Survival for some mom and pop landlords hangs in the balance

If Judicial Counsel lifts eviction ban on Aug. 14, legislation will likely continue to put the burden of missed rent payments on landlords.

Just how far can California kick this rent-free mirage down the road without causing insurmountable damage for landlords, lenders and local communities?

Just how quickly, and how many of California’s renters who are righteously paying their rent get soured and resentful (and start thinking, me too!) by their bragging neighbors who have the means to pay but refuse to?

Rightly so, we are too humane of a society to allow mass scale evictions, especially as it concerns the millions who have lost their jobs through no fault of their own. If you can’t pay your rent, you can’t pay.

Even Gov. Gavin Newsom figured out a way back in March by executive order to house the homeless — an admirable attempt to protect them and everyone else against the spread of COVID-19.

It’s likely that on Aug. 14, the California Judicial Council will lift its statewide tenant eviction ban — meaning landlords can start the legal process of kicking out freeloaders, and those who can’t pay.

Waiting in the wings is pending legislation (namely SB 1410 and AB 1436) that will likely continue the eviction ban baton.

And, let’s acknowledge the additional complication of frayed nerves.We’ve seen a wave of property destruction and looting across California and the nation as violent protests occurred separately from peaceful protests — sparked by George Floyd’s brutal slaying at the hands of Minneapolis Police. Nobody wants to see evictions and rent protests escalate into violent protests or looting.

Where is the accountability in all of this? How do we make this a soft landing, and not a crash landing for tenants and landlords?

Dave Stevens has the benefit of hindsight.

He was the Federal Housing Administration Commissioner under President Obama during the Great Recession mortgage meltdown days.

“We were inventing things on the fly,” said Stevens. Number one on his list is proof of hardship as government shifts the responsibility for those who were not prepared for it.

“You can’t put the burden of real estate (financial responsibility) on landlords, especially mom and pop,” said Stevens. “Wholesale (rent payment) forbearance is excessive.”

That was certainly a common theme for those I interviewed.

“If you assist just one group (renters or owners), then you are creating a problem for another group,” said Professor Raymond Sfeir, director of economic research at Chapman University. “You can’t just help one group.”

How bad are things right now?

There are 318,000 additional past due mortgage holders in California than there were three months ago, representing 4.3% of mortgage holders in the state, according to Black Knight. There are 565,000 California mortgage holders currently in forbearance.

More than 14% of California tenants responding to the U.S. Census Bureau’s latest Household Pulse Survey reported they were unable to pay their June rent on time – and more than 16% were late on their June rent in Los Angeles, Orange, Riverside and San Bernardino counties.

“Right now probably 90% of people are paying their rent,” said Debra Carlton, executive vice president of state government affairs at the California Apartment Association, which has been conducting its own rent collection surveys.

Twenty-four percent of all single-family homes in California were rentals as of 2016, according to the census. Just over 21% of Southern California houses were rentals that year.

Christopher Thornberg, founding partner of Beacon Economics, has a completely different view.

“There is scant evidence huge numbers of people are falling behind in rent,” he said. “The recession is already over.”

The good news is mortgage rates reached a record low of 2.88% this week, according to Freddie Mac. For those landlords that are not in forbearance, perhaps they can reduce the mortgage payments.

And, Attom Data Solutions just announced that home equity levels improved across the nation during the second quarter, despite the coronavirus pandemic. Cash-out refinances might become a survival tool.

My solution: Give tenants who can prove financial hardship a pass on paying rents until 30 days (not 90 days) after THE COVID-19 virus is officially contained.

Give landlords immediate dollar for dollar tax credits against the financial hardship of rents not paid (pending legislation calls for being able to use those tax credits starting in 2024). Landlord must show proof of rent losses due to COVID-19.

Tenants and landlords are subject to audit. If any shenanigans are found, the Franchise Tax Board can immediately go into the cheaters bank accounts and/or garnish the cheaters wages to recover the ill-gotten free rent or tax credits. And, charge a 10% cheaters penalty to boot.

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Jeff Lazerson - Mortgage Columnist since 2011