want to get the property free and clear of all junior claims (which would inlcude the tenants' leases), which is one of the benefits of buying a foreclosed property. Banks just want out, and will seek to sell the property in the way most likely to generate the highest price from auction. This sets up the perfect storm of tenants who have done nothing wrong, pitted against banks that are trying to get out from under bad real estate deals. In fact, we will likely see a lot more of this before all of the troubles in the market are over. I fear that the sheriff's decision, while laudable, will only forestall the inevitable, which is that banks will have to sell the property, and that buyers don't want to inherit the problems of the old landlords.