The CDC vs. Your Property

The CDC vs. Your Property

By Mark Nestmann • September 8, 2020

Last week, the Centers for Disease Control (CDC), with the support of the Trump administration, announced a nationwide moratorium on evictions through the end of this year. The CDC justified the unprecedented move on the premise that the action is necessary to prevent further COVID-19 spread.

If you’re a cash-strapped renter living paycheck to paycheck, the moratorium probably sounds like good news (although it isn’t, for reasons I’ll explain in a moment). But if you own rental property and are dependent on regular payments from your tenants to pay the building’s mortgage, the moratorium could spell financial disaster.  If you evict a tenant in defiance of the CDC’s order, you could be fined $100,000 and face a year in prison. While the deferred rental payments aren’t forgiven, the longer they persist, the more difficult it will be for landlords to collect past due payments.

The CDC claims it has the authority to halt evictions under regulations it issued under the authority of the Public Health Services Act. This law is one of the hundreds enacted by Congress giving the president and the executive branch the authority to make law at the stroke of a pen in the event of an “emergency.”

To be sure, there are a few formalities that tenants need to follow to avoid eviction for non-payment of rent. They must prepare a sworn affidavit declaring they:

  • Have "used best efforts to obtain all available government assistance for rent or housing”;

  • Expect to earn less than $99,000 ($198,000 for joint tax filers) in 2020 or did not have to report any income to the IRS in 2019, or received a stimulus check under the CARES Act;

  • Are "unable to pay the full rent… due to substantial loss of household income … a lay-off, or extraordinary out-of-pocket medical expenses”;

  • Are “using best efforts to make timely partial payments that are as close to the full payment as the individual's circumstances may permit"; and

  • Would likely become homeless in the event of eviction or be forced “to move into and live in close quarters in a new congregate or shared living setting."

The income limits for these provisions to take effect are far higher than Uncle Sam’s poverty guidelines. For 2020, the Department of Health & Human Services determined that a one-person household would need to generate less than $12,760 per year in income to qualify as impoverished. For a two-person household, the threshold is $17,240 per year. For each additional person in the household, the HHS adds $4,480 to these thresholds.

Thus, to qualify for the CDC’s moratorium, a tenant living alone could have an income almost eight times higher than the poverty line. A married couple could have an income more than 11 times higher. Treasury Secretary Steven Mnuchin estimates the moratorium would affect up to 40 million renters.

Moreover, a close reading of the regulation the CDC used to declare a rent moratorium appears to authorize the agency to impose virtually any other restrictions it chooses. All it needs to do is to make an unsupported claim that the action would slow the spread of a contagious disease and that state or local laws are "insufficient" to effectively limit its spread. There’s no minimum standard necessary to demonstrate that the restrictions are reasonable, proportionate, and that state and local measures are truly insufficient.

As well, while the moratorium expires at the end of 2020, regulations issued under the Public Health Services Act need not have an expiration date. Thus, the CDC could conceivably declare that to deter the spread of any disease (even the common cold!), everyone currently living in “close quarters” be given a single-family home to live in. Further, if their incomes are below the CARES Act thresholds, that they be permitted to live in their new homes rent-free until the pandemic subsides.

As Senator Pat Toomey (R.-Penn.) put it, "If the CDC has the authority to force landlords to effectively give away their product for free, I don't know where that ends. Can General Motors be forced to give people cars unless they otherwise crowd into subways? What future administration, what future president, certainly what future Democratic president is going to want to be accused of being less generous than Donald Trump? Are we to expect that the standard response of the government to an economic downturn is an eviction moratorium?”

That’s a valid point. A spokesperson for the Biden campaign has already indicated the Democratic candidate supports the moratorium. His only question is why it took Trump so long to declare it.

Nor is America actually facing an eviction crisis. Indeed, eviction rates have been well below normal since COVID-19 related lockdowns began in March. Data collected by the National Multifamily Housing Council (NMHC), which represents landlords of multifamily apartment buildings, indicates that fewer than one million households are at an imminent risk of eviction.

That number is a lot lower than 40 million. And it only makes sense that landlords wouldn’t want to evict tenants during an economic crisis. And not for altruistic reasons: landlords realize it could be difficult to find new tenants that will pay as much as the old ones. In the meantime, they’ll collect no rent at all.

But there’s an even more important principle at issue here. The CDC’s edict is a direct violation of the “Takings Clause” of the Constitution’s Fifth Amendment: “nor shall private property be taken for public use without just compensation.” The new rule is a “regulatory taking”: a rule that inhibits the owner’s use of their property, without compensation for their losses.

Unfortunately, America’s judiciary doesn’t enforce the takings clause as it’s written. On issues ranging from civil forfeiture to eminent domain, the takings clause gets lip service from the courts, and little else. That’s a tragic omission, because the right to property is foundational to every other right we have. As James Madison, the principal author of the Constitution, put it: “As a man is said to have a right to his property, he may be equally said to have a property in his rights.”

And make no mistake, the consequences of the CDC’s rent moratorium will quickly permeate through the economy. Most landlords finance rental properties with borrowed money. Since the CDC hasn’t (yet) declared a moratorium on mortgage payments, landlords still need to make those. If they don’t, the lender can foreclose and seize their properties. Congress imposed a foreclosure moratorium through July 31, which has been extended to the end of 2020 by federal housing agencies. But it applies only to federally backed mortgage loans, which are available only for owner-occupied properties.

In addition, many mortgages are bundled into mortgage-backed securities and gobbled up by hedge funds, pension plans, and insurance companies. As the cash flows from these mortgages dry up, the economic hardship will multiply, setting off a tidal wave of defaults and bankruptcies. The value of rental properties will decline due to the perceived risk of continued and/or future rent moratoriums. Deep-pocketed investors – think hedge funds, which are already snapping up homes – will swoop in to buy distressed properties on the cheap. The concentration of ownership will lead to even less affordable housing for everyone, especially the poorest Americans.

The CDC’s new rules will no doubt be challenged in court by landlords, either based on the Takings Clause or on the theory that the moratorium exceeds the authority delegated to the CDC by Congress. But even if the CDC suspends enforcement of its new rule, or the courts invalidate it, the die has been cast. Americans have once again been shown that their financial obligations can be erased by government diktat. And we’ll all be paying the costs for years to come, in ways we can’t even begin to foresee.

Plan B, anyone?

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About The Author

Since 1990, Mark Nestmann has helped thousands of clients seeking wealth preservation and international tax planning solutions. He is the author of highly acclaimed Lifeboat Strategy and other books & reports dealing with these subjects.

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