By Shivu Srinivasan
With mounting unemployment and continuing economic strain, many individuals are having difficulty making ends meet. The dire situation led California to pass an eviction moratorium, putting pressure on property owners that still owe mortgages and other commercial property debt. As a result, some residents in the state have begun to question whether waiving rents and mortgages during the pandemic is financially feasible.
It’s a complicated issue that deserves more than a simple yes or no answer. While there will undoubtedly be the need to assist residents who are unable to pay rent, apartment landlords and banks must find ways to secure payments for rent and commercial debt. Initial discussions have been underway in California regarding tax credits and other plans to ensure that the drop in collections is countered with practical and sustainable policies aimed at reducing stress on the credit markets.
Ideally, tenants who cannot pay rent should be required to prove their financial hardship. In turn, any commercial borrowers looking to defer payments should also be required to provide similar financial hardship documentation. A policy of this nature would help protect the entire housing industry by ensuring that those receiving aid are truly in need of assistance, and those that can continue payments are sustaining the ecosystem.
A potential solution for those needing relief is for banks to pause mortgages for residential and multifamily property owners for the duration of the shelter-in-place mandates, and then simply tack on those payments to the end of the loan term. Many of these loans are pooled together and sold in bulk, with the valuations of the bulk loans based on the underlying cash flow over the life of the loan. If the missed payments are simply tacked on to the end of the loan, the cash flow over the life of the loan would be preserved, and in theory, ensure stability in the CMBS markets.
Regardless of what decision is reached between banks, owners and residents, any waivers of rents or mortgages will have to be treated as a forbearance rather than forgiveness to prevent the system from collapsing. In the same vein, any loan modifications should be treated with the same level of scrutiny as they were during the loan origination process.
Amid these discussions, we also need to consider the sustainability of banks through this crisis and the availability of debt. The banking industry has evolved since the 2008 crisis and is much better capitalized. Stress tests and other regulations put in place over the past decade have ensured that most, if not all, big banks are positioned to weather shocks to the market. In layman’s terms, banks were required to have enough cash reserves to survive any potential defaults on their loans. While the regulations have been loosened over the past few years, most banks continue to safeguard robust reserves in the interest of self-preservation. It is paramount for policymakers and bank executives to make the right decisions in the future to protect the housing industry’s security.
Taking all this into account and considering long-term implications, policymakers with a thorough understanding of investor sentiment should aim to maintain stability in the rental market, and, in turn, the underlying debt market that is used to finance housing. While the current crisis is not a financial one, any missteps could lead to shocks in the banking industry down the road and further weaken the economy. The only fair solutions to this difficult situation will require the burden to be shared equally among renters, landlords, creditors and politicians.
Shivu Srinivasan is Senior Director of Multifamily Investment Sales in Transwestern’s San Francisco office. He specializes in the acquisition and disposition of investment properties throughout Northern California.