Foreclosure stigma haunts would-be renters

As if losing a house on the court steps wasn't enough, some former homeowners may find themselves turned away by apartment owners spooked by the foreclosure history on their credit reports.

One Virginia couple ended up living in a hotel after their foreclosure, according to Trish Lynch, a trainer and former credit counselor at ClearPoint Financial Solutions, who worked with them.

"No one would rent to them. And the hotel is costing them $3,000 a month to stay there," she said.

Lynch recommended they try to rent from a private owner or individual who might be more lenient on credit checks, but who could also ask for higher rents to cover their risk. So far, the couple's still stuck at the hotel.

As foreclosures rise across the country and skyrocket in economically depressed areas and once-hot housing markets, more apartment owners are seeing an increase in the number of rental applicants with derogatory mortgage histories. That includes foreclosures, short sales — when a house is sold for less than the amount owed on the mortgage — and deed-in-lieu of foreclosure, when a homeowner gives up a house to the lender to end the foreclosure process.

Many of these would-be renters flood the so-called shadow market of investor-owned homes and condos, which make up almost half of the rental stock and are not tracked by the apartment industry. But some former homeowners are making their way to the traditional rental market, causing concern for some landlords.

When Jane Garvey, president of the Illinois Rental Property Owners Association, informally surveyed the 500 members of her association, the landlords expressed some discomfort with renting to people with foreclosure issues.

"They need to know they're going to get paid," she said. "As a group, people seemed more reluctant to accept people going through a short sale. They look at it as signing a contract but not going through with it."

Some in the apartment industry have been trying to slice and dice the applicant pool to identify who could make good renters and add to occupancy levels and the rental base, said Mark Fogelman, president of Memphis, Tenn.-based Fogelman Management Group, which owns and manages 18,000 rental units in the Southeast, Midwest and Southwest.

"For us, that's too subjective and sets a risky proposition," he said. "We have not successfully been able to accept many applicants with defaulting mortgages primarily because they tend to have other credit issues."