Mortgage

Small landlord lenders are making ready for credit score losses

Dawn Garza, a San Antonio landlord and small business owner, is hoping to receive a second loan from the Paycheck Protection Program to cover her property taxes due in late January.

She's small because business isn't up and she gave her tenants – a college student and a part-time restaurant worker and an unemployed hairdresser recovering from COVID-19 – a three-month rental break this year.

"I'm not going to ask for rent back because I know it's impossible for them," said Garza.

The economic stimulus package passed in December extended the moratorium on eviction from the Centers for Disease Control and Prevention until January 31, and granted tenants further relief. For many landlords, however, mortgage payments are still due, which is reflected in an impending credit risk for banks.

According to the Mortgage Bankers Association, around 1.6% of the estimated $ 1.6 trillion market for 1 to 4 unit home mortgages was in arrears in November and was flat from the previous month. However, arrears are expected to increase.

Chris Nichols, chief strategy officer at CenterState Bank, with nearly $ 19 billion in assets in Winter Haven, Fla., Said the banks worked closely with landlords to restructure their debt and provide leniency. However, that relief is about to run out and is worrying. Losses in rental properties are usually caused by mismanagement or economic downturns, which are easier to assess.

"Since none of us have been through such a major pandemic before, there is no playbook and few alternatives," said Nichols.

Nichols estimates that banks will see a peak in these arrears in the fourth quarter of 2021. In some markets like New York and Chicago, the default rate in some markets like New York and Chicago could rise a full percentage point to the middle of 2%, Nichols said, and lenders could handle these problem loans for up to two years.

"Small landlords will be hit hard without really getting out of the problem until the pandemic ends," said Nichols.

Nearly eight out of ten landlords surveyed by Chicago real estate technology company Avail said they had a mortgage on their rental property. Unlike large multi-family businesses that have access to financial markets and investors to fill in loopholes when tenants fall behind and eviction bans are in place, these mom and pop home landlords rely on renting their tenants to cover their mortgage and property tax bills use.

Moody's analysts recently estimated that a rent back of around $ 70 billion is overdue.

The stimulus package included $ 25 billion in rental subsidies that states could pass on through tenants to their landlords to cover part of the deficit. The package also contained $ 600 checks and $ 300 additional unemployment benefits.

It is uncertain when the rental assistance will get to those who need it, but it is clear that it will not be enough.

"It is difficult to predict how long tenants will be unemployed, but we are seeing a bigger than expected setback with the vaccine, leading to expanded projections for crime through 2022," said Nichols. "At the current rate, more than $ 100 billion could be required."

Rick Sharga, executive vice president of marketing at RealtyTrac, who tracks foreclosure data, said the stimulus package was needed to prevent a "catastrophic failure" in the rental market. Foreclosure activity is just a trickle for now, but it is expected to pick up again in the sector before the pandemic and recession end, he said.

"I believe if evictions are extended much longer and the unemployment rate remains high, smaller investors, who often have high levels of debt, will begin to default on their loans," Sharga said.

The number of falling back tenants is increasing. An estimated 44% of tenants surveyed by Avail in October said they would not expect a full rent payment this month, up from 35% the previous month.

The company is expected to release its latest survey data later this week.

While avoiding outright foreclosure, according to the Avail survey, around 57% of landlords who have not received full rental payments reported feeling pressured to sell.

The way banks are handling the situation could have implications beyond the financial system.

“Since rental properties from mom and pop landlords are generally cheaper than rental properties from institutional investors, this pressure could mean that the real estate market – which was already suffering from a shortage of available units before the COVID-19 pandemic – loses even less. Rental housing at prices, ”Urban Institute researchers said in a recent article on the Avail data.

Since Garza also runs a small business on her property, her mortgage is secured by the Small Business Administration, which gave her some relief on the loan. The latest Congressional stimulus package includes a new round of PPP loans that she can apply for.

"Such things happen when hardly anything sticks together," said Garza. "We were hoping for more stimulus money, but we are now hoping for a PPP loan because we know things can go bad very quickly."

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