Fair and Equal Housing Guarantee via Surety Bonds
A "Fair and Equal Housing Guarantee via Surety Bonds" is a landscape-changing policy that would guarantee rental housing during the pandemic and simultaneously address the housing crisis.
Eligible landlords would purchase surety bonds to guarantee full rent for every rental unit affected by COVID-19. In exchange for a guarantee of being paid back, however long it takes, landlords cannot evict for nonpayment.
The bonds would be paid for and underwritten by the Commonwealth, specifically by a $300 million increase in the Chapter 64 excise tax applied only to deeds for land zoned single family. According to MLS, $27 billion worth of single family deeds were transferred in 2019. The tax is a small part of conventional closing costs and can be financed.
To avoid the tax, simply convert the single-family zoned lot to multifamily as-of-right.
- Webinar: A Fair and Equal Housing Guarantee via Surety Bonds
- Video: Rent-payment surety bond pilot program
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?
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.
If you are not familiar with why we are advocating for a surety bond, see the following resources first:
- Massachusetts Eviction Moratorium: Full Explanation and FAQ, May 7, 2020
- Eviction Moratorium Response: Board Vote for Surety Bond, May 5, 2020.
- FAQ, petition, and powerpoint on how surety bonds will work
- Eviction Moratorium Survey Results: 22% of Providers Unable to Pay for Housing, April 17, 2020
- Housing Surety Bond Spreadsheet Models Costs Now, Savings Later, May 4, 2020.
- Estimates of Post-Moratorium Eviction Filings Now Exceed Housing Court Annual Caseload, May 27, 2020.
About the lawsuits:
- MassLandlords is lobbying for statewide surety (this page).
- Third parties are litigating to overturn the eviction moratorium; they are not funded or supported by MassLandlords.
Members can log in for additional participation options, like providing testimonials.
Video: Rent-payment surety bond pilot program
Bill: Rent payment surety bond pilot program
Douglas Quattrochi - Doug
Presenter: Rent Payment Surety Bond Pilot Program, so one of the many problems with the eviction moratorium was that it was unfunded. The eviction moratorium stopped housing providers from getting to court, and it stopped renters from getting access to housing court as well.
Perhaps the biggest problem was in addition to the principle of the eviction moratorium was the dollars and cents issue of the legislature saying, two renters in Chapter 65 saying in the statute, “Yes, you really have to pay rent, and if you don’t…” and it’s silent as to what happens if you don’t because landlords could not take renters to court for nonpayment of rent, and if they didn’t, bad luck.
We wanted to come up with a market-based solution to a government failure. Very often in public policy, what you’ll hear people talking about, even come up with a policy solution to a market failure, and here we have a market-based solution to a government failure because the eviction moratorium and the response to the aftermath of that, even though RAFT and ERMA are helpful, a market-based solution would be better.
It would just the principle of the thing is important, and I’ll explain why in a little more detail in a moment, but what we hope to do with this bill is establish a pilot program as opposed to just shoving this on the Commonwealth as a whole and seeing if it works. We're suggesting a pilot program that EOHED would administer and giving them a lot of leeway as to how expansive and extensive the pilot program would be to see whether this idea of underwriting rent payment bonds basically a subsidy by another name works. We want to see whether it works.
Here's what the bill looks like. There are some definitions of lesser and less sea and rent payment, surety bond, so lessors landlords; lessee tenants basically, and rent payment surety bond that's something that's actually available on the market in some jurisdictions and maybe some available in Massachusetts right now, a bond conditioned on payment of rent or use and occupancy payments by a lessee to a lessor.
The idea would be that uh it's akin to a form of insurance. You would say to the bond company I would you to guarantee that my tenant will pay the rent or that rather if my tenant doesn't pay the rent, you'll pick up the tab and pay in their stead. You will stand in the shoes of the tenant and you will pay the rent instead of them if for any reason they default, so that's what a rent payment surety bond is. It is a bond company standing in the shoes of the tenant who is defaulting on rent and paying the housing provider in their stead.
Now why is that not an appealing economic prospect right now for bond providers? Well the peril that would be insured against has already been made manifest. It’s similar to you know if a tree falls through my roof, me calling the insurance company the next day and saying, “You know I really wish looking back that we'd insured against this particular peril, but we didn't. Could I now buy insurance to insure me against the prospect of the tree falling through my roof, that thing that happened last night?”
No. The insurance company is not going to do that because the peril has already made manifest, so they would be paying for something that the risk of it happening is a hundred percent. There isn't a market for this kind of product right now in Massachusetts because the default risk is so high and certainly was much higher during the eviction moratorium.
So how do you sweeten the deal for people who are in the business of selling rent payment, surety bonds? You underwrite them, so what we'd like to do is have the secretary of housing and economic development establish a pilot program to test the viability and efficacy. That's important to test see whether this works of allowing housing providers to purchase this kind of product, this kind of insurance product from companies that already licensed in Massachusetts to transact business and we want the pilot program to reflect the geographic, racial, and ethnic diversity of the Commonwealth, so we don't want them to run the test just in say Amherst, or Leominster. It’s fine if they run it in Worcester obviously, but we want some diversity to this pilot program and it would have to be funded.
The next part of the bill establishes the fund, establishes a kind of a pot of money, so in the architecture of a piece of legislation that even though in Massachusetts the legislature can appropriate money and that's not something we can do through ballot initiative. When you're writing a bill that you want the legislature to enact, it's okay to say where the money should come from and our bill does that.
Our bill says that there'll be a rental payment surety bond guarantee fund and the legislature can appropriate money to it and they can borrow for it. They can issue bonds to fund it, so our bill says there will be a fund, and then the bill says that the secretary must ensure that companies are authorized to transact business in Massachusetts and that they will pay up to $10 million. They will guarantee surety companies against losses.
The goal here is to have the surety bond companies paying it well by having the public pay at both ends, having the public pay the housing provider the cost of the premium for buying this bond in the first place, buying the surety bond and then in the event that the renter defaults if the tenant stops paying because of COVID-19 or government response thereto to have the surety bond company pay the rent for the renter, and then the Commonwealth, meaning the taxpayers of the Commonwealth pick up the tab so that's what we would like to happen.
It’s like RAFT in ERMA in the sense of it's a public subsidy, but it's a market-based solution that doesn't require a new government agency to run it or the expansion of an existing agency. It’s using the private sector to try to fix a government-created problem. This one, this part of the statute sets some standards. One of the most important ones I think—
It's on the screen. I won't read the entire thing for you.
But I think that the most important provision here is that uh there's already a residential dwelling and there's already a lease or a rental agreement. Why would we want to do that? Well, we want to prevent fraud obviously. We want to prevent people taking advantage of this new surety bond guarantee just to make money at the public's expense. Does this really happen yes and the example that policymakers nowadays often have in mind when they're putting provisions like this into bills is what was called the not very long ago, the Cash for Ash Scandal in Northern Ireland when the government of Northern Ireland said, “We really want to encourage people to adopt wood pellet stoves because this is very good for the environment and this will help combat climate change. We want more people to buy wood pellet stoves and we will subsidize them to the extent of a hundred and plus percent.”
So you go out buy a wood pellet stove and you get reimbursed for that and all the wood pellets you bought for it, you'd get reimbursed for that and then some. What do you know, people started heating sheds in the middle of nowhere. They started building structures that were completely unnecessary, they would build them ramshackle structures just in order to put a stove in them and heat the thing and get paid for that, so it was a scam.
That's the kind of invitation to abuse that we want to avoid, so our bill does that. There has to already be a written lease or tenancy-at-will, a written agreement, and we also go into some detail about what kind of evidence will be sufficient, and the burden is on us housing providers to show that the lessee's reason for nonpayment for renters, the tenant's reason for nonpayment is COVID-19 or government response thereto. It's not just an open invitation to stop paying rent. You have to be able to establish that the reason for not paying rent was COVID-19 or policy responses thereto.
Moving on to the next part. “The department shall promulgate regulations to make sure that necessary forms are available.” this is pretty standard language. The next part is not in all pilot programs. It should be I think, E I think is an invaluable provision, the department shall review the results and outcomes and provide annual reports.
We want to know if this is efficacious. We want to know whether it solves the problem that we hope it will solve. That's the point of a pilot program to see whether it really works. All too often in politics, a program will take off and it will just never come back to earth and just keep throwing money at it to mix metaphors and the program just keeps going even if it's not efficacious, even if it doesn't have the effect that policy proponents wanted it to have said it would have.
We should judge policies by their effects, by their outcomes, not by the intentions of their proponents but that's what we want. We want our rental payment surety bond pilot program to work and we want to know whether it's working so we have this provision in there to gauge its effectiveness. Of course we want to make sure that people aren't being taken to court for nonpayment of rent when there is a rent payment surety bond in place that that could cover the rent, so we have something similar to the new Chapter 257 that says if there's an application for a subsidy for RAFT subsidy pending, the case is not going to move forward.
By the way sidebar, Doug encouraged you to take the initiative and apply for RAFT on behalf of tenants and he listed some really important reasons for doing that. Let me add one more as a practitioner. If you've initiated the summary process case and you're sort of slowly staggering toward the finish line. It takes a long time now I know, and at any point even on the day of trial or after trial, on the day that you think you're going to get execution, the tenant can apply for a subsidy. They could have refused up until that point and then at the very last moment apply for the subsidy and that puts everything on hold. That’s the kind of headache you don't want, so it really does make a lot of sense tactically to get that application in early, okay so that's what we would like to happen in our rental surety bond pilot program bill.
Now let me pause that.
Doug: Before we move on. Yes, we have from another Peter. We have some maybe misunderstanding or maybe suggestion or question, but other Peter says, “Usually the insurance concept is risk management, so the client invests X amount in the form of a premium in exchange for a possible insurance payout in the event of a disaster or unpaid rent. Are we not considering that the landlord might pay a modest premium and then just have insurance backed by the Commonwealth but administered by the surety bond companies?”
I think that is exactly what we're suggesting, right?
Presenter: Yes, although we're also suggesting that the Commonwealth repay the housing provider for the cost of the of the premium, so yes that is that's exactly what was suggesting only that landlord should not pay it out of pocket.
Doug: So we haven't been very prescriptive but you could imagine the state coming up with a procedure whereby the landlord cash out of pocket, pays for the bond, and then submits to reimbursement from DHCD or whomever, and then that's what triggers the initial underwriting by the state. We aren't very clear on the money flow because we want the state to have conversations and figure out how that should work, right?
Presenter: Yes, because we're MassLandlords, not Mass Surety Bonds, and there are things that we don't know and we want to strike the right balance between setting the broad policy parameters and leaving the regulatory body to fill in the details, but not just going overboard and leaving it all to the regulatory body. That's an important rule of law issue and it's an important practical issue.
We want to we want to provide important guidelines, but we also want to acknowledge that the expertise lies with the industry and with the bodies, the administrative agencies that regulate the industry, they will know better than we, the bill drafters, how to make this work properly, so it's a somewhat detailed bill but it's not nearly so detailed as the regulations would be. It's a fine balance to strike and I hope we've struck the right one. I know we haven't struck the perfect balance. It's a human-made product, but I think we've just about got it right.
Doug: All right great and then the second follow-on to that comment is, “Well really this could be extended to just cover market tenants regardless of COVID impact. If the state wanted to expand on this idea and say we're going to guarantee housing to everybody, that would certainly be an extension of a successful pilot, right?
Presenter: It would wouldn't it and I think one of the one of the co-benefits of a pilot like this succeeding would be to sort of shift the mentality of the political class in Massachusetts toward these market-based solutions to government assisted if not always government-created problems rather than saying okay let's set up a new agency or a new section within agency X in order to deal with this trying to find ways of enabling encouraging private sector responses and shifting the mentality somewhat. We can't shift the number of seats, but perhaps we can shift the mindset of some policymakers over time in favor of market-based solutions where the private sector can do something better.
You know there's this saying that government is what we do together. It's partly true government one of the things that we do together uh markets is something else we do together as a society and sometimes we do things better when we're acting through markets than we do when we're acting through government agencies, so one of the co-benefits of this bill is to encourage that sort of thinking that yes okay perhaps there's an industry out there that could fix this problem better than the very laudable and dedicated people of the Department of Housing and Community Development. Maybe there are insurance industry experts who could do this better.
Doug: All right so let's we'll get that filed.