Will Delaying Evictions and Foreclosures Worsen a Downturn?

In April 2020, tenants in a single-family home I own in Texas stopped paying rent. They had all sorts of reasons, including losing their job, being sick, and having the bank hold their unemployment check.

I was willing to wait another week with every excuse they made, given the sudden hardships due to COVID-19. I offered to let them pay rent slowly and waived late fees. Everyone was experiencing troubling times, and I wanted to partner with my tenants.

As the weeks went on, there was still no rent and more reasons for the delay in payments.

What’s Happening With Evictions?

In any case, by August, I was ready to file for an eviction. Due to the moratorium on evictions until the end of August for FHA, Fannie Mae, and Freddie Mac loans, I needed to wait.

On the day before filing, more news came.

When I heard on September 4 that the CDC had banned evictions or foreclosures until December 31, 2020, extending the ban on evictions through the end of the year, I was extremely frustrated.

I know the ban is about something much more extensive than landlords losing their homes. As an investor and property owner, I am facing challenges. For a tenant with no job, no prospects, government subsidies, and no extended family, an eviction could be detrimental to survival and create a spike in the outbreak.

The CDC is prioritizing health and safety before it considers a landlord’s consequences.

Fear of Homelessness

Homelessness in the U.S. has been growing steadily and was an issue pre-COVID-19. Seventeen out of every 10,000 people were experiencing homelessness as of a January 2019 investigation. Once someone becomes homeless, it is harder to reintegrate them back into society.

What’s worse, the Los Angeles Times noted, “Mass unemployment over coronavirus could lead to a 45% jump in homelessness.” And homeless people are more at risk of getting and spreading COVID-19.

CDC and Landlords

The CDC’s ruling states that if tenants are unlawful, they won’t be exempt from eviction. The writing of all the other rules says the tenant only needs to sign an affidavit, stating they can’t work, make money, or earn a lot of money this year and will become homeless if evicted.

As a landlord, this is of course concerning. It is not clear if you can legally request documentation. This stipulation may come down to a court ruling state by state, but if the tenant says they may be homeless due to the eviction, they are currently protected by law.

Where Is the Money?

While tenants are unable to pay, most landlords cannot afford to foot the bill.

“Stuck between tenants who can’t, or simply won’t pay up and banks that still expect mortgage payments every month, many landlords say the eviction moratorium puts them in an impossible spot,” writes the Boston Globe. “They don’t want to evict tenants in the midst of a health and economic crisis. But they also don’t want to go broke.”

Many tenants are paying and working with landlords. Rents are 92% paid for multifamily housing as of August 17, according to the NMHC tracker.

The problem worsens from state to state and by areas hit harder by the economic shutdown. For instance, in the Bay Area, renters seem to be making payments. However, one New York Times headline reads, “31% Can’t Pay the Rent: ‘It’s Only Going to Get Worse.’”

The economy is still paralyzed, and companies continue to go out of business and struggle to survive, making it challenging to pay bills. So even if a small group of tenants takes advantage of the situation, or some cannot get through the burden, those numbers will add up.

COVID-19 Is Not Going Away

According to doctors, the COVID-19 pandemic is not getting any better, and they are calling for a reset on shutdowns. The Washington Post said, “In April, the International Monetary Fund projected that the global economy would experience a 3 percent downturn in 2020, its sharpest contraction since the Great Depression. Last week, the IMF revised those forecasts, saying that the global recession will be far worse than originally thought. New projections suggest output will drop by 4.9 percent.”

The numbers surrounding the pandemic do not support landlords seeing any relief soon.

What Happens Now?

Fannie Mae, a government-sponsored enterprise that makes mortgages available to low- and moderate-income borrowers, also sent out a press release with the news about the extension on evictions and foreclosures, saying that they were working to support homeowners. Still, it is hard to see how the forbearance will ultimately support the property owner.

Requesting a forbearance from lenders indefinitely only increases debt to the bank. All the money is going to need to be repaid, and at that point, if the tenants can’t catch up, the landlords will be faced with a troubling situation.

One viable option is lenders put the money owed into an extended loan, so instead of 30 years fixed, you now have 31 years. Otherwise, lenders can wrap the sum into a 30-year, and your payment will go up. To get one of these loan arrangements, you need to prove hardship.

Household repairs are one area where expenses are not covered, and it falls on the landlord to tap into reserves. Utilities payments can also be deferred, but if the tenant is irresponsible, never pays them, and ultimately is evicted, it could fall on the owner to make the payment.

Forbearance

I called my lender to find out about the forbearance. There are clear guidelines qualifying my ability to get three months of a grace period with no record on my credit report and no interest payments. The problem increases when I have six months of deferred payments on a mortgage. How do I pay that money back?

Also, if I want to buy another property with a loan, it may be reflected on my record that I had a forbearance. Then I could be seen as a risk to a lender.

According to a headline from CNBC, “Small landlords across America are dipping into their wallets to save their homes.” The issue with landlords’ not paying the mortgage indefinitely will lead to defaults and foreclosures when the ban is lifted.

Foreclosures

DSnews believes foreclosure rates could as much as double next year. Studies performed by ATTOM Data Solutions were shocking: “In the most likely scenario, the number of cases somewhere in the foreclosure process would shoot up more than 100 percent, from the current level of about 145,000 to roughly 336,000 in the second quarter of 2021.”

If I take advantage of the forbearance, albeit without interest, I still owe the bank that money for three months. Once I get a performing tenant in the unit, it won’t make up for those three months of rent I lost. The forbearance will also cover your PITI, according to Nolo and my lender at Northpointe Bank.

Evictions

The Washington Post writes, “This crisis has struck the United States at a moment when millions of people were already living perilously rent-burdened. Because of stagnant wages and rising rents, on one-third four renters spent over half of their income on housing. Among rent-burdened households—defined as those that spend more than one-third of their income on housing—half have less than $10 in sa vings.”

What Can We Do?

Throughout this pandemic, there have been millions of thoughts about the decision-making process. I don’t know if there is a way that everyone could win in this unprecedented scenario. There is no question these are challenging times. It is difficult for the landlord who has nonperforming tenants and for tenants whose rents continue to rise and work is nowhere to be found.

When the foreclosures and evictions start, many more will face trying circumstances. If there has ever been a time to be flexible and to get creative, it is now. It is critical to continue to stay on top of sources for financial relief during COVD-19 and to find sources of opportunity and income.

The best investors know how to move with the changing times and prepare for them. History has shown us that real estate will always be a sound investment and grow your wealth as long as you can ride the wave.

For now, landlords must weather the storm and face the hurricane ahead.

How do you think landlords and tenants can work together best despite current and future COVID-related challenges?

Let us know in the comments.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.