Sunday, June 9, 2019

Rental Screening Proposals Go Too Far

Minneapolis is proposing a sweeping change to how landlords can screen tenants.  The ordinance is, well, problematic enough to rouse me from my slumber.  I've got a few blog posts left in me on this site and then I'm doing my best to look forward instead of back at my old town.

The proposed changes can be found here and here.

And it's not all bad, to be honest.  But like a lot of what this council does, this proposal takes some good and necessary changes, adds in some trendy left-wing buzzwords, mimics west-coast policies that may or may not apply to the realities of a Minnesota marketplace, tosses those in a blender with some predetermined conclusions and today's ideological purity requirements, and presto!  That's how you get new city code!  Schoolhouse Rock really ought to write a song about this, but it's tough to find words that rhyme with "ordinance."

I do want to break this down into the good, the maybe, and the ugly.  First, the good parts...

According to the authors of a Star Tribune counterpoint, a landlord can file an eviction notice the first day a tenant is late, without notification to the tenant, and that can stay on their record as an eviction even if an actual eviction for non-payment of rent is avoided.  I don't know how often renters are impacted by this, but even if the number is zero or close to it, this is a loophole that needs to be closed.  There's a vast difference between a day and even a month late versus full and forced eviction for several months of unpaid rent.  If rental history showing on-time payments or late payments is part of the screening process already, this seems like it's duplicating the worst parts of a tenant's history and not giving people a fair shake at getting to a better spot.  I think the council is right to look at removing this from consideration.

And that's where the unquestionably positive changes stop.  The criminal history restrictions have some good elements to them.  There really ought to be some tough questions we ask ourselves about how long a criminal history can define someone's options in life.  But it's not as cut-and-dry as proponents make it seem.  For instance, someone pleading guilty to a minor drug offense for something that may soon be legal may very well have been engaging in and known by police and others to have engaged in worse activities. Like if that person assaulted someone in the course of a drug deal but pleaded to a lesser charge of distribution, and at some point in the future distribution of small amounts of marijuana is no longer illegal, what do you do with that conviction that was really for something more serious?

Maybe there's a good way to thread that needle.  But realistically if we're going to decriminalize certain acts and acknowledge that a racially biased legal system has harmed people, and then work to undo that harm, then changes like this may have to be a part of how we give people a chance to rebuild their lives.  Put this one in the category of "Ok, let's try this and see how it helps people, but if it causes problems we should be willing to revisit it."

I'm also of the opinion that in most circumstances, arrests without convictions or charges shouldn't stop someone from getting housing.  However, I think back to when I was assaulted in front of my own home.  Long story short, I was taking down waterlogged sign spam from telephone poles and a perp threatened to assault and rob me, then punched me unprovoked, hopped on the bus like it was his getaway car, and was subsequently arrested.  The assault on me was dropped, presumably because he had other charges he was pleading to, but the last I heard of the case, he wasn't showing up for his scheduled court appearances.

Isn't an arrest like THAT something that a landlord should be able to take into account when figuring out who is the best tenant to lease a property to?  Wouldn't you want the landlord next door or the owner of your apartment complex to be able to 1) find out about such things and 2) use that information to make a determination about whether to rent to one person or another or even let the unit sit vacant until a qualified tenant applies?  Or from this man's perspective, let's say the incident where he punched me was his rock bottom, and he is now trying to put his life back together.  The more access he has to quality housing, the less likely he is to wind up needing to rent from the likes of Mahmood Khan, and then easier it would be for him to continue improving his station.

There's a whole lot of grey area here.  Give too much leeway to landlords, and one bogus arrest could taint someone's housing choices for years and years.  Restrict the use of this data entirely and it becomes harder and harder for landlords to make the right decision on who to rent to.  Minneapolis should look to write rules like the "evicted before convicted" St. Louis Park disgrace out of existence.  But if the pendulum swings too far in the other direction, neighbors bear the burden of unsafe communities.  Reasonable people should agree with the principles behind this, but there are real-world consequences to getting it wrong.

The part that give me the most pause though is the limitation on what kinds of credit history could be considered.  In fact, I was shocked that a credit score of below 500 could be something that a landlord couldn't take into account.  As someone who spent the better part of my twenty years in the Twin Cities in roles where I examined credit (a non-profit credit counselor, a mortgage loan processor and a mortgage loan originator, and even while renting out rooms in my own home), let me explain something about credit scores and the kinds of credit profiles they point to.

It's honestly quite scary that forty percent of Americans couldn't take on an unexpected liability of $400 or more without having to borrow money or start juggling which bills get paid late.  But the reality of it is that once you get below credit scores in the 620-640 range, you see that people at or below that level tend to not even have $400 in borrowing capacity on their credit cards.  Once you get much below 600, people tend not to have open revolving lines of credit at all.  And once you get to the mid 500's and below, people tend to have collections, judgments, charge-offs, tax liens, child support, or other liabilities that could very quickly change into payroll or income garnishment.  And at THAT level, the applicant's rental history, however positive, starts to matter less and less.  If someone has never been late on a housing payment before, but has derogatory credit with a higher likelihood that garnishment will render irrelevant that last shred of fiscal responsibility, shouldn't a landlord be able to know that information and use that information when they decide on a qualified applicant?

Limiting pet deposits is another level of ridiculousness.  The amount of damage a dog or a cat can do to a unit pales in comparison to the pet-related damage deposits that are already legally collected.  If those become even further restricted, I would assume most landlords would respond by simply implementing a "no pet except for disability accommodations" policy.

I've had some experience in this regard.  Through much of my time in Minneapolis, I rented one or two rooms upstairs.  Mainly this was because I had more space in my home than I was using and I felt it was better to provide housing for people than let that space sit empty.  My tenants included:  a recent college graduate who had never lived on his own before, a divorcee who needed a place to restart his life, a struggling artist, an ex-con, a friend of that ex-con who had a spotty rental history of his own, and a person who wound up being a hoarder who cost me significant money in unpaid rent and property repairs.  In other words, almost every single tenant I had in my home is someone who the proposed ordinance changes would be meant to protect.  It's not clear from the language of the ordinance whether it applies to people renting out parts of their own residences, or a second unit or ADU on their property, or if it's just for non-owner-occupied housing that would trigger a rental license requirement.

The ex-con reoffended and never got out of jail before his lease expired.  The ex-con's friend with a spotty history skipped town and bailed on his lease.  The hoarder cost me over two grand in property repairs and I let his last two months of rent slide because I wanted him to be able to go to a new place of residence instead of becoming homeless.  In all, those three tenants cost me over $4,000 in lost rent and property damage.  That pretty much wiped out the net profit from my other tenants.  The cost would have been higher if I'd gone to court to file eviction notices.

And that's where the real world starts to intrude on these noble ideas about rental restrictions.  I have outgoing expenses on my property.  There is most likely some sort of debt associated with it, whether it's secured by the property or a different kind of a credit line.  Even if the property was purchased in cash, an owner is going to want to replenish those funds over time.  Tack on taxes, insurance, and other property-specific fees like association dues. Add whatever utilities a tenant is not covering.  Finally, I know I will have to maintain and upgrade the property from time to time.  So part of my proceeds really should be set aside for that.

Then let's presume I want to actually make a profit.  So let's just say the expenses come out to $800 per month and I want to make $100 in monthly income, I have to charge $900 to my tenant.  And here's a crucial part of the equation:  No amount of rules or regulations that a city imposes is going to change that $800 amount.  Or more accurately, I wouldn't count on lower property taxes lowering that figure any time soon.

And then we have the unknown.  I am going to have a unit vacant and unrented from time to time.  Sometimes I can plan for that, through scheduled maintenance.  More likely I will not.  Even the best of tenants move out and there may be a month or more of vacancy.  Tenants may wind up unable or unwilling to pay rent.  I may have to evict, which costs money.  Tenants may treat the property poorly, requiring unplanned repairs and adding to the vacancy time.  Natural events, such as hail damage, may be unforeseen and require repairs.  I'm going to want to anticipate as many of these costs and scenarios as possible, building in a contingency factor to my rent amount and getting an insurance policy that covers as much as I can afford.  The more I can anticipate (such as determining whether rent will be paid on time) or mitigate (perhaps a higher security deposit for a credit-challenged tenant or pets) the cheaper my rent can be.

But if I can't know certain risk factors or if I cannot use what I believe is a risk factor in determining whether and how to extend a lease agreement, I'll either charge more money or not be a landlord in that city at all.

So the response to these proposed changes will fall into a few categories.  Some landlords will say, "Fine. I support or at least can live with all of these changes with little impact on how I conduct my daily business and decide who should rent from me."  Others will look at parts of the proposal and say, "If I can't look at credit scores alone, then I'll set up credit profile criteria (i.e. no new collections in the past 24 months or no collections totaling more than $2,000) that will help me screen out unqualified applicants."  And that won't significantly change who gets the apartments but it WILL change how much work it takes a landlord to make such a determination.  And if that cost goes up enough, landlords absolutely will pass that on in the form of higher rent.  ESPECIALLY if it's because of a citywide mandate instead of a more naturally-occurring market shift.

Still others will make broad changes, like a no pet policy.  Some will switch to contracts for deed and fly under the radar.  Some will decide to get out of Minneapolis entirely, and others may opt out of using their extra space to provide rental housing.  But the most common response I would anticipate is in the form of higher rents.  Too many restrictions on how someone can decide on the best applicant will mean that there's more unknown risk that a landlord cannot factor into their screening process.  So rents may go up as landlords build up their reserves in anticipation of the next property repair or eviction that they wouldn't have had to undertake within different rules.

There are elements of this proposal that are morally right and demonstrably better than the existing ordinances.  But not everything is a clear-cut improvement and I believe that if the changes were put into place in their current form, that would ironically lead to more housing restrictions and higher rents.  There's a middle ground here, if this council wants it.

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