The pandemic has been with us for a year and yet there are few visible signs of distress. You don’t see a lot of abandoned buildings or vast armies of homeless families. One reason has been the government effort to bar evictions and foreclosures, programs where deadline after deadline has been pushed back to maintain social order and economic tranquility.
But there has to come a point where such programs end. That moment – whenever it arrives – will impact communities nationwide.
A new report from the Urban Institute (UI) estimates that more than one in six renters – about 10 million families – are now at risk of eviction.
“To put that into some perspective,” says UI, “approximately seven million households lost their homes in foreclosure during the five darkest years of the global financial crisis (2008-2012).”
The situation for many renter households is bleak.
According to the Institute, “those who have fallen behind in their rent are among the most vulnerable members of society: more likely to be unemployed, with less income and less education. They are also more likely to be families of color. Consistent with this, delinquent renters are most likely to live in urban areas in the Northeast corridor and California, and parts of the South with a preponderance of lower income households. Only one in four still has the sources of income they used prior to the pandemic to cover their rent payment and other expenses. To help make up for this, more than half of those behind in their rent are borrowing from their family and friends, and a third need unemployment insurance and food assistance from the Supplemental Nutrition Assistance Program”
The federal eviction moratorium established by the Centers for Disease Control & Prevention (CDC) has just been extended from January 31st to March 31st. This moratorium essentially impacts properties financed with the involvement of the FHA, VA, USDA, Fannie Mae, and Freddie Mac. Additionally, there are state and local moratoriums. For example, the California eviction moratorium was just pushed back to June 30th.
The Exit Plan
There’s no doubt that the eviction moratoriums were a rush job, something done to stem the potential results of no plan at all. But the 2020 approach has two substantial problems that ultimately need to be resolved.
First, the moratoriums protect tenants but landlords still have obligations to pay property taxes, insurance, repairs, etc. In turn, unpaid lenders and mortgage investors have not received expected income, putting many landlords at risk of losing their properties to foreclosure.
Second, an exit plan for tenants was created under the combined funding bill signed on December 27th. This legislation included $900 billion for COVID relief as well as $1.4 trillion to operate the government through the 2021 fiscal year. Buried in the legislation is $25 billion for a Coronavirus Relief Fund (CRF) to be operated by the Treasury Department.
How will the Coronavirus Relief Fund (CRF) work?
The effort to unwind the rental moratoriums is complicated. There’s money in hand to work on the problem but the actual impact is uncertain.
Let’s start with the money. The legislation set aside $25 billion. That’s a big sum but not nearly enough to make all landlords whole. Diane Yentel, president and CEO of the National Low Income Housing Coalition, said at the end of December that “renters will owe an estimated $30B to $70B in back rent, more than they can possibly pay off.”
Naturally, the longer the moratoriums continue the more that is owed.
Not only is $25 billion insufficient to cover the money owed to property owners, it’s not actually limited to rent.
“In general,” explains the Consumer Financial Protection Bureau (CFPB), “funds will be paid directly to landlords and utility service providers. If a landlord does not wish to participate, funds may be paid directly to the eligible household. These funds must be used for direct financial assistance, including rent, rent that is past due, utilities and home energy costs, utilities and home energy costs that are past due, and other expenses related to housing.”
Looking forward you can see a repeat of the Payroll Protection Program (PPP) in the making.
The PPP model
The PPP plan was a massive relief effort established last year for small business owners. According to The Washington Post, some 5 million PPP loans were originated but more than half the money went to just 5% of the recipients.
It turns out that PPP money was not actually distributed on the basis of need. Instead, according to the Federal Reserve Bank of New York, “the limited size of the PPP fund means that borrowers whose applications are processed and approved earlier get funding while late-comers are left out. The SBA approves PPP loans on a first-come, first-served basis, based on the date it receives applications from banks. However, the order in which banks submit applications to the SBA may not coincide with the order in which they were received from borrowers, due to differences in banks’ acceptance, processing, and approval times.”
What can landlords do to protect themselves?
“It’s unclear how the Coronavirus Relief Fund will work but surely $25 billion will be insufficient to cover the losses faced by landlords due to the pandemic,” said Rick Sharga, Executive Vice President with RealtyTrac, a leading source of real estate data. “A surprisingly large percentage of landlords are not corporations or institutional investors – they’re local mom and pop investors, who own a handful of properties, and who may not have the financial strength to absorb these losses.”
If the CRF works like the PPP program did there will likely be a rush to file relief applications for limited funds. This means landlords should begin now to assemble the likely paperwork they will be required to show. For instance, think of local licenses to operate a rental unit and investment-unit property taxes. Work with tax professionals and attorneys to document lost income. Speak regularly with bank officers, the point of contact for PPP advances. And follow the news from DC for any announcements regarding landlord relief.