Here’s a scheme that has sprouted from the avalanche in bank-owned, aka REO (real estate owned) market. It should outrage every honest, hard-working person who plays by the rules and doesn’t want to subsidize those who don’t.
The City of Los Angeles Housing Department (LAHD), under its Rent Stabilization Ordinance (RSO), declares that every property within its boundaries that contains a tenant is subject to the RSO when that property’s title reverts back to an institutional lender, usually meaning a bank. Under the doctrine that it is not the tenants’ fault that the former property owner defaulted on their loan (neither is it the bank’s), the LAHD requires banks to pay crushing relocation fees to the tenants before the banks can move those tenants out in order to market and resell the property. In contrast, once the property is sold to a new owner, the new owner must merely give the tenants 60 days notice; no relocation fees required if the new owner moves in. And if the tenants qualify as “low income” under federal HUD (Housing and Urban Development) poverty guidelines, the banks are forced to pay the tenants even more – almost $18,000. Contrast this sum with the $3,000 or less that the former homeowners are likely to receive from the lender for vacating the property without damaging it (“cash for keys”).
These generous pay-outs established by the cash-strapped, almost-bankrupt City of L.A., besides putting a damper on business, have created a cottage industry in fraud by some renters and pretend-renters. Here’s how their Let’s-get-some-free-money scheme works:
The former owners, having lost their home to foreclosure, get a cooperative real estate agent to write an offer on the property for new “buyers”, claiming that the buyers are “tenants” living on the foreclosed property. The buyers/tenants are usually either friends or relatives of the former owners, but with a different surname. If the buyers succeed in fooling the bank’s listing agent and the bank’s asset managers, they purchase the property and join their relatives there. They might even transfer title back to the former owners in a year or so once they believe no one is looking.
If the “tenants” fail in their quest to purchase the property, they then demand the generous location fees as set forth by the LAHD, again sums that can total close to $18,000. Maybe these con artists will even produce a phony lease agreement between themselves and the former owners to “prove” that they are tenants.
Sometimes, the former homeowners don’t bother with setting up a buyer for their foreclosed property. Instead, they collude with friends or relatives, installing the latter as “tenants” in order to “qualify” for the LAHD relocation assistance fees.
And of course there are a number of attorneys and tenants’ “rights” groups swarming, ready to save the renters, or would-be renters, from the evil banks.
My beef is not with our legal system protecting the disabled or elderly persons, which it should; it is against overly rewarding able-bodied working persons to the extent where it creates incentives to be dishonest and no downside if the dishonesty is discovered. Why should low-income renters be paid to move when middle-class renters get nothing? Why are some cities paying teenage girls not to get pregnant? Doesn’t anybody think this system of entitlement is nuts and is creating a nation of sloths?
How does the honest consumer fit into this equation? Very simply: all businesses pass on their costs in the form of higher fees; banks are no different. Having to pay $18,000 to get tenants out of a $200,000 or $300,000 property creates more losses on the banks’ balance sheets, again, stifling business. And because banks are now required, courtesy the LAHD, to lay out large sums of money to either real or make-believe tenants, the banks are much less likely to pay to repair their REOs for a new, legitimate buyer.
It’s not that I’m defending banks wholesale; what I’m concerned with is the LAHD creating a hostile environment for businesses to operate and no defined penalties to discourage renters from fraudulently milking the system. There are very few municipalities in the U.S. that are as generous with other people’s money as the City of Los Angeles Housing Department, so my question to the LAHD is, what do they know that the other municipalities in this country don’t?
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