Owners of rental property want to know how to avoid foreclosure

Q: A number of years ago, we needed to move because of a new job, but as a result of the mortgage meltdown, we could not sell our home and wound up becoming accidental landlords. Our current tenants no longer pay their rent because of two job losses. We’re sympathetic, we get it; the tenants are good people, but we still have big monthly costs. What can we do to avoid the foreclosure of our rental property?

A: Most tenants continue to pay rent, understanding that today’s missed payments may lead to eviction and bankruptcy tomorrow. However, there are a large number of tenants who simply cannot make their payments. Using 2015 IRS data, HUD has estimated that across the country, there are “between 10 million and 11 million individual investor landlords managing an average of two units each, many with just one unit.” With the outbreak of the COVID-19 pandemic, more than 50 million people quickly filed for unemployment and millions of businesses downsized or closed. The federal government — as well as state and local governments — moved quickly to stop both evictions and foreclosures. Under the federal rules, landlords could not evict if they had financing through the FHA, Fannie Mae, Freddie Mac, USDA, HUD or the VA. In turn, lenders could not foreclose because of nonpayments created by the pandemic. The idea was to avoid a massive downturn on a scale not seen since the 1930s. Combined with $1,200 Treasury checks, the Paycheck Protection Program (PPP) for small businesses, an additional $600 a week for the unemployed, and other measures, the worst was avoided. However, the seeds of future problems have plainly been sown. Take the eviction and foreclosure bans. They’re not as balanced as they may seem. The National Association of Realtors points out that “renters in federally-assisted properties are provided 120 days protection from eviction, but their landlords only receive 90 days forbearance.” No rent does not mean landlords have no costs. State and local governments still collect property taxes. Property insurance bills need to be paid. Repairs and maintenance wait for no one. At some point, lenders will want their mortgage money. How will millions of small landlords pay off back mortgage debt without rental income? We’re likely to see government-required investment mortgage modifications on a mass scale at some point. Maybe landlords will be able to get payment plans to make up for missed mortgage obligations. Or, perhaps, missed payments will be moved to the back of the loan schedule, debts that will be paid off only when properties are sold or refinanced. Meanwhile, what about the unpaid rental money owed by tenants? The eviction prohibitions will ultimately end, and millions of tenants will then face enormous debts. Will the federal government step in to help tenants? If yes, how will the government pay for such costs? The best advice for small landlords is to work with tenants, pay the mortgage if possible, and speak with lenders if you cannot make your payments. For specifics regarding fast-changing rules and regulations, landlords should speak with local real estate brokers and attorneys to see what’s allowed and what makes sense in a pandemic economy.