residential hard money loans

New eviction laws that Democratic lawmakers recently passed would prevent landlords from filing evictions for nonpayment for a full year after the bill is passed. It would further prohibit foreclosures over nonpayment over the same period and enact automatic forbearance for delinquent borrowers.  What does this mean for real estate?  How will this impact property owners?

Why is this eviction/foreclosure moratorium proposal important?

Although the bill was passed by the Democratic house and is not likely to become law by year end, it is an indication of what is to come.  Regardless of your political affiliation, the market is putting  the probability of a Biden win at somewhere between 75-90% (The Economist).  Although the passage in the house was more symbolic, if the predictions are correct then passage of this bill could occur early next year.

What is in the recent bill?

The legislation would prevent landlords from filing evictions for nonpayment for a full year after the bill is passed. It would further prohibit foreclosures over nonpayment over the same period and enact automatic forbearance for delinquent borrowers to address the needs of struggling homeowners.  This is different than the Cares act which only covered properties with federally insured mortgages.  This moratorium would be on top of the one-year grace period already given so renters would receive two years of housing rent free.  Furthermore, with a ban on starting foreclosures, property owners in default will receive even more time.  For example, in many states, foreclosures take between 6-12 months so in total a borrower in default could stay in the property for over 3 years.

Property occupants (renters and homeowners) will be responsible for the unpaid rent.  Unfortunately, the probability of collecting this is around zero.  For example, if a renter was unable to pay their rent initially due to an economic shock (like loss of job), how are they going to come up with two years of rent?  Furthermore, the property owners and lenders are on the hook to continue to pay to maintain the property, utilities, taxes, and their own mortgage on the property (or lines of credit if they borrowed to make the loan).

Furthermore, there was a proposal to help struggling property owners, unfortunately unless the government is going to forgive the mortgage payments on rental properties, then the property owner is still underwater as they will never collect the lost rent.

Law of unintended consequences for an eviction/foreclosure moratorium

Unfortunately, in economics there is no free lunch.  Having occupants stay in properties for two to three years rent/mortgage free will have serious impacts on the residential market.  Over half of all rental property owners are “mom and pop” owners with one or two rental units, these property owners are the heart of the middle class.  With the government choosing renters and borrowers over lenders and property owners there are bound to be severe consequences.  Below are the top 5 impacts to real estate.

  1. Stricter lending standards: Banks have already tightened credit standards, with new laws prohibiting foreclosures, the repercussions of a defaulted loan are multiplied.  If a lender now has to keep a defaulted loan on their books for up to three years, the house will likely degrade due to lack of maintenance, taxes, insurance, etc… will have to advanced, and capital is tied up with a negative return for years.  This legislation will amplify the bank pull back to servicing only the top tier of borrower due to the increased risks.
  2. Increased costs for renters and borrowers: There is no free lunch as costs from nonpaying borrowers and renters pile up, lenders and property owners will increase costs for their performing customers to mitigate the huge losses they are seeing due to the moratoriums. This will lead to increased rental rates and increased costs for new mortgage borrowers.
  3. Corporate buyers: Mom and Pop owners will not be able survive another year with no rental payments and negative cash flow created. Unfortunately, this legislation will further the consolidation in the industry to the largest players with substantial capital to whether the pandemic.
  4. Selling property: With evictions now taking years, the profitability of many long-term rentals is in doubt. You will see many smaller property owners opting to sell the properties which will many times remove them from the rental pool creating an even increased shortage of rental housing.
  5. Tighter scrutiny of tenants: with evictions taking substantially longer and costing property owners substantially more, just like in lending, rental owners will tighten their standards for new tenants leaving many prospective owners unable to find affordable rental units on the private market.
  6. More nightly rentals: As costs add up for long term rentals many property owners in resort markets will continue to migrate into short term rentals as the profitability will increase over long term tenants and the risk is substantially lower.

The moratoriums on evictions and foreclosures does nothing to address the root cause of what is driving the non-payment.  Essentially the government is focusing on the effect as opposed to solving the underlying employment issue.  The only way to solve the housing crisis is to increase employment so people are able to pay their rent and mortgages, without addressing this issue, a moratorium will only delay the inevitable eviction/foreclosure.

Summary

With the unemployment rate hovering around 8%, I would agree that something needs to be done to keep people in their homes to mitigate the crisis we are in.  Unfortunately, moratoriums on evictions and foreclosures will lead to substantial unintended consequences that will drastically alter the real estate market.

The government is picking winners and losers which will ripple through the entire economy.  It is not fair, or wise, to pick tenants over property owners.  A balanced approach must be taken; blanket moratoriums distort the market and places the burden of free housing on property owners and lenders which will lead to market altering unintended consequences.  The government response needs to focus on the root cause of non-payment, employment/lack thereof as opposed to the effect.

 

 

Additional reading/resources

 

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors Magazine,  The Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

 

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