In the wake of the COVID-19 situation and the democratic lawmakers taking the lead, there have been specific significant changes in the real estate laws—a recent eviction law by democratic lawmakers preventing landlords from filing evicting tenants non-payment of rent.
Furthermore, it would also prohibit foreclosures for non-payment of the loan amount and thus enact automatic forbearance for borrowers.
What does this mean for the real estate market, and how would it impact property owners?
As an informed commercial real estate investor, knowing the impact of the new eviction laws will help make future decisions.
This blog will walk you through the recent bill’s critical things, why these new eviction laws and foreclosure proposal is essential, and the five most significant impacts on it to the real estate market.
What does the Recent Bill Cover?
In the most simple terms, the new legislation would prevent landlords from filing evictions for non-payment-payment of rent for a full year once the bill has been passed.
Furthermore, to address the needs of struggling homeowners, it would also prohibit foreclosures over non-payment-payment of loans and enact automatic forbearance for delinquent borrowers.
Note that this is different from the Cares Act, which only covers properties with federally insured mortgages. This new legislation would be over and above the one-year grace period, which is already given and protected under the Cares Act.
Thus, in essence, renters would receive two years of housing rent for free. As with the property owners, they would receive even more time due to the ban on starting foreclosures.
According to the new legislation, renters and homeowners who are the property occupants will be responsible for unpaid rent. However, it must be noted that the probability of collecting this rent is very low.
For instance, if a particular entry is unable to pay their rent liability due to the economic crisis, the chances of coming up with two years of rent are close to zero. Furthermore, the property owners and the lenders are both on the hook as they need to continue paying maintenance charges of the property, including utility taxes and their mortgage, if any.
There was, however, a unique proposal to help struggling property owners. Although in essence, it must be noted that unless the government is going to forgive the mortgage payment on such rental properties, the property owners are still underwater as their chances of collecting unrealized rent are meager.
Why is this Foreclosure Moratorium Proposal Important?
The Biden government favored the new eviction laws, and now that they’ve won the elections – we can expect the passage of this bill to occur early next year. We cannot be sure of the passing of the bill until it’s officially announced. However, it is good to be prepared well in advance so that you don’t have any last-minute surprises as an informed property investor. Here are the top 5 impacts of new eviction laws on the real estate market.
Top 5 impacts of New Eviction Laws to the Real Estate Market
The new eviction laws are undoubtedly good news to the renters and borrowers. Having property occupants stay in the properties for more than two years rent or mortgage-free is sure to have severe consequences on the residential market. With more than half of all rental property owners comprising mom-and-pop owners with two to three rental units, we can say that these property owners are the heart of the middle-class economy.
With the new eviction laws, it is clear that the government favors renters and borrowers over property owners and lenders, and there can be some severe consequences. Here are the top 5 impacts on real estate.
#1 – Stricter Lending Standards
As we are aware, traditional lending institutions already have pretty tight credit standards and loan requirement standards. The new eviction laws have made these standards worsen, as the repercussions of a defaulted loan are multiplied.
Think it this way: if a lender now has to keep any defaulted loan in their accounts for a period of 2 to 3 years, the property will likely degrade as a result of lack of maintenance and non-payment of taxes and insurance.
Thus, this property will have to be advanced, leading to the capital being tied-up with the negative return for many years.
Thus, this means that any average lender or a bank will pull back to provide their services only to the top creamy layer of borrowers who will possess lower risks. If you have an excellent credit score and a good lending history, you are not likely to be impacted adversely by the new election laws.
However, if you are on the other end of the spectrum who has a low credit score, your chances of getting a loan in the real estate market right now are very minimal.
#2 – Tighter Scrutiny of Tenants
The new eviction laws will make the eviction periods much longer and adds up to property owners’ cost. This means that the rental owners will tighten their standards for finding new tenants. Just like the lenders would pull their lending requirements, it goes unsaid that property owners would also tighten their new tenant requirements. It might leave many prospective owners unable to find affordable rental units in the private real estate market.
#3 – An Increase in the Sale of Properties
Now that the evictions will take a long time, the profitability of many long term rentals is very bleak. Thus, many small property owners would choose to sell their properties instead of having a negative cash flow. This will further remove them from the rental pool, creating an increased rental housing shortage in the private real estate market.
#4 – Higher Costs for Borrowers & Renters
The costs from the non-paying renters and borrowers will only pile up as time passes by, and the lenders and property owners will increase the price for their performing customers to mitigate these vast losses.
Thus, even if you are a performing borrower, you will see that your cost would still be increased. If you are a new mortgage forever, you will notice higher rates of loan approvals, higher rates of interest, and higher prepayment penalties.
#5 – Increase Incorporate Property Buyers
The middle-class property owners will not be able to survive more than one year without any rental payments. The mom-and-pop owners might find it very difficult to absorb the losses of negative cash flow created.
Hence it goes answered that, unfortunately, the new admission legislations will further the consolidation in the real estate industry only to the largest players in the market. They have substantial capital to weather the storm of the pandemic.
Real estate experts and economists believe that the moratoriums on evictions and foreclosures will do nothing to address the problem’s root cause. The government is rather seen focusing on the effect instead of the reason, driving the non-payment.
Essentially, many real estate experts believe that the economy would be better off if the government tries to solve the underlying employment issue instead of trying to solve the housing crisis by waiving off rental payments or loan payments for long periods.
A brighter way of looking at it would be to solve the underlying housing crisis by increasing employment in the market so that people can pay their mortgages and rents on time.
A moratorium as such the new legislation will only delay the inevitable foreclosures or evictions and might not help the economy positively.
Many real estate market experts support the government as they agree that something needs to be done to keep people in their homes and mitigate the economic crisis.
Unfortunately, these blanket moratoriums on evictions or floor courses will only lead to substantial and internet consequences which might drastically impact the real estate market for years to come.
The government is following the picking winners and loners’ approach, which might ripple through the entire economy. It is not fair to pick tannins over property owners or pick borrowers over commercial real estate lenders. It is not a balanced long-term solution to the underlying crises.
However, there is only little we can do to change the laws. How it plays out, given the current economic crisis, is something we must wait and watch. If you are a new mortgage lender, you need to make the most informed decision in terms of your loan terms and conditions, as taking unnecessary risks is not an option at all anymore.
Economic crises are the times you cannot shoot in the dark. If you have any loan requirements, ensure that you consult a commercial real estate lending expert before taking any loan.