One of the many markets that have been destabilized by the economic shutdown is the rental market. Even though missed payments in April, May, and June have not been as many as feared1, the pending uncertainty associated with mounting job losses has increased concerns for tenants, landlords, and creditors. Policymakers around the country acted swiftly and prudently to ensure that tenants forced out of a job due to COVID-19 would not be kicked out of their home. Research on both eviction2 and foreclosure3 moratoria suggest that a pause is a good first step to stabilizing both rental and owner-occupied housing markets. But landlords are getting restless, and have filed suit over Los Angeles’ eviction moratorium.4 We need a plan for stabilizing the rental market. Unfortunately, unrestricted rental assistance to tenants or landlords, such as the $100 Billion in the Heroes Act5 is not a plan. It simply provides some promise of assistance without a strong link to long term stabilization in the market.
Policymakers must develop a “Blueprint for Rental Market Stabilization” that prevents the dire outcomes for renters and landlords alike that would result from mass evictions or personal bankruptcies filed by tenants. If we delay in providing a clear plan now, then tenants, landlords, and creditors will continue to make haphazard decisions in the face of an unknown future.
While there are no precedents for dealing with large scale accrued rental debt, there are analogies in commercial real estate that can inform a solution. It is quite common for lenders to allow commercial real estate owners at risk of mortgage default to refinance debt in a way that either reduces the principle owed or extends the loan terms. Developing such a plan allows lenders to avoid the expense of a mortgage default or bankruptcy resolution.
There are three core elements that any blueprint must include: a tenant eligibility criterion, a financing mechanism for accrued rental liabilities, and a mechanism to address landlord distress.
Under such a blueprint, eligible tenants would document their job loss as well as their need for assistance. These criteria could mirror the eligibility criteria used for current eviction moratoriums, such as the inability to work due to COVID-19 illness, a layoff, loss of hours, or other income reduction due to COVID-19, or inability to work due to caregiving for a child whose school was closed due to the pandemic.
In addition to having clear eligibility criteria, a blueprint must include a mechanism to finance the accrued liability. The most obvious source of financing would be the federal government, since it can borrow at very low interest rates to finance these loans. In much the same way as student loans are financed, a financing vehicle could be created to provide loans to tenants and pay landlords the required loan amount. As with student loans, the payments would not begin until the tenant had a job guaranteeing a certain level of income. California legislators have drafted a bill that is currently in committee that would have tenants pay what they owe over 10 years with landlords receiving the money back through tax credits.6 Unfortunately, this leaves small landlords with a significant upfront deficit that some may not be able to overcome.
Lastly, a politically feasible and sustainable blueprint must address landlord distress for the roughly 10 million landlords across the country.7 While tenant loans would address a percentage of the significant cash flow shortfall that landlords are experiencing, provisions of this program should also incentivize the finance sector to work closely with landlords to refinance existing mortgages into more payment friendly options.
Why force eligible tenants to pay a portion of the rent? If tenants are offered full forgiveness, there is less reason for them to pay, even if they could afford to. Instead, the blueprint must include a formula to calculate what percentage of accrued rental liabilities should be paid, such as an income and rent level threshold to focus this program on those that are most in need. Those with lower incomes could then pay a smaller percentage of their accrued rental liability than those with higher incomes.
The blueprint outlined above is not a panacea for the severe instability faced by renters and landlords as a result of COVID-19. However, it proposes a way forward where all parties, including the public sector, can be part of a solution that is desperately needed now so that all participants in the rental market can plan their best path forward with less uncertainty.
1 National Multi-Family Housing Council Rent Tracker: https://www.nmhc.org/research-insight/nmhc-rent-payment-tracker/.
2 Collinson, R.P., & Reed, D.K. “The Effects of Evictions on Low-Income Households.” (NYU Law School, 2018).
3 Gabriel, Stuart A. and Iacoviello, Matteo M. and Lutz, Chandler, A Crisis of Missed Opportunities? Foreclosure Costs and Mortgage Modification During the Great Recession (2020). Forthcoming, Review of Financial Studies. Available at SSRN: https://ssrn.com/abstract=2831830 or http://dx.doi.org/10.2139/ssrn.2831830.
4 Liam Dillon, “Landlord group sues city of L.A. over coronavirus anti-eviction protections.” (Los Angeles Times, 2020). https://www.latimes.com/homeless-housing/story/2020-06-11/landlord-group-sues-city-of-la-over-eviction-protections.
5 Kristina Peterson and Andrew Duehren “House Narrowly Passes $3 Trillion Aid Package.” (Wall Street Journal, 2020). https://www.wsj.com/articles/house-set-to-vote-on-democrats-3-trillion-aid-package-11589561178.
6 John Myers, “California considers unprecedented $25-billion economy recovery fund, rental relief.” (LA Times, 2020). https://www.latimes.com/california/story/2020-05-12/coronavirus-rent-relief-tax-vouchers-plan.
7 “Message From PD&R Senior Leadership.” (PD&R Edge, 2020). https://www.huduser.gov/portal/pdredge/pdr-edge-frm-asst-sec-061118.html.
Chair of the Department of Public Policy and Director of the Sol Price Center for Social Innovation
Director, USC Sol Price Center for Social Innovation, Director, Homelessness Policy Research Institute