“Warren’s Eviction Bill Is Economically and Politically Savvy”
Yves here. I’m the first to admit that I don’t have a good answer to the question of what to do about the problem of millions of tenants and homeowners being unable to keep up their housing payments and facing eviction. But Warren’s unduly simple-minded eviction bill, which provides for a one-year eviction freeze, is not it.
First, as even the fan of her plan, Eric Kramer, concedes, it doesn’t work on a stand-alone basis. He argue it would require bankruptcy reform and bank bailouts to work. But these recommendations reflect a lack of understanding of bankruptcy and housing debt.
Anyone who is keen about bankruptcy is almost certain not to have gotten close to it. The best thing that can be said about bankruptcy is that it (often but not alway) is better than the alternatives (I know someone who simply stared down her creditors past the five year statute of limitations in her state). Bankruptcy is emotionally draining. It regularly leads to divorce. If you have too much income to qualify for a Chapter 7, you instead have to resort to a Chapter 13, which requires the borrower to adhere strictly to a 60 month plan in which they make payments to the trustee, who in turn pays the creditors. Those 60 month plans are designed to be punitive. They contemplate minimal spending on food, for instance. Rice, beans, and ramen become dietary mainstays. No room for emergencies like a car breakdown either.
And the bigger issue is that bankruptcies are a blot on your credit record in a world where pulling a credit report is a normal part of pre-hiring background checks. So anyone who has gone bankrupt puts himself at a serious disadvantage in the job market.
On the “what about the landlord or lender,” they can be anyone from a multifamily complex, where the loan might be held by a bank or sold to a commercial real estate securitization, to a tenant in a private equity owned single family home, to a homeowner. Most residential mortgage debt is securitized. The Obama Administration was unwilling to figure out how to pressure mortgage servicers to do mortgage modifications. One year of non-payment, if that is what results, simply assures an eventual eviction. The arrearage would be so large as to make it difficult to work out a sensible mod, even if you could get over the fact that services are not set up to do modifications, which are time-intensive one-offs, and are resistant to spend the money to gear up to do that.
So shorter: saying you need to bail out banks reflects a lack of understanding of who the players are. Oh, and the owners of the lowest rated but not yet defaulted mortgage tranche will also fight mods. It takes a lot of ink to explain why.
And I also wonder if this sort of prohibition could be contested on eminent domain grounds, as in landlords/lenders being barred from getting non-payers out and getting a paying tenant in or selling the property sooner rather than later amounts to a taking and the government needs to pay for that directly.
Kramer also has an odd comment about how the eviction prohibition would impact small businesses. Again he conflated small businesses that own their buildings but have borrowed against them (a minority) versus tenants. I assume he is referring to the fact that small business owners often have to make personal guarantees of borrowings and other major obligations, so a business bankruptcy would trigger a personal bankruptcy.
In fact, many commercial landlords now are cutting deals with tenants, since these leases are big enough to justify the cost of renegotiating (and the landlords recognize re-leasing the space now is an uphill battle). One way of sharing the pain is for the landlord to get a cut of gross revenues rather than a fixed amount.
Warren’s bill is radical enough to get a lot of pushback yet not radical enough to address the real problem. Warren seems to be unwilling or incapable of concluding that landlords need to be first in line to take losses. Proposing an eviction holiday and then being silent on what happens next leads too many to assume that the landlords/lenders can and should still try to claw as much as they can back out of households and business tenants. So who takes the hit will be be subject to an ongoing legal and political battle.
By contrast, this is what Murphy said:
What I am suggesting is that whatever we think or do we are heading for the most almighty economic crash. The things that we have treated as stores of value – which are mainly shares and both commercial and residential property – are massively overvalued now. And there is nothing we can do to prevent the value of them crashing because the Ponzi style financialisation that has gripped western economies – and those of the US and UK in particular – for the last forty years was always heading for a massive crash, and now it has arrived. The genie is out of the bottle and it will not go back in again.
But that is not to say that our government (and other governments) are left powerless in the face of this. They are not. They can still make a decision about which factor of production – labour, business (enterprise), banks (capital) or landlords they wish to favour in the crisis to come
If they favour people and business and sacrifice landlords (whos assets will survive, come what may, albeit at considerably less worth) and banks (which will inevitably need to be nationalised) then more people and many more businesses might make it through the coming crisis. If they favour landlords and banks – as the UK government is at present – then the chance that much business at all will survive this is pretty remote. And in the end, nor will the banks or the landlords either. That’s my bleak prognosis. And either way, pension funds and pensioners are in deep trouble: most will now be dependent on the state, which means much more generous provision has to be thought about now than we have ever previously imagined…..
As I have said since this crisis began, even if every landlord fails now, the properties that they own will still be there: in other words, even if their financial capital disappears, their physical capital does not. What that means is that the economy can survive the failure of landlords more than it can survive anything else because whatever happens to the current owners of these properties they will still exist. We cannot say that of any other part of the economy.
In that case what is required now are statutory rent holidays. The rest of this year should be required, at least. And thereafter rents should be reduced, drastically, and by law, and right across the board. Eighty per cent cuts may be appropriate. It may be more. Whatever is necessary to ensure business can survive must be done.
I stress though that I am not seeking to wipe out the rentier: I have also argued, and repeat that argument now, that if, as I think appropriate, there should be long-term statutorily enforced rent holidays and then mandatory rent reductions I would match that with a right to bank loan holidays, and a right to a statutory reduction in loan liabilities so that the sum secured on a property cannot exceed its market value, whatever that might be in the future. To be fair over time to all involved, this would have to be subject to periodic reviews. This is hardly a concept landlords are unfamiliar with. Rentier insolvency is not my aim: rent reduction is so that businesses and people might survive.
Needless to say, a rent holiday is a very different beast than an eviction holiday with the money still owed when the suspension is up.
By Eric Kramer. Originally published at Angry Bear
Senator Elizabeth Warren has a new bill out to prevent evictions during the COVID-19 crisis. The bill imposes a 1 year moratorium on evictions nationwide. That’s it.
On its face, the bill seems to have two deficiencies. First, millions of low-income tenants will be unable to repay their past due rent. To give them a fresh start we will probably need a streamlined process for consumer bankruptcy filings. Second, a rent moratorium may trigger a financial crisis, as landlords default on their mortgage payments. To prevent this, an eviction moratorium will need to be accompanied by a bank bailout if banks end up having their capital depleted by mortgage defaults. Although bank bailouts are unpopular, an eviction moratorium coupled with bankruptcy reform and a bank bailout will potentially be much cheaper for taxpayers than giving insolvent tenants money to pay their landlords in full, because it pushes losses due to tenant insolvencies from taxpayers to landlords and banks.
In a rational world, these predictable problems would be addressed in Warren’s bill. But we do not live in a rational world, and an eviction moratorium is much easier to sell politically than a bankruptcy overhaul and a bank bailout. (We know this is true, because a 120 day limit on evictions included for federally financed properties was included in the CARESact, Democrats have made numerous proposals for a more comprehensive approach, and many statesand localities have put a temporary freeze on evictions.) And – this is the critical part – Congress will deal with the bankruptcy problem and bank bailout if they lead to crises in the future. There is certainly some risk here, especially if a bank bailout is handled poorly, but the benefits to struggling tenants (avoiding homelessness) and savings to taxpayers could easily be worth the risk. Warren knows what she is doing.
The general approach of shifting losses caused by the COVID economic collapse from renters and taxpayers to landlords and banks would also be valuable for small businesses, who (if I understand this correctly) cannot avoid past rent obligations in bankruptcy reorganizations. An eviction moratorium – especially if coupled with bankruptcy reform – might do more to help small businesses survive than the Paycheck Protection Program, which did not adequately address non-wage costs and probably channeled hundreds of billions of dollars to businesses that did not need support.