By: Gary Painter | July 9, 2020
Dr. Gary Painter is a professor at the USC Price School of Public Policy and Director of the USC Price Center for Social Innovation and the Homelessness Policy Research Institute.
(Read the summary document here.)
Watch Dr. Gary Painter discuss the eviction crisis on Fox 11 News here.
BACKGROUND
COVID-19 has led to unprecedented loss of life and economic activity in the United States and across the globe. During the month of April, 20.5 million Americans applied for unemployment, a weekly average that is seven times the number of claims filed during the worst week of the 2008 recession.1 By June, unemployment claims had exceeded 40 million since the start of the pandemic.2 The effects of the virus are disproportionately felt by low-income households and people of color, many of whom are already in a financially precarious situation.3
In California, the sharp increase in unemployment that has come as a result of stay-at-home orders is of particular concern for renter households in an already high cost housing market. As of 2018, 53% of renters in the state were paying more than 30% of their monthly income towards rent, while 27% were paying more than half of their incomes towards rent. Research shows that rent-burdened households have higher eviction rates, less money in the bank, higher risk of entering homelessness, and higher usage of public programs and welfare.4
The UC Berkeley Labor Center recently estimated that approximately 3.2 million workers in California are employed by industries most at risk of direct economic impact due to COVID-19.5 California workers in these high-risk industries disproportionately identify as people of color and are significantly more likely to be low income, with an average annual pay of $34,000 compared to $68,500 for workers across all industries in the state.6 In Los Angeles County, 67% of workers in high-risk industries were renters as of 2018.7 This initial data suggests that COVID-19 increases the risk of income reduction for households who were already less than a paycheck away from missing a rent payment. Even though missed payments in April, May, and June have not been as many as feared, the pending uncertainty associated with mounting job losses has increased concerns for tenants, landlords, and creditors.8
CURRENT CALIFORNIA POLICY RESPONSE
On March 25, 2020, Governor Newsom worked out a deal with banks, credit unions, and servicers to provide a 90-day grace period on mortgage payments for borrowers economically impacted by COVID-19.9 This policy shields borrowers from any negative credit effects from forbearance and prohibits mortgage-related late fees or CD withdrawal fees. Just two days later, the Governor issued an executive order prohibiting evictions for renters affected by COVID-19, effective immediately. It bans landlords from seeking evictions on tenants who fail to pay their rent and prohibits police departments and the courts from enforcing any evictions (Executive Order N-37-20). It requires that tenants inform their landlords in writing no more than 7 days after they miss a rent payment that they could not pay the full or partial amount due to COVID-19 (Executive Order N-37-20).
Governor Newsom extended the eviction moratorium from May 31 to September 30, 2020. However, the tenant must still make full repayment in a “timely manner” and could still face eviction after the moratorium is lifted on September 30 (Executive Order N-71-20). Moreover, tenants must keep documentation to support their reason for nonpayment and provide it to landlords upon repayment (Executive Order N-37-20). Many cities throughout have responded by creating a more detailed moratorium on evictions.10 For example, 38 of the 88 cities in Los Angeles County have issued specific policies that differ from the tenant protections in the Governor’s Executive Order.11
While eviction moratoriums and mortgage forbearance immediately delay the worst case scenario of housing displacement, these measures do nothing to help individuals and families recover lost income, and households are still required to pay a large lump sum after the repayment period expires. A 2017 study found that after paying rent, the average U.S. household in the bottom quintile of the income distribution has less than $500 per month remaining to cover all other household expenses including food, clothing, childcare, transportation, and healthcare.12 This budget constraint leaves households with the highest risk of economic impact due to COVID-19 with no room to save for backlogged rent or mortgage repayments even if they had 6 or 12 months to do so.
Eviction moratoriums will also hurt property owners and landlords. With the eviction moratoriums, landlords are still liable for their bills, including mortgages, utilities, insurance, taxes, and payroll for staff and contractors.13 If these measures force landlords to bear a disproportionate amount of the burden, they risk landlords laying off their own workers and contractors, missing mortgage or bill obligations, and forfeiting their ownership of the property.13 Faced with these constraints, landlords may resort to evicting tenants through other methods, including by shutting off utilities or taking units off the market through the Ellis Act.14 As such, eviction moratoriums and forbearance relief must be designed in a way that avoids placing undue burden on property owners and protects tenants from alternative pathways to displacement.
A PLAN FOR RECOVERY IN THE RENTAL MARKET
While there are no precedents for dealing with a large scale rental recovery program that is needed to address the accrued rental debt, there are analogies in commercial real estate that can inform a solution. It is quite common for owners of commercial real estate that are at risk of mortgage default to approach a lender to develop a blueprint where debt is allowed to be refinanced in a way that might involve a principle reduction or at least reduction in the present value of the principal by extending the loan terms. The reason that lenders are willing to do so is that mortgage default or bankruptcy resolution can be far more expensive in the long run that developing a workout strategy.
Similarly, the State of California must develop a “Blueprint for California Renter Recovery” that prevents the dire outcomes for renters and landlords that would exist with mass eviction or personal bankruptcies that tenants might use to slow down eviction. Due to the unprecedented nature of this economic and health crisis, I believe that rental forgiveness on behalf of landlords or public sector payments of rent are not politically feasible solutions due to potential losses faced by landlords and state budget constraints.
It is worth noting that not all share my pessimistic view on public payment of accrued rent liabilities by the state or federal government. The U.S. House passed the Heroes Act which suggested $100 Billion in emergency rental assistance that could cover these accrued rental liabilities.15 The legislation stalled in the Senate, perhaps in small part due to the perceived “moral hazard” risk of the market inadvertently encouraging additional non-payment of rent, or possibly because the overall spending in the bill was too large for Senate Republicans.
SB1410 is a solution that is closest in spirit to the Blueprint proposed below. In SB1410, the accrued rental liability will be financed over a 10 year period. Landlords will receive payments over 10 years in the form of tax credits, and tenants will have to repay the states. However, this proposal does not address the immediate distress of landlords.
“A Blueprint for California Renter Recovery” should address the following elements:
- Eligibility – Tenants would document their job loss and need for assistance. Much of the eligibility criteria for the eviction moratorium could apply here, including:
- Unable to work due to suspected case of COVID-19 or caring for sick household or family member with suspected case of COVID-19
- Layoff, loss of hours, or other income reduction due to COVID-19, the state of emergency, or other government response
- Unable to work due to taking care of a child whose school was closed due to COVID-19
- Refinance of Accrued Rental Liabilities
- Develop a mechanism to finance the accrued liability. This proposal suggests that a long term (10 year) low interest loan be provided to the tenant to pay for this liability. The most obvious source of financing would be the federal government since they 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 these loans to tenants and pay landlords the required loan amount calculated above. As with student loans, the payments would not begin until the tenant had a full-time job or part-time job paying a set level per month.
- Develop a calculation for percentage of accrued rental liabilities to be paid. I would suggest an income threshold (% of Area Median Income) and rent level threshold (% of Fair Market Rent) to focus this program on those that are most in need. A continuous or step-wise function could be created so that those will lower incomes and lower rents are required to pay a smaller percentage of their accrued rental liability than those with high incomes. For example, someone earning more than 150% of AMI and paying a rent more than 150% of FMR would be required to pay 100% of the back rent, and someone at 30% of AMI and 50% of the FMR would be required to pay 50%.
- Address landlord distress – While the tenant loans would address the significant cash flow shortfall that landlords are currently 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
In sum, this proposal, “A Blueprint for California Renter Recovery,” does not provide full reimbursement of unpaid rents to landlords and by extension, the creditors of lenders. It also does not provide full rent forgiveness for vulnerable tenants that lost their jobs because of the pandemic. Instead, it proposes a way forward where all parties, including the public sector, can be part of a solution that is desperately needed in the near future.
1 Carmen Reinicke, “US weekly jobless claims hit 4.4 million, bringing the 5-week total to more than 26 million.” (Business Insider, 2020). https://www.businessinsider.com/us-weekly-jobless-claims-labor-market-unemployment-filings-coronavirus-recession-2020-4.
2 Patricia Cohen, “‘Still Catching Up’: Jobless Numbers May Not Tell Full Story.” (NY Times, 2020). https://www.nytimes.com/2020/05/28/business/economy/coronavirus-unemployment-claims.html.
3 A Pew Research survey found that 52% of low-income American households (making under $37,000 for a family of 3) have lost a job or taken a pay cut due to the outbreak compared with 32% of upper-income families (making more than $112,600). The same study found that Black and Latinx Americans have lost jobs at a disproportionate rate compared with White Americans. (Parker, K., Horowitz, J. M., & Brown, A. (2020, April). “About Half of Lower-Income Americans Report Household Job or Wage Loss Due to COVID-19.” Retrieved from https://www.pewsocialtrends.org/2020/04/21/about-half-of-lower-income-americans-report-household-job-or-wage-loss-due-to-covid-19/.)
4 Erin Currier & PEW Charitable Trusts, “American Families Face a Growing Rent Burden.” (Pew, 2018). https://www.pewtrusts.org/-/media/assets/2018/04/rent-burden_report_v2.pdf.
5 Industries included restaurants and bars; retail (excluding gas, hardware, and online); hotels and other lodging; amusement, gambling, and recreation; personal care services; performing arts and spectator sports; air transportation; other passenger transportation; and museums and parks.
6 Sarah Thomason, “Industries at Direct Risk of Job Loss from COVID-19 in California: A Profile of Front-Line Job and Worker Characteristics.” (Center for Labor Research and Education, 2020). http://laborcenter.berkeley.edu/industries-at-direct-risk-of-job-loss-from-covid-19-in-california.
7 Analysis included workers ages 18 and older employed in the industries listed above. Relatives of the head of household (such as older parents and adult children) were not included in the worker population (ACS, 2018).
8 National Multi-Family Housing Council Rent Tracker: https://www.nmhc.org/research-insight/nmhc-rent-payment-tracker/.
9 Kathleen Pender, “With coronavirus cancellations, workers worry about use-it-or-lose-it FSA money.” (SF Chronicle, 2020). https://www.sfchronicle.com/business/networth/article/FSA-woes-Workers-worry-how-to-use-health-15216716.php.
10 Multiple cities specify the types of evictions as one or more of the following: (1) non-payment of rent, (2) no-fault, or (3) unauthorized occupants, pets, or nuisance related to the pandemic. For example, the City of Los Angeles’s moratorium applies to all three categories. Multiple city policies only cover evictions for non-payment of rent, some cover both non-payment and no-fault, while very few other than the City of Los Angeles specify all three eviction types. Multiple cities allow longer time periods to provide notice to landlords, usually within 30 days of the first non-payment. The City of Los Angeles allows 90 days. Multiple cities specified an actual period for repayment, usually 6 months, as opposed to the executive order’s “timely manner” phrasing. For instance, Gardena and Whittier allow up to 120 days for repayment, while the City of Los Angeles and the City of West Hollywood allow up to 12 months. Multiple cities banned the charging of late fees or interest on those making repayments. Multiple cities specify that evictions for the purposes of public safety will be allowed to proceed. The City of Los Angeles banned utility shut-offs.
11 “Guide to COVID-19 Tenant Protections.” (Housing Rights Center, 2020). https://docs.google.com/spreadsheets/u/0/d/1HesUhp9rFQy8GytXzY0kBcR9BgLgjtkN-3E-aYrI1no/htmlview#.
12 Jeff Larrimore & Jenny Schuetz, “Assessing the Severity of Rent Burden on Low-Income Families.” (FEDS Notes, 2017).
13 Capps, K. (2020, March 26). “Do Landlords Deserve a Coronavirus Bailout, Too?” Retrieved from https://www.citylab.com/equity/2020/03/coronavirus-stimulus-bill-rent-due-landlords-property-owners/608353/.
14 The Ellis Act is a 1985 California state law that allows landlords to evict tenants in order to get out of the rental business. Landlords can take advantage of the Ellis Act to evict tenants when they convert an apartment building into condominiums, hotels, or even retail space.
15 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.