A Review of Two Federal Housing Moratoriums

TODAY’S NEWSLETTER: A Review of Two Federal Housing Moratoriums
 
Owning rental properties as a landlord generates a solid return on investment (ROI), but it also comes with significant pitfalls where laws imposed by the government can affect the earning potential of a property. First trust deed lending allows investors to realize a solid rate of return associated with owning rental properties, but without the headaches that come from collecting rent, property maintenance, or government overreach. Our vendor partners specialize in rent collection. They own hundreds of rentals that allow them to realize the efficiencies that come with economies of scale. Letting someone else deal with the complexities of property management regulations imposed by the government is often the best approach. As a lender, and not a landlord, you can maximize your returns and minimize your risks.
 
Eviction Moratorium for Foreclosed Loan Borrowers
 
In the U.S. about 80% of the population has a monthly obligation towards either a mortgage provider or a landlord. The federal government recognized this reality early on during the Covid-19 pandemic and responded by enacting, and later extending, two federal moratoriums that aimed at controlling the mortgage and rental markets.
 
The Federal Housing Administration (FHA) is the government agency that issued the foreclosure moratorium for homeowners, however the moratorium only applies to government-backed loans (i.e. FHA, Department of Veterans Affairs, and the Agriculture Department loans). That being said, privately owned mortgages are not included in the FHA moratorium.
 
Borrowers of government-backed mortgages have the ability to apply for forbearance. This generally includes the pausing of or reduction in mortgage payments for a certain period of time. At the conclusion of the forbearance the borrower must still repay the lender. This repayment is generally resolved by extended repayment terms, increased monthly payments, or a lump sum payment.
 
Officially, the foreclosure moratorium ended on July 31, 2021. The affected homeowners and renters were afforded a grace period, being that occupants cannot be evicted until after September 30, 2021, which would allow homeowners an additional opportunity to apply for forbearance and potentially avoid displacement. 

The currently available data for May 2021 compared to last year shows signs of improvement (see the chart U.S. National Loan Performance May 2020 vs 2021 for detail). In May 2021, the nation’s overall delinquency rate, which is defined as 30 days or more past due, including those in foreclosure, dropped to 4.7% vs 7.3% one year ago.
 
Further, the share of mortgages that are early-stage delinquencies, loans that are 30 to 59 days past due, was 1.2% in May 2021 which is down from 3% last year. The share of mortgages 60 to 89 days past due was 0.3% in May 2021, down sharply from a post-pandemic high of 2.8% in May 2020.
 
The current national mortgage performance paints a mostly encouraging picture with one caveat: The serious delinquency rate, which is defined as 90 days or more past due, including loans in foreclosure, has increased in May 2021 compared to May 2020. Most notably, loans that are 120 days or more past due have increased from 1.0% to 2.7%. Only the FHA eviction moratorium has kept these delinquencies from progressing to foreclosure, thereby keeping the foreclosure rate mostly unchanged compared to one year ago.
 
The FHA’s intervention in the mortgage and foreclosure process has caused a rather large build-up of unpaid loans older than 120 days, which cannot be foreclosed upon, meaning the lenders cannot collect what is owed. Fortunately for the private sector this build-up primarily affects government entities, thereby limiting the negative impact on private businesses. Unfortunately for the borrowers of these government-backed loans, most will likely be unable to make payments... unless they are able to move quickly to find a solution with their current loan provider.
 
Savvy investors will be on the lookout for an increase in foreclosures and evictions in the fourth quarter of 2021. This increase in housing supply becoming available across the country brings with it new investment opportunities with massive potential for rental income earnings.
 
Eviction Moratorium for Nonpayment of Rent
 
The moratorium imposed by the Centers for Disease Control and Prevention (CDC) is barring landlords from evicting renters making less than $99,000 annually due to nonpayment of rents. Additionally, the Emergency Rental Assistance Program is providing $46 billion in rental relief funds. Qualifying renters are eligible for up to 12 months of back rent accrued since March 13, 2020, as well as up to 12 months of missed utility payments. When the eviction moratorium is lifted, renters will still have to repay any debts not covered by the relief funds.
 
Landlords are bearing the costs of the moratorium, as they must pay all the expenses associated with owning a rental property. Additionally, many are not collecting rental income or have the ability to apply for the rental assistance program. Many landlords, especially private individuals, are facing financial difficulties themselves due to lost rental income. Many landlords have resorted to legal action, in an attempt to repeal the eviction moratorium, in order to resume standard rental operations.
 
The Supreme Court recently took up a case on the eviction ban. It did not directly rule the ban unconstitutional, but rather indicated that only Congress can enact such as ban.
 
In response to the Supreme Court opinion, the CDC pivoted by issuing a new eviction moratorium in counties, which are “experiencing substantial and high levels of community transmission levels” of Covid-19. It is estimated that this new moratorium will cover approximately 90% of U.S. renters. Renters lose this mandated protection once their community is no longer experiencing substantially high levels of community transmission. This extension will be in effect through October 3, 2021.
 
Of the $46 billion in rental relief allocated by the federal government, just $3 billion has been claimed by renters and dispersed to their landlords. Complicating matters, each state has its own program and process for distribution of aid while tenants have to overcome state-specific hurdles in order to access the funds. Furthermore, most tenants have no idea that these funds are available to them considering that many tenants do not know how to find the online assistance forms or lack adequate internet access. It is also difficult for some tenants to produce the required documentation required for the relief.
 
The households that need access to these government funds the most are those with a very low household income. A single family dwelling with a tenant income of less than $25,000 per year will have a 23% chance of being behind on rent and households making up to $34,999 still face a 20% chance of being behind. That is almost every fourth and fifth household in these two income brackets (See the chart Likelihood of Being Behind on Rent by Household Income for details).

Across the U.S. an estimated 6.4 million households have fallen behind on rent with an average estimated debt of $3,300. This amounts to the total debt owed to landlords at $21 billion in June 2021, as reported by the National Equity Atlas.
 
The national share of renters who have accumulated debt on their rent payments has mostly been stabilized since April 2021. It came down from a high of 19% in January and has held steady at 14%. June 2021 saw a slight up-tick again to 15% (See chart U.S. Share of Renters with Debt for details).

The June increase most likely is a result of increased rental pricing due to supply and demand in the marketplace. Generally speaking, landlords have had to adjust rental prices while navigating vacancies all while having an eviction moratorium in place. Thankfully, economic activity is returning, states are reopening and demand for rentals, especially apartments that were abandoned in 2020, is returning. While this is good news for landlords, it will put additional pressure on renters who already have difficulties making rent payments.
 
The government intervention via the CDC provided social benefits to renters, as many were not displaced during the Covid-19 pandemic. However, in doing so, the government required landlords to foot the rental bill. Nationwide $21 billion is still owed to landlords. In good cases, these landlords simply forgo investments in their properties, while in other cases the landlords themselves face financial trouble because of this undue burden.
 
Once the federal eviction moratorium ends after October 3, 2021, a wave of evictions is likely to sweep across the country as many landlords are filing for eviction. Many renters will be displaced, and they will look for new housing opportunities, which constitutes a normal free-market process that has been delayed by the government. In addition, the accumulated financial losses of landlords have been exacerbated by the multiple extensions of the eviction moratorium. It remains to be seen if Congress extends the current moratorium as it stands.
 
Recommended Action
 
Government intervention changes the outcome of otherwise free and efficient operating markets. This is true for the mortgage as well as rental property markets. While policies concerning the mortgage market impact big national players, rules concerning the rental market impact all types of investors, from large to small.
 
Investing in a rental property is a solid and stable investment, backed by the power of real estate. Even if a government mandate changes the process within the marketplace, the lending entity remains in a position of power and does not need to concern itself with the day-to-day minutia that the typical landlord must deal with. First trust deed lending affords the lender this power while expanding an investor’s portfolio to include valuable and tangible real estate. Safeguard Capital Partners gives our clients this type of investment power all while utilizing known and trusted partner vendors that specialize in the retail rental marketplace. Let someone else deal with government regulations and the tenant headaches. Become a lender, not a landlord, because it’s the best way to maximize your return and minimize your risk.
 
If you are interested in earning a return above the current high levels of inflation to protect your purchasing power and grow your overall wealth through real estate lending, we encourage you to contact our representatives to learn more about First Deed Lending.
 
Become a Real Estate Lender