Delinquencies, Collection Issues, and The New Renter Mindset

The New Renter Mindset

The Centers for Disease Control and Prevention (CDC) ended its nationwide eviction moratorium in 2021, roughly a year after it took effect. The temporary halt on evictions had been issued to prevent people from losing housing during the pandemic, when economic uncertainty and unemployment ran high. Usually, each state determines its eviction laws. However, because a national emergency had been declared, the federal government stepped in and prohibited landlords from evicting tenants for unpaid rent.

The measure was a necessary relief for millions of Americans whose income for rent was seriously at risk. After the federal ban expired—and after several extensions—all decisions regarding eviction bans were left to the states. California’s last eviction moratorium expired in March 2023, nearly three years after the CDC issued its first protections. Similarly, eviction protection for New York City residents ended in January 2022. Tenants who claimed hardship were generally protected from eviction or received some rent relief. At one point during the pandemic, 43 states had some form of eviction protection.

The widespread eviction moratoria during the pandemic gave rise to a new renter mindset. Renters, who had earned stimulus payments, rent breaks, and unemployment benefits, adopted new expectations for landlords. Tenants wanted leniency. Then, the post-pandemic cost of living went up, incomes trailed behind, and many renters stopped paying rent. After residual protections at the state level were lifted, renters’ lack of income left many landlords without enough funds to pay their mortgages.

Rent Burden Prompts Growing Delinquencies

A recent report by Moody’s Analytics found that in 2022, the average American household income landed closest to the 30% rent-burdened threshold in nearly 25 years. The U.S. rent-to-income ratio (RTI) peaked at 28.8% in 2022, only to decrease slightly in 2023 to a level still near the rent-burdened threshold. Renters remain extremely burdened in metropolitan areas like New York, where the RTI peaked at 63% in 2023. The increased burden on tenants has led to a growing number of mortgage delinquencies among landlords whose rental income has suffered from unpaid rents.

Multifamily mortgage delinquency rates rose again during the fourth quarter of 2023. Every major capital source—banks, life insurance companies, CMBS, and Fannie Mae and Freddie Mac—had seen increases over the last six months of the year. For banks, the volume of multifamily loans that were at least 30 days past due or in non-accrual rose to $3.7 billion, up more than 80% year-over-year and the highest recorded total since 2013. Here are the delinquency rates for each group at the end of Q4 2023:

• Banks (90 or more days delinquent or in non-accrual): 0.94%,
• Life Insurance Companies (60 or more days delinquent): 0.36%
• CMBS (30 or more days delinquent): 4.3%
• Fannie Mae (60 or more days delinquent): 0.46%
• Freddie Mac (60 or more days delinquent): 0.28%

Note: Because each investor group tracks delinquencies in its own way, delinquency rates are not comparable from one group to another.

The rise in commercial delinquencies prevails against a challenging backdrop: According to the Mortgage Banker’s Association (MBA), an estimated 20%, or $929 billion, of the $4.7 trillion of outstanding mortgages will mature in 2024. This marks a 28% increase from the $729 billion that matured in 2023. Jamie Woodell, Head of Commercial Real Estate Research at MBA, cited a lack of transaction activity and lender flexibility as reasons for the bump in loan extensions.

Like the days of eviction moratoria, employment conditions may be the clearest indicator of delinquencies this year. A low unemployment rate usually suggests strong mortgage performance. In Q1 2024, the U.S. unemployment rate increased slightly to 3.9% compared to 3.6% at the same time last year. States with the largest quarterly increases in loan delinquencies were Louisiana, West Virginia, Illinois, Texas, and New Mexico, all of which comprise the top 20 U.S. states with the highest unemployment rates.

More Eviction Filings

According to data from Princeton University’s Eviction Lab, landlords had filed for more than 1 million evictions over the last 12 months in Q1 2024. The center’s Eviction Tracking System (ETS) tracks eviction filings in 10 states and 34 cities since the U.S. government does not collect eviction data, typically housed within county court systems. The current number of cases nears pre-pandemic levels and threatens to hold up courts, which struggle to process a high volume of month-long evictions.

In January 2024, more than 8,000 evictions were filed in Maricopa County (Phoenix), the most ever recorded in a single month. Maricopa County landlords filed 21% more evictions in 2023 compared to 2019, the last full year before eviction protections. The average judgment (the amount a renter owes) increased to $3,450 from $1,977 during the same time. Currently, no legislative efforts are underway to overhaul Arizona’s eviction process. (Source: Axios)

Effects of Growing Delinquencies

Bridge Loans In Trouble

Bridge lenders bet big on a low-rate market, specifically from 2020 to 2022, when multifamily investment activity peaked. Bridge loans—short-term, floating-rate, high-leverage loans—funded roughly 90 percent of apartment acquisitions during this time. As property owners sought more short-term financing options, bridge loan lenders bet on the interest rate tide to turn—and it didn’t. With nearly a dozen rate hikes last year, lenders fell short of original expectations and face growing delinquency rates.

Backlog of Eviction Cases

The volume of eviction cases remains troublesome for county courts nationwide. Fulton County, home to the metropolitan hub of Atlanta, has been known for its substantial eviction case backlog. Since 2020, hundreds of thousands of cases have been backlogged by the pandemic, only a portion of which the county has been able to resolve. According to a Fulton County report, the courts resolved 37% fewer superior court matters and 56% fewer state court cases between September and November 2023. 

Local Politics Favor Tenants

Tenants aren’t the only group to exhibit a shift in mindset. Officials in major metropolitan areas like Los Angeles and New York City have become more lenient toward renters who fail to meet obligations. For example, in January, Los Angeles City officials granted extensions to tenants who accumulated unpaid rent from October 2021 to January 2023. The measure prohibited landlords from evicting tenants for an additional 120 days after the February payment deadline. If and when rents are paid, some landlords will receive allocations over two years late.

Investors Adjust Expectations

The collection issue has been going on for so long that investors have adjusted their expectations about certain markets. In some cases, investors are advised not to buy or hold off in metropolitan areas where rent payments are least reliable, including Atlanta, Los Angeles, and New York City.

Looking for Solutions Locally

Unsurprisingly, suburban areas outside of Fulton County in Georgia don’t face the same collection issues as the city. The rise in mortgage delinquencies remains concentrated in urban areas, likely because that’s where the pandemic’s effects were felt most. As such, solutions to the nation’s growing delinquency rates will be found at a local rather than regional or national level.

Good news has emerged from nowhere other than Atlanta and offers promise as a template for other eviction hotbeds. In an effort to reduce the city’s case backlog, the Atlanta Apartment Association (AAA) successfully advocated for additional funding to hire more officers tasked with eviction cases. The AAA also proposed a measure that would allow off-duty officers from other jurisdictions to see cases. Other cities with similar case backlogs may benefit from a hyper-local approach.

Whether they’re investing in Atlanta or elsewhere, buyers can expect more evictions and tenants moving out. Landlords may find the most challenging hurdle to overcome is a new, more sensitive renter mindset. Until then, while cities work through case backlogs brought on by the pandemic, multifamily delinquencies will persist. But unlike other sectors, multifamily collection issues see a light at the end of the economic tunnel.