California’s Next Housing Crisis Looms

The ripple effect from the pandemic-caused recession continues to reverberate in California. Millions of unemployed workers face rent and mortgage payments, while the memory hasn’t faded of more than a million foreclosed homes during the Great Recession. These circumstances are motivating the Legislature and other policy makers to seek some temporary relief for renters and homeowners.

The California housing market has historically been one of the key drivers of growth in the state’s economy. During the Great Recession, home prices in California declined by more than 30% from their mid-2006 peak and the availability of credit in the residential mortgage market substantially tightened. The fall in home values, combined with an unprecedented collapse in credit availability, made it difficult, if not impossible, for most owners and buyers to qualify for new credit. As the Great Recession ravaged California’s economy and housing market, eviction filings also increased.

On April 6, 2020, the Judicial Council of California adopted Emergency Rules related to COVID-19. Emergency Rule 1 provides a temporary moratorium on evictions and foreclosures in California. The Judicial Council most recently voted to extend Emergency Rule 1 protections through September 1, 2020, leaving the California Legislature to fill the vacuum after that date. As the financial fallout from COVID-19 extends into the fall and winter months, the Legislature is considering two very different measures to address the looming housing crisis: SB 1410 (Caballero) and AB 1436 (Chiu).

SB 1410 (Caballero) – The Tax Incentive Approach

SB 1410 creates a tenant-owner COVID-19 eviction relief agreement, restricts rental property owners from evicting tenants for unpaid rent accrued during the state of emergency, and allows a tax credit to rental property owners that defer rent for tenants who cannot pay their rent due to COVID-19. This approach attempts to protect the most vulnerable tenants without sacrificing mom and pop rental property owners who are not able to financially absorb months of no rent without financial assistance. This bill spreads the interest-free payments from tenants and the landlords’ corresponding tax credits over a 10-year period beginning in 2024 in order to minimize any immediate impacts to the state revenues.

AB 1436 (Chiu) – Renter Relief Approach 

AB 1436 creates the COVID-19 Tenant Relief Act of 2020 which would allow renters to withhold 100% of their rent until April 1, 2021, and then prohibits landlords from collecting any unpaid rent or seeking to evict tenants until after April 1, 2022. The only requirement on the renter is to provide a written letter to their landlord stating that they have been financially impacted by COVID-19. The bill attempts to provide foreclosure protection for rental property owners who will struggle to meet their financial obligations by providing mortgage forbearance, but the legality of these provisions remains in doubt. The bill also has no financial assistance from the state for rental property owners.

The Governor also recently announced his interest to work with the Legislature to limit evictions and protect renters, although it is unclear whether he is taking the tax incentive approach, renter relief approach, or something in the middle.

With the Judicial Council protections expiring midnight on September 1st and the legislative session coming to a close, there is no question that something on this issue will happen in the next two weeks – the only question is what that something will ultimately be.

Adam Regele, Policy Advocate