“Pain felt by landlords is only temporary.”
The law of unintended consequences was popularized by a Columbia University Professor considered a founding father of sociology, Robert King Merton. The Professor theorized that unanticipated or unforeseen consequences are the outcomes of a purposeful action not originally intended or foreseen. The consequences can be positive, an unexpected benefit; negative, an unexpected drawback; or a perverse outcome when a solution worsens the problem. People’s actions can result in unintended consequences, but far more often, its government’s interventions that have effects that are not anticipated nor intended.
Governing is hard. Even the most altruistic actions designed to protect those in need during difficult times are subject to unintended consequences. This article addresses the CARES Act Eviction Moratorium, which began on March 27, 2020, in effect through July 24, 2020, continuously extended since – and some of its unintended consequences. Sometimes adverse outcomes are the result of poorly conceived or improperly administered legislation. Other times people “game the system,” the company that accepts millions in PPE funds, then fires the workers and moves production offshore, or the person who accepts their CARES payments then buys a new sportscar rather than paying their rent.
U.S. Supreme Court Upholds Eviction Moratorium Extension
Recently the CDC (Center for Disease Control and Prevention) extended its eviction moratorium through July 31, 2021 – more than one year after the original moratorium in the CARES Act was set to end. Landlord groups petitioned the Supreme Court to end the moratorium, but in a 5 – 4 ruling, the Court upheld the ban on evictions.
The government argued that the CDC had the authority to extend the ban and that its judgment should be accepted as new variants of the COVID virus spread. The Acting Solicitor General arguing the case further stated, “the pain being felt by landlords is only temporary, and that Congress has allocated nearly $50 billion for rental assistance.” Were government employees’ income disrupted for thirteen months, would they still consider the inconvenience only temporary?
Landlords Suffering the Unintended Consequences of Eviction Moratoriums
Even as life begins to return to normal, millions of Americans are delinquent on their rent payments. CNBC estimates that 20% of renters are behind on their payments, an average of $5,600.00 per household, some $57.3 billion in the aggregate. With the eviction remedy banned, past due rents continue to accumulate, and there is little hope they will ever recover a substantial amount of these balances. Compounding the unintended consequences, mortgage lenders to these landlords do not share in the pain as there are no restrictions on their activities to address the borrower’s non-payment.
One would think the ten million renters faced with this mounting debt would aggressively seek ways to increase their income to address their liabilities. As our economy reopens and recovers from COVID, job opportunities are plentiful. There are nearly as many job openings as people unemployed, a 1:1.1 ratio of job openings to unemployed. Yet, the reverse seems to be the case. Four million people walked away from their jobs in April 2021. Companies, entire industries, cannot find enough qualified applicants. Some companies are resorting to “signing bonuses” to attract new employees. These are not necessarily low-paying, menial-work positions. Some examples are Amazon paying $1,500, a health management company- $10,000, a local Ford dealer - $7,500, and a transportation company - $5,000.
Although the administration extended the eviction ban, and the Supreme Court upheld that decision, many states are ending their participation in federal unemployment programs … early, almost three months before their official expiration! Their rationale, the unemployment program had the unintended consequence of keeping people from going back to work. The enhanced benefits are offering the unemployed an incentive to stay home. Undoubtedly, some of these unemployed are behind in their rent, now with even fewer resources through next month to address payments.
Rental Credit Reporting – the New Strategy for Landlords
It would be incredibly naïve to think that people have been saving their rent payments during COVID to remit at some time in the future. The government continues to “kick the can down the road,” but the day of reckoning is approaching. Soon landlords will face the dilemma of how to mitigate the impact of the eviction bans, benefit from more favorable economic trends, and optimize the ROI on their properties.
One strategy long used in the finance world is credit bureau reporting. Consumers today are aware that their credit rating impacts their ability to secure loans or make future purchases. When a tenant is advised that you report both positive and negative information to the credit bureaus, seven in ten are more likely to make their rent payments on time, every time.
For example, negative rental credit information may result in a home or car loan rejection, or if approved, at a higher interest rate, and with additional conditions, like PMI private mortgage insurance. Conversely, those tenants who make their rent payments on time can benefit from rental reporting with a more established credit history and improved credit scores.
Rental credit reporting is guaranteed to elevate rent payments as a priority for your tenants.
Landlords Should Join the Credit Reporting Ecosystem
Although most independent landlords conduct a thorough credit check when screening potential tenants, few contribute back to the credit rating ecosystem by reporting rental payment data. Perhaps many are unaware that today all three major credit bureaus include rent payment histories in their reports, and the most up-to-date versions of FICO scores include rental payment information. The financial reporting system works best when the bureaus, the consumer, and the lender/landlord are involved. When you opt to report payment history, you make a statement regarding the tenant’s creditworthiness and ability to make future purchases.
As we exit COVID restrictions, various organizations alert consumers to this new dynamic of rental credit reporting, its potential adverse impacts, and how to protect their credit scores if delinquent on payments. Unlike the agencies that taught underwater homeowners how to “walk away” during the mortgage crisis, these companies recommend responsible courses of action such as working with the landlord to amend the lease, spread or reduce payments for a specified time.
Companies proactively addressing rental credit reporting from the consumer’s perspective and providing counseling and services is a testament to the new strategy’s effectiveness and gains in popularity.
The Sperlonga Solution
Sperlonga is at the forefront of credit reporting for firms not traditionally served by the credit reporting ecosystem, focusing on landlords and rental payment data. Although reporting rental payments to the credit bureaus is not mandatory, doing so can significantly benefit both parties. Sperlonga case studies illustrate landlords who initiate credit reporting see a reduction in delinquencies, while tenants making payments on time see their credit scores increase.
As eviction bans end next month, landlords must employ every available strategy to mitigate COVID-induced losses. New landlords in the Sperlonga system will see reduced outstanding balances. Once our credit reporting software is implemented, people realize the importance of paying down their obligations to improve their scores and qualify for better rates for future purchases.
It is relatively certain government interventions in our industry will continue with increasingly complex laws and changes in compliance and regulatory measures. Therefore, navigating rental customer relationships and addressing the myriad of changes to come requires a thoughtful approach and an intelligent solution.
The winning solution from Sperlonga Data and Analytics Systems simplifies administration, ensures compliance, and delivers more timely payments with fewer delinquencies. Let us show you how to enhance your collection processes and improve the credit scores of your best-paying tenants.