09/29/2010 08:38 pm ET Updated May 25, 2011

The Big Squeeze -- Unwitting Tenants Caught Between Defaulting Owners and the Banks

An interesting by-product of any downturn in an economy is that you can categorize the stakeholders into four categories -- victims, users, scavengers and survivors. The category that you fit into is not always one of your choosing but there is one universal thread between all of them -- they are all trying to make the most of their situation.

In this current situation, the banks, for the most part, are survivors, although there are exceptions (i.e. Lehman Brothers). Survivors and also be victims -- looks at the massive inventory of Real-Estate-Owned (REO) Properties on and off the market that are doing nothing but depreciating rapidly. As this case also shows, sometimes the survivors are also the cause, since they probably knew what was about to happen before it occurred (i.e. Bernie Madoff 's Ponzi-scheme and Goldman-Sach's mad rush to package and sell derivatives and betting against there value increasing). Sure Bernie's in jail and G-S seems like they are in trouble, but Bernie's family is set for life and you won't find the folks at Goldman-Sachs at the shelter or in line to apply for food stamps any time soon.

Certainly, some homeowners who attempted the American Dream of home-ownership are victims, especially if they were set upon by predatory lenders with sub-prime mortgages (i.e. Lehman Bros).

However, some of the Homeowners were not going after the American Dream in that manner, but were in it for Gordon Gecko's ("Greed is Good") version. Investors imagined themselves as Donald Trump without the hair (No offense, Mr. Trump, but not everybody can be a real estate tycoon, no matter how much to tried to pitch it to them). These investors became victims of themselves. Real-Estate investing is a gamble, and you NEVER gamble more than you can afford to lose.

This brings us to another victim of this housing crisis, and one that I know of first-hand. The Renters.

We lost our house in Cincinnati to medical bills and became a renter in Florida, only to become a victim of an owner who bought a house to flip it at the height of the housing bubble and decided to rent when he figured that it wasn't going to sell. We moved into the house in July of 2007. At the end of 2008, seeing the value of the house continue to plummet (it is now worth less than half of his purchase price), he decided to stop paying his mortgage to Bank of America (Countrywide). When we got served a Lis Pendins foreclosure document as tenants in June of 2009, he claimed that he was doing it to force the bank (which, as I previously mentioned, is usually a survivor), and the owner claimed that he did it to force the bank to modify his loan. I suspect that he wanted them to reduce the already low interest rates or drop a chunk of the principle (two pie-in-the-sky conclusions).

It has now been 21 months that we have faithfully paid the rent and he has faithfully pocketed it without maintaining his responsibility to the bank to pay the mortgage. We now live everyday by checking out the clerk of courts website to check on the progress of the foreclosure and waiting for the hammer to fall. The owner on the other hand is watching his bank account grow with my money and keeps the home-equity to himself until the bank takes it. Assuming that he was the victim (of his own poor investment strategy) he has decided to attempt to make the bank, his tenants, and the State of Florida his victims. (He added a Second Home Rider to the mortgage, which give him a property tax break, although it also prohibits him from contracting with a management company to rent the home, which he ignored). He has moved from the category of Victim to User.

And so it goes in my neighborhood, Pasco County. The figures from Realty Trac show that one in every 155 homes in Florida received a foreclosure filing in August, 2.5 times the national average. In Pasco, it meant 1620 filings, one in every 136 homes, an increase of 60.2% since last year at this time.

Our area of Pasco County is overrun by investors like the owners of my home. In a community very near mine, the developers had promised current and future homeowners that they would limit the sales to investors to only 30%. By the time the homes had been all sold in 2007, the investors made up 70% of the households. Some had opted to rent the home as Chapter 8 properties. Some had rented homes to multiple families, so that 10 to 20 people were living in the same house. Many did no background checks of tenants. Other continued to hold on to the houses, expecting to flip them, so they sat vacant with utilities turned off and got moldy and vandalized. Crime rates started to rise, including drug sales at the playgrounds. Nice families began to get evicted even though they paid their rent, due to the homes being foreclosed. The Resident Association launched a campaign to get the undesirable tenants out, and even took over some properties so that they could rent them at lower rates to good families. In the meantime, houses that sold for almost $400,000 in 2006 are now going for $150,000 and almost every homeowner in the community has a mortgage worth twice as much as their homes' current value.

In the meantime, Florida is losing out on badly needed property tax dollars. Governor Charlie Crist worked hard to give the homesteading citizens of Florida a tax cut, and these investors are abusing that policy. With a shortfall of six billion dollars, Florida cannot afford to give homestead tax breaks to the investors, many of which do not even live in this state, that are using the system to their advantage, any more than they can afford another case of Medicaid fraud, as the legislature threatens to close down local health departments and clinics and reduce Medicaid reimbursement by 38%.

Florida has been known for many years as the scam capital of the country, always running neck-in-neck with Nevada. "Sixty Minutes" talked about 55 billion dollars in Medicaid and Medicare fraud here. Now that it is also near the top of foreclosures at a time when the country's foreclosure rate is the highest in history, it not much of a stretch to figure out that mortgage frauds and rental frauds will be high on the Hit Parade over here, as well.

As I mentioned before, there are also Scavengers, not too unlike the Carpet baggers after the civil war. One notorious case was in my part of Florida where a gentleman was breaking into abandoned houses (of which there are plenty, in almost every neighborhood, including mine, which is only a few years old). He would change the locks and rent the homes for as long as he could get away with it, and asking for cash-only rent to prevent a paper trail. Other folks have moved into a rental property and paid their rent faithfully only to find out that the landlord no longer owner the property before he even moved in. However, since the bank couldn't even sell the property at auction, (since they were desperately trying to recoup THEIR loss) the house sat there empty, waiting for the scavengers to feed off of them.

And the pain goes on, and the stories repeat themselves, over and over again. Survivors make victims, victims become users and make more victims, and scavengers make even more victims. Something needs to happen to reduce the number of victims and create more survivors. Another victim of this crisis is the civil court system. They are so choked with foreclosure cases that the disposition of other civil cases is being severely hindered. Retired judges have been brought in with a $9.6M plan to fast track the cases in an alternative court, but that is being met with resistance, as well.

Banks had been passing the bad mortgages like a game of "hot potato," making it difficult for law firms to help the banks settle the foreclosure cases, since several institutions often lay claim to ownership of the mortgage. Law firms handling those cases have been morphing into quasi-foreclosure mills. One of the largest firms doing this work in Florida is the law offices of David J. Stern. The Attorney General an others have been putting out a lot of negative press on them, but I'm not sure that they are the villains.

I wouldn't blame the lawyers for this mess. They are merely filling a niche that this mess created. For those paying their rent in earnest, while waiting to be kicked out of their homes while they are still living within a valid lease they cannot break and watching the owner pocket their hard-earned monthly rent, the current dragged-out process is maddening and degrading. The law firms-turned-foreclosure-mills may be getting richer, but the competent one are doing it legally, surrounded by an insane amount of paper-juggling and information mishandling. It's a bureaucratic Armageddon, complete with utter chaos. Those who can straighten it out without cutting corners (like signing papers without ever having the time to read them, which has been verified in two major mortgage banks.)

So what is the answer? How do we reduce the number of innocent victims? Here's one clue -- the Users may need to have a reversal of fortune, and pay their dues to this great society. This is not a socialistic view, if anything is it more like Adam Smith's invisible hand of capitalism at its handiest.

The investors who came into our neighborhoods for profit instead of home ownership turned the market on its head, greatly inflated home prices, and now they are defaulting, and making us pay. We as taxpayers are bailing them out by shoring up the banks and their tenants are being forced to help investors recoup their losses by pocketing the rent payments without paying their mortgage. They aren't paying the interest that was their responsibility, nor are they paying their property taxes, especially if they presented themselves as residents or owners of their second home (via a second home rider) to get a homestead tax break. Thanks to their irresponsible investing, genuine homeowners were suffering through the devaluation of their homes, and new home buyers are finding it hard and harder to get the loan they need.

Perhaps there should be legislation preventing unlicensed investors from stumbling greed-first into our neighborhoods as hands-off landlords. First and foremost, they need to take the heat for their bad judgment, instead of the rest of us. Orange County, Florida has also been hit hard by this situation. Perhap Mr. Grayson should take up the charge.

We need to stop any future damage to our American Dream, which as Mort Zuckerman pointed out, has become the American Nightmare.