Surety Bonds
Slides, Past Video and Training Material
Webinar: Oppose Rent Cancellation and Hear Our Alternative: A Fair and Equal Housing Guarantee via Surety Bonds, First Bill Text Released
Questions from the Surety Bond Webinar Recorded July 8
What does it mean to be impacted by COVID-19? If a tenant’s income decreased a little and they stop paying rent altogether, does that mean the state guarantees 100% of their income?
The intent of a Fair and Equal Housing Guarantee via Surety Bonds is that regulations established pursuant to the law will prevent frivolous and fraudulent use of the bonds. In the same way that unemployment insurance is paid only on the basis of a history of an employer filing quarterly taxes and withholding set-asides, equivalent oversight infrastructure must be developed to insure rental agreements. There can be means or asset testing. All agreements will have to be documentable. All premises will have to be real and lawful.
How long can this Pandemic and the Eviction Moratorium go on?
A realistic estimate for a vaccine having commercial distribution is sometime in 2021, likely summer 2021, but there is obviously variability there. This is unlikely to go into 2022, but if we continue to experience weak national and international coordination around containment, and/or if medical researchers encounter setbacks on their path to treatment and/or vaccination, COVID-19 may become endemic.
Which rental units would be within the scope of HD.5166 and which outside its scope? What does HD.5166 provide regarding the covered unit?
We respond to questions regarding HD.5166 on a page pertaining specifically to that bill (scroll down to read webinar attendees’ questions.)
Has anyone done any MA apartment vacancy forecasting if the ICE action against international university students is enforced?
At time of webinar, ICE had indicated it would revoke lawful residency status for college students whose institutions are completely virtual in Fall 2020. No, we haven’t estimated the impact yet, but nationwide estimates for college student abandonment of college housing due to the pandemic alone (prior to the ICE announcement) were around 2 million residents nationwide. ICE enforcement would likely further the collapse of the college housing market and render many large units (i.e., three bedrooms plus) vacant, sustaining what is already high demand for studios and one-bedrooms.
We include the questioner’s comment here verbatim: What are you whining about "systemic racism"?
Systemic racism refers to a set of socioeconomic forces that perpetuate inequality between racial groups even without regard to individual racist intent. Systemic racism is particularly noticeable in housing policy: landlords who screen tougher on the numbers like evictions, credit score, and income are likely to have screening policies that create a disparate impact on applicants of color compared with white applicants for rental housing, even if the landlord has no direct knowledge of the applicant’s race, name, etc. It is critical to craft housing policy with these systemic impacts in mind.
Rent control is particularly problematic, as Sims 2007 and the Economist 1998 detail the racist disparate impact this seemingly anti-racist policy actually had: renters of color occupied only 12% of controlled housing in Cambridge, Boston, and Brookline during rent control, even though there were 24% residents of color in those communities. When rent control was repealed, the number of people of color in formerly rent-controlled housing doubled back to 24%, where it should have been. This is because landlords were denying opportunity to marginal applicants, holding units vacant for perfect applicants, and, unfairly, perfect applicants tended to be disproportionately white and/or wealthy. Rent-controlled apartments were held by such notables as the Mayor of Cambridge Ken Reeves, a person of color, and Judge Ruth Abrams, white, rather than the poor and disadvantaged people that one might hope to target with such a policy.
What is iCORI and what’s the best practice of using this database? Where can one gain access to it?
The Criminal Offender Record Information (CORI) system is accessible through a website called iCORI, which landlords can use to screen applicants for convictions in accordance with applicable regulations. See “How to Check a MA Criminal Record.”
If the tenant is already not paying, what is the premium that the landlord will have to pay to a surety company? Doesn’t this mean that the landlord will not get rent and then will have to pay a premium roughly equivalent to current and ongoing lost rent to the surety company?
No. There is no premium. Because the Commonwealth is not trying to make money on surety, the Commonwealth accepts a 100% underwriting loss, plus the cost of administration (the cost of purchase). Landlords will “purchase” a bond with credit from the Commonwealth. There is no cost to the landlord.
How do you see voters agreeing to fund this housing guarantee through single-family home sales, given that it will require only homeowners to pay?
The tax can be avoided by converting your lot’s zoning to duplex or higher. Lots converted to avoid the tax will appreciate sharply, more than offsetting any tax-related loss of sales volume for brokers.
Each legislator can make the case to their constituency using locally appropriate phrasing that indicates:
- This is important to provide rental housing for your children when they go off to school, for your neighbors who can’t afford to live here anymore, and for the Commonwealth’s future as a diverse and robust economy;
- The tax only applies to single family zoned sales;
- The tax can be avoided by permitting the next owner to have at least two households live on the lot; no construction is required; all other zoning regulations remain in full force and effect.
Whether or not to emphasize that single-family housing is a primary cause of the housing crisis remains with each elected official.
How complicated is it going to be to get the Commonwealth to reimburse the premium? How do we afford a premium when people aren't paying? It’s usually a nightmare to collect on an insurance claim.
The intent is to make the process as simple as proving the unit is lawful, compliant, and rented, and that a bond has not already been taken out on this address.
If you obtain a bond that will not be paid anytime soon, that bond will have resale value. You can “factor it” (sell it) for cash now, or obtain other financing.
What are some surety bond companies, or is there a department to go to for surety bonds? What is the cost, say, for a small landlord making about $10,000 per month in gross rental income?
There is no cost for landlords. Landlords will have the ability to shop around for a surety company that offers the desired level of service, interest rates, ease of applying for multiple bonds at once, etc.
If the Commonwealth underwrites the premium up front, and the premium is equal to the unpaid rent (because the risk to the surety is 100%), then how is that different from the Commonwealth just reimbursing unpaid rent directly now (which would also avoid the insurance company profit markup)?
The Department of Unemployment Assistance hired 1,000 customer service workers to deal with the rise in cases. We are trying to avoid asking the Commonwealth to hire when there are existing surety companies set up to serve their local markets.
What is considered “eligible” landlords?
Eligible landlords have a real address, compliant with code, and a documentable rental agreement.
So, I have a surety bond being a real estate broker. But the Commonwealth mitigates their risk by requiring me as well as other brokers to meet certain requirements and professional standards. But if you want a surety bond for your rent payments, what standards would a landlord have to meet to qualify for one?
To purchase a surety bond from a private company without a Fair and Equal Housing Guarantee underwritten by the Commonwealth, you would have to provide underwriting information to the surety bond company including a copy of the rental agreement and application materials for that household.
Since the purpose of the Commonwealth’s guarantee is to cover all renters, the standards for eligibility are aimed at fraud prevention but not at reducing underwriting losses. Landlords must have a real address, compliant with code, and a documentable rental agreement dated prior to enactment. Income for the household, cost basis for the property, etc., do not come into consideration except insofar as renter income or assets may need mean testing to prevent fraud.
I have a tenant that hasn't paid rent since January. I served her a Notice to Quit on Feb. 1, 2020. This tenant is in no way affected by COVID-19 because she doesn't work. Is there any talk about allowing the courts to start clearing cases like mine off the docket that aren't COVID-19 related but have gotten swept up in this broad moratorium? I am just a small landlord with one 3-family that I also live in.
The Fair and Equal Housing Guarantee via Surety Bonds would reopen the courts. Nonpayment cases pertaining to properties covered by a bond would not be able to be filed. Your renter would be eligible for bond coverage from March 13 forward. You could file for the time between first nonpayment and coverage, and possibly obtain RAFT or other funding to bridge the gap to the bond.
You're going to get major pushback from realtors on this proposal. MAR (Massachusetts Association of Realtors) is adamantly against transfer taxes.
Every realtor stands to gain more from selling a single-family zoned for a duplex or higher than a single-family that will remain so forever due to overly constrained zoning. The appreciation in property values from communities that rezone (50%? 100%?) will outweigh a 1% transfer tax from those that don’t. The tax can be financed as part of closing costs.
We did email MAR in April 2020. Since MAR focuses on transactions and MassLandlords focuses on long-term rental housing operations, we are bound to have different priorities and solutions from time to time. We believe the transfer tax on single-family deeds is workable.
Question: do you have a partner in the legislature already who is or will be introducing the Surety Bond legislation? If so, who (so we can consider contributing to their reelection campaigns)?
This bill is not yet filed. We hope someone will pick it up and file it.
Putting aside the merits of the surety idea, the process you're laying out would take – at a minimum – many months to set up. So what is MassLandlords' idea for dealing with the present crisis?
The Eviction Moratorium and closure of the courts took less than one month, start to finish. Underwriting guidelines would be established first, guarantees issued second, and repayment and verification processes would be established later after the initial guarantees were being made.
This is interesting, though it's too late for the COVID-19 landlord crisis, isn't it?
It’s not too late. The COVID-19 pandemic is far from over, and the rental losses continue to accrue. Furthermore, it’s not too late to help renters avoid eviction.
Does the landlord have to prove that it is a COVID-19 related rent loss? What if a tenant is not providing info, if it is COVID-19 related nonpayment?
The intent of the surety process is to leave it primarily in the hands of the landlord, so that if a renter defaults (fails to contribute to the documentation) a guarantee can still be effected. Landlords must have real premises, code compliant, and a documental rental agreement to qualify.
Is this bond for small landlords or for all landlords?
All landlords.
If units/renters corroborated via Census, what about transient renters (international students, for example),who do not show up in Census? Don’t these renters/units miss being counted in Census?
Census takers are required to estimate all residents, including those of us in nursing homes, public housing, permanent shelters, international students currently renting apartments, and those of us experiencing homelessness.
Note that people experiencing homelessness by definition do not have a documentable rental agreement, and would rely on existing assistance mechanisms (i.e., the guarantee does not guarantee rental housing for residents who currently lack it.)
Public housing and other forms of housing where renters have a minimum payment (e.g., $25/mo) would qualify. International students and undocumented residents would qualify to the extent that they have a documentable rental agreement at a real and lawful residence.
Why would a landlord not take out a bond if the Commonwealth covers costs?
Correct. The intent is that every landlord with nonpayment would take out a bond.
Have any bonding companies been contacted and agreed on the deal?
We have talked with bond companies and to the extent that this is a real proposal, there is interest. There will be increased interested once the bill is adopted by a legislator and filed.
My unit is vacant right now due to COVID-19. Will this Surety Bond cover my case?
Probably not. The intent is to guarantee renters currently occupying housing that they will be able to remain and that the landlord will have the resources to continue providing that housing. If your household disbanded (common), then your primary means of redress is to re-list and re-rent the apartment.
I like it! In Massachusetts there is a Community Preservation Act. Perhaps we can call this the Rental Preservation Act? (Because mom and pop landlords are 75(?) % of Massachusetts landlords.)
This is an excellent suggestion. We figure the proposal will have to be rebranded, for the “surety” phrasing confuses folks.
Mom-and-pop landlords are approximately 60% of our housing here.
Will this continue forever or is it specific to pandemic times?
The guarantee is specific to the pandemic, but the Pigouvian transfer tax on single-family zoned deeds continues forever. Spillover funds remain in the guarantee fund for future assignment to housing production and preservation, and/or supportive services and subsidy, as the legislature sees fit.
What about damages to a rental unit? Would they be covered by a surety bond?
No, but since under surety the courts would be open, eviction for cause (wanton damage) would be able to proceed.
Is there any talk about allowing courts to start clearing cases off the dockets that are not COVID-19 related and were initiated prior to the crisis, but have gotten caught up in the moratorium?
Yes, under a Fair and Equal Housing Guarantee via Surety Bonds, the courts would reopen. Only nonpayment cases would be prevented from being filed if a bond was outstanding.
Why do you think that municipalities will be willing to rezone just because a homeowner doesn't want to pay?
We think many municipalities will continue to resist rezoning, hence the ability of this legislation to raise funds. For single-family lots within site of multifamily neighborhoods, those will likely rezone and multifamily zoning will be expanded.
Does it all go back to normal after the emergency ends? Or would this be just during COVID-19 for a specific time frame, then reenacted if we have another pandemic/emergency?
The transfer tax remains in effect along with the Fair and Equal Housing Guarantee fund, should we have a second or third wave of COVID-19 or other pandemic.
Have you worked with the lead sponsors of HD.5166 in offering this alternative? What is their response?
Representative Connolly thanked us for the invite to listen. In general, MassLandlords are not invited to participate in discussions between renter advocacy groups and the legislature.
Is there a stop date for this surety/guarantee/tax? In other words, once there’s a vaccine and effective immunity, will the tax go away for the single-family owners?
No, the tax will endure past COVID-19, continuing to create an incentive to expand multifamily zoning.
Are there any other states that have successfully implemented surety bonds?
Outside the context of rental housing, yes. Bonding is common within Massachusetts and throughout the Common Law world. For rental housing in particular, no, Massachusetts would be a world leader in enacting a housing guarantee.
