The Guru Is In

Eviction Minimization Done Right

By David A. Smith
November 30, 2020 6 min read

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“I have a life and it only goes in one

        direction: forward.”    – Don Draper

When it comes to dealing with the looming or present expiration of judicial eviction moratoria, our industry should do what many of us have done whenever the economic times are out of joint: don’t litigate the past, negotiate the future.

Post-Covid eviction minimization is an exercise in the enlightened self-interest of workout thinking, whose basic principle is share the misery.

Owners, managers and capital providers need to take deep breaths and reset their emotional tone around three mantras:

1. Forget about what they thought they had or may be contractually entitled to claim. Few will ever recover all the back rent owed, only part of it – and the smarter they approach the future, the more of the past they’ll get back;
2. Envision how collaborating with residents can minimize the owners’ losses as part of minimizing everyone else’s losses too; and
3. Share the thinking, especially about goals and principles, to reassure the good and motivate the wavering.

All of this requires consciously unthinking our normative judgments. A renter’s eviction is as traumatic as a homeowner’s foreclosure. Both remedies are deliberately draconian because the dwelling is usually the only recoverable asset the owner or lender has, and also as a behavioral signal to others that the rent or mortgage needs to be paid or severe consequences follow. As such, eviction is viewed by others as proof of guilt, because it’s the failure to pay what is owed, but what if eviction isn’t proof of guilt? What if it’s a consequence of a disaster beyond the household’s control?

Now it’s time to ditch the enforcement mentality in favor of the mutually beneficial workout. Everybody loses in an eviction epidemic, some just lose more than others:

• The evicted household. Eviction is natural disaster on a human scale, same disruption, loss of income, loss of schooling, severe family anxiety and stress, and everything that comes with these. Because it’s treated as proof of guilt, it can chop off benefits (e.g. homelessness assistance for up to three years). As Matthew Desmond put it in Evicted, “Eviction is a cause, not just a condition, of poverty;”
• Society and government. Housing is the foundation: it may not cure a household’s poverty, but without housing, poverty’s root causes cannot be cured. Government saves money when the families stabilize; and
• Owners and capital providers. Every eviction is a negative economic event, an expensive sunk cost for an uncertain return. Nor does eviction by itself recover the back rent, most of which usually gets written off. Returning good households to paying full rent, and potentially recouping some back rent is almost certainly a better outcome than an eviction nobody really wants.

Even when new thinking is logical and urgent, breaking old habits takes persuasion: an eviction minimization strategy will work only if the people who implement it—asset management, property management and residents individually and collectively—want it to work. To build trust and confidence, the owner should lead and create an eviction minimization policy strategy that should:

• Give clear direction;
• Be in writing, with as little jargon as necessary, so that it can be published, widely circulated, and widely understood;
• Be effective upon launch, so everybody has decision certainty: the ability to evaluate the new rules and act upon them;
• Be approved beforehand by regulators, lenders, or investors, as appropriate;
• Reduce everybody’s expected losses compared with their do-nothing status quo of grinding mindlessly to eviction. Analysis, evidence, and persuasiveness are required;
• Offer participants a clear path that, if followed, will clear their debt through a combination of current payments (possibly at a restructured rent), rescheduling back payments and owners’ waiving of remaining unpaid amounts; and
• Incentivize good tenant households using the Guru’s Law of the Observant Herd.

Already there are plenty of trail markers of these principles, including:

• The CDC’s eviction-moratorium application certification: “I am using best efforts to make timely partial payments that are as close to the full payment as the individual’s circumstances may permit, taking into account other nondiscretionary expenses;”
• The Reserve Bank of India’s October 23, 2020 directive to all lenders, including housing microfinance lenders, a model of forward-looking government-led share-the-misery thinking that (a) grants good borrowers a waiver of the difference between simple and compound interest on their deferred payments, and then (b) provides complying lenders a make-whole matching cash injection out of the public fisc;
• HUD Handbook 4350.3, Chapter 5 (rent determinations and income certification) and Chapter 7 (recertification), which allows (pages 7-22 through 7-28) interim recertification of income and concomitant drop in tenant share payments for Section 8 recipients; and
• Massachusetts’s pre-Covid Rental Assistance for Families in Transition (RAFT) program, now Covid-updated as part of the Commonwealth’s Eviction Diversion Initiative.

As a starting point, a basic eviction minimization strategy might include these elements:

1. Available to all residents who (a) were in good standing pre-Covid, (b) lost income during Covid, (c) made good-faith efforts to pay partial rent, and (d) didn’t otherwise violate the lease;
2. Those who apply disclose and recertify updated income information, and commit to re-recertify when their income recovers;
3. The owner and property manager pre-identify all potential rental assistance relief sources, whether governmental (e.g. RAFT, HUD recertification) or philanthropic. The resident household commits to apply for any such, and the property management company does all the paperwork, transparently with the resident and at no cost. Any rent relief obtained goes to the household’s arrearage;
4. The lease is modified to set a current reduced rent and a new future ‘full rent,’ based on recovery of income, with some rising scale or formula for moving from reduced back to full;
5. Whatever back rent remains as of the new ‘full future rent’ date is split into a repayment note over a (say) 12-month period, with any remainder forgiven by the owner month by month as the rent pays down the back rent note; and
6. None of this hits a successfully-participating household’s credit rating.

All this takes selling, and selling begins with belief. Belief is contagious, it starts from the top, and it needs to start right away.

        “You’ll tell them the next thing will be better

        because it always is.”   – Don Draper