No Light Yet at End of COVID-19 Real Estate Tunnel

It has been nearly a year since the most Americans experienced the onset of the COVID-19 pandemic. While vaccines and other protective measures have created a light at the end of the proverbial tunnel, it remains unclear how long this tunnel remains. 

The ongoing pandemic has left the future of real property in a state of flux. Attempting to predict the future of real estate during this pandemic has proven futile. But many are left wondering, is the other shoe going to drop – with another foreclosure and eviction surge? Only time will tell but a number of factors are in play that are currently serving to, more or less, maintain the status quo. 

At the federal level, the Government Sponsored Enterprises (GSEs), Fannie Mae, Freddie Mac, and the Federal Housing Administration, continue to extend foreclosure and eviction moratoriums, which were instituted when the pandemic first set in. These moratoriums have been extended more than a handful of times, most recently through June 30. The GSEs back the majority of single-family mortgage loans, so these limitations on foreclosure and eviction greatly impact the real estate market – at least for now. 

In addition, in September 2020, the Center for Disease Control (CDC) issues its own eviction moratorium (Order), prohibiting landlords from evicting covered persons from residential property for the non-payment of rent. 

To qualify as a covered person, the individual tenant must provide a declaration to their landlord under penalty of perjury indicating that: (1) “[t]he individual has used best efforts to obtain all available government assistance for rent or housing;” (2) the individual satisfies certain income requirements; (3) “the individual is unable to pay the full rent or make a full housing payment due to substantial loss of household income, loss of compensable hours of work or wages, a lay-off, or extraordinary out-of-pocket medical expenses;” (4) “the individual is 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;” and (5) “eviction would likely render the individual homeless—or force the individual to move into and live in close quarters in a new congregate or shared living setting—because the individual has no other available housing options. 

The CDC’s Order was originally in effect through December 31, 2020, but the Order has been extended twice – first by the CDC through January 31, 2021 and then by the Biden Administration, during President Biden’s first day in office, through March 31, 2021. 

While the Order has likely been a godsend for renters’ whose livelihoods have been directly impacted by the pandemic, it certainly leaves landlords holding the bag in many instances. This prompted one group of landlord plaintiffs to file suit against the U.S. Department of Health and Human Services, seeking a preliminary injunction against the Order in Brown v Azar, in the United States District Court for the Northern District of Georgia. 

In moving for injunctive relief, the plaintiffs argued that the Order: (1) lacked statutory and regulatory authority; (2) was arbitrary and capricious; and (3) violated plaintiffs’ rights of access to the courts. The court disagreed and found that, among other things, the CDC had broad authority to issue such an Order, that the Order was reasonably necessary to limit the spread of the pandemic, and the measures taken by state and local governments were insufficient, thus warranting the Order. 

While this ruling, in itself, may not be surprising (especially given similar federal court rulings in New York and Massachusetts during the pandemic – both of which addressed more strict eviction moratoriums), perhaps the most telling aspect of the Brown case was the analysis and discussion regarding the practical impact of the Order and its scope across the United States. 

The court noted that the CDC analyzed each state’s eviction restrictions and, without the Order, as many as “thirty to forty million people in the United States – an unprecedented number – could be at risk of eviction.” The court further noted that numerous states, including those where the plaintiffs were located, had no restrictions on evictions – other than the CDC Order. 

Despite ruling against the landlord plaintiffs, the court acknowledged they were essentially forced into the position of “involuntary creditors” because their tenants were not paying rent and the landlords alleged that the tenants would have no future ability to pay rent – thus mooting the alternative relief not prohibited by the Order, such as seeking money damages for breach of contract. The Brown plaintiffs have appealed to the Eleventh Circuit Court of Appeals, which remains pending (a similar ruling is also on appear in the Fifth Circuit Court of Appeals).  

In Michigan, the pandemic’s eviction moratoriums have long since expired. The Michigan Supreme Court, however, in January, recognized the CDC Order – although not unanimously, with one justice dissenting and stating that the Order “relied on dubious legal authority.” However, the speed at which eviction cases are progressing is hit or miss given that the majority of state district courts are operating solely through remote access and many are not fully staffed. 

No formal foreclosure moratoriums were ever instituted in Michigan. However, foreclosures have predominantly been on hold because of social distancing requirements – where the foreclosure sales, in essence public auctions, are predominantly held in court houses, which remain generally closed to the public. Presently, very few counties in the state are proceeding with foreclosure sales.

Collectively, this leaves real estate largely in a state of limbo. While foreclosures are largely at a stand-still, both locally and nationally, in 2020, mortgage delinquency rates reached their highest levels since the second quarter of 2010 – during the Great Recession. While some metrics are showing signs of improvement, it is currently estimated that as many as 2.1 million homeowners remain 90 days or more past due on their mortgage loans but are not yet in foreclosure. 

Similarly, while many evictions are currently prohibited, some estimate that approximately 18% of renters in America, around 10 million people, are delinquent in their rent payments. This far exceeds the approximately seven million homeowners that lost their properties through foreclosure during the Great Recession – however, that occurred over a period of approximately five years. 

Contrast this with the many residential real estate markets that are seeing historically low inventory with sale prices soaring and buyers and realtors regularly approaching owners not even in the market to entice them to sell at a premium. Commercial real estate is a whole other story as many are questioning whether working remotely will become the new norm – even when the pandemic is truly in our rear-view mirror. 

At the same time, the national unemployment rate remains well above the pre-pandemic levels and Michigan’s unemployment rate is climbing, but still below the national rate. Yet, consumer bankruptcies are at historic lows, a stark contrast to 2009 and 2010 when consumer bankruptcy filings reached their peak. However, consumer bankruptcies are often triggered by the threat of foreclosure or eviction. Bear in mind, too, that the real estate market cycles through booms and busts every 10 years or so – and we are now well beyond 10 years since the start of the Great Recession. 

Will those behind in their rent be able to catch up before the eviction moratorium expire? Will those with delinquent mortgage loans, be able to bring them current to thwart eventual foreclosures? All told, it is easy to be left with a sense that there will be some correction in the coming months, perhaps significant, to the current state of real property.

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