In early April, Congress approved a $2 trillion stimulus package that provided homeowners, tenants, businesses, and certain industries much-needed funds to help supplement the loss of income many have faced since the COVID-19 outbreak.
Talk of a second round of stimulus is underway with three proposed policies on the table at the present time, one of which would have a HUGE impact on homeowners, tenants, landlords, and real estate investors everywhere: The Rent and Mortgage Cancellation Act of 2020.
This bill would eliminate rental and mortgage payments on any primary residence for the duration of the national emergency, allowing landlords and lenders to recoup losses by applying to a relief fund. However, there are some regulations you must follow if you accept the relief.
Let's look at what the act proposes, how it would work, and let’s see how it would affect us, as real estate investors.
In the Rent and Mortgage Cancellation Act of 2020, all rental and mortgage payments would be eliminated. Beginning from April 2020 until 30 days after the state of emergency declaration is pronounced to be over.
A fund established by the United States Department of Housing and Urban Development (HUD) would repay any rent or mortgage payments made in April 2020 to the tenant or mortgagor.
Landlords and lenders would be unable to request past due rent or mortgage payments, charge late fees, or report any missed payments to credit bureaus.
Two separate relief funds sponsored by HUD would be created for both landlords and lenders that would cover the entire lost rent or mortgage payment as long as they agree to certain “terms” for a period of FIVE years.
Any violation of this act by a lender or landlord could result in penalties ranging from $5,000, all the way up to $50,000, and possible forfeiture of the property.
What the Relief Fund Requires
The Landlord Relief Fund would require eligible landlords, which would include "small property owners, family investors, public housing authorities, non-profits, and cooperatives" to agree to the following terms for a period of five years:
The rental rate cannot be increased over the following five years. (If you were renting your property for $700/month before this started, and you decided to accept the relief funds, you would be stuck at $700/month for five years.)
Landlords can only evict for "just-cause" and must provide documentation with any just-cause eviction.
The landlord cannot discriminate against a tenant's income source. (Income verification would become null & void during the five year period)
Landlords must coordinate with local housing authorities to make new vacancies eligible to Section 8 voucher holders. (Even if it’s A-Class, you would be mandated to accept Section 8 Tenants.)
A provision of 10 percent equity to tenants. (I’m not really sure what this means, but I know I wouldn’t want to give up 10% equity of my property to my tenants.)
The sexual identity or orientation, gender identity or expression, conviction or arrest record, credit history, or immigration status of the tenant cannot be discriminated against.
It also states that the funds would be disbursed on a tiered basis, giving priority to not-for-profits, who likely have the least available capital or assets.
The Lender Relief Fund would require the following of lenders:
Yearly reporting of "detailed lending data delineated by race, ethnicity, zip code, age, credit score, interest rates, and other loan pricing features."
Provide comprehensive data on the lender's office location(s), outreach practices, and referral systems on an annual basis.
If at any time during this five-year period a landlord wants to sell a property, they must first offer the property for sale through the Affordable Housing Acquisition Fund, which is designed to help promote housing affordability, while offering tenants safe, habitable living conditions.
The Affordable Housing Acquisition Fund would require:
HUD to have the first right of purchase, providing them 60 days to find an eligible purchaser. If no such purchaser is found, the seller can proceed to a private sale.
Permanently "reserve a portion of rent-restricted units for lower-income households."
Follow requirements 2 through 6 of the Landlord Relief Fund.
Agree to provide residents with free services such as access to "healthcare, employment or education assistance, childcare, financial literacy class, and other community-based support services."
While this proposal does offer relief for millions of Americans who are currently unemployed or have seen a significant decrease in income from the recession, it puts real estate investors, and particularly landlords, in a very uneasy position.
It forces the landlords to waive their right to annually adjust their rental rate to offset inflation, increased property taxes, property insurance, ongoing maintenance, or to compensate for any other variable costs that rise with time, in order to receive relief in the time being.
Additionally, it mandates that they essentially become participants in the Section 8 Housing program, restricting the pool of tenants they must first allow.
Lenders must agree to increased annual reporting requirements or suffer a loss of income for an indeterminate amount of time, which would equate to millions of dollars in lost funds.
This act also removes the free market, regulating who can purchase real estate and what they do with the real estate once purchased. It also caps the income potential for any participating property or asset in this plan.
Imagine what would happen to syndicators?! I’m no expert at understanding all the legalities of this bill, but it sounds to me like syndicators who own, lets say a 100 unit complex, would be forced to continue paying their debt servicer whilst their entire tenant base is legally allowed to NOT PAY RENT. The affects of this bill to real estate investors is astronomical. Real estate would become an investment that would lose its attractiveness for returns. If what I mentioned above is, in fact, what this bill intends to accomplish, then syndicators all over will be in BIG trouble. Investors will lose most, if not all, of their capital.
How likely is the bill to pass?
This bill is aggressive to say the least. The limitation it poses to private property owners and lenders, in addition to the tremendous cost it would take to be able to pay all rent and mortgage payments for the entire country for an undetermined period of time, means it's unlikely to gain traction in Congress.
However, we could see elements of this bill pushed forward in future bills that would offer some sort of relief to borrowers and tenants that could impose more restrictions on the private real estate market.
Moving forward, we hope to see that if any portion of this bill passes, it won’t have such a negative affect on real estate as a whole.