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What works in housing affordability: Rental guarantees open new doors to stability for tenants and landlords

Rental guarantees—insurance-like products that reimburse a landlord’s expenses if a tenant doesn’t work out—can expand housing options for renters with credit issues, employment gaps, or criminal records

July 31, 2020

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Rental guarantees open new doors to stability for tenants and landlords, key image
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Article Highlights

  • Renters with barriers face limited housing options, higher costs
  • Guarantees give landlords incentive to work with these renters
  • Case management, landlord outreach appear key to success
What works in housing affordability: Rental guarantees open new doors to stability for tenants and landlords

Some nonprofits are offering rental guarantees for landlords as part of an effort to overcome biases against renters who have low credit scores, gaps in their employment history, or past interactions with the criminal justice system. Similar to insurance, a rental guarantee reimburses a landlord for losses due to property damage or lost income if a tenant doesn’t work out. However, unlike insurance policies, these nonprofit-run rental guarantees generally do not require landlords to pay a premium.

In Minnesota, two nonprofit organizations are expanding their rental guarantee programs after conducting pilots that successfully interrupted a harmful cycle for hundreds of renters at a relatively low cost. Practitioners credit their success to their organizations’ efforts to understand the needs of both landlords and their tenants.

Market consequences for renters with barriers can be severe

Many renters are primarily concerned with finding a unit they can comfortably afford that matches their neighborhood preference and desire for amenities. For low- and moderate-income renters, today’s escalating rents and a shrinking supply of low-cost units complicate the search. The complications increase if a tenant is perceived as “high-risk” by landlords due to having a low credit score, gaps in employment history, or criminal convictions. Biases about these perceived barriers can push an individual’s rental application to the bottom of the pile.

A longer, more challenging search isn’t the only burden to be overcome by renters with barriers. Landlords may also charge renters they perceive as higher-risk a premium. For example, landlords may require a much larger security deposit, or a higher monthly rent, than they would for other tenants.

Renters with barriers may feel pressured to accept such conditions as their housing search lengthens. The tough search process may also lead them to accept housing located farther away from work, their children’s school, or their social support network.

Consequences can accrue to higher-risk renters’ loved ones, too. When renters with barriers feel like they have no other options, they may move in with friends or relatives. Such “doubling up” can put both parties’ housing stability in jeopardy, since adding more occupants may violate the terms of a lease (or the rules of a housing assistance program).

As one developer in Minnesota said, market reactions to what is often flat-out bad luck act as a punishment, contributing to vicious cycles that make it hard for renters with barriers to rebuild credit and maintain employment. Research suggests that access to stable housing reduces recidivism, but formerly incarcerated Americans are 10 times more likely to experience homelessness, by one estimate.*

Connecting Twin Cities metro residents and landlords

HousingLink, a nonprofit organization based in Minneapolis, works to improve affordable housing options for renters by increasing access to affordable housing, performing and disseminating research on the rental housing market, and hosting a robust rental housing listing service. The organization’s offerings include Beyond Backgrounds, a rental guarantee program that serves the Minneapolis-St. Paul metropolitan area.

The workings of Beyond Backgrounds are fairly typical of rental guarantees: the program has a pool of funds set aside to reimburse landlords should they suffer a financial loss in excess of the security deposit after renting to a tenant with certain perceived barriers. The program was initially funded by the Suburban Metro Area Continuum of Care through a grant from Minnesota Housing, the State of Minnesota’s housing finance agency. Additional partners and funders include the Minnesota Department of Veterans Affairs, Dakota County, the Pohlad Family Foundation, Medica Foundation, St. Paul Foundation, Mardag Foundation, Bigelow Foundation, Target Foundation, and Ramsey County’s Outside In Collaborative. In some cases, funders work through HousingLink and Beyond Backgrounds to offer rental assistance for tenants facing particular barriers—for example, they may support homeless veterans.

All Beyond Backgrounds participants undergo a formal assessment that identifies at least one characteristic that would cause most landlords to view them as higher-risk.

Staff members from HousingLink or its partner organizations sign up potential Beyond Backgrounds tenants. Eligibility varies depending on a funding partner’s standards, but all Beyond Backgrounds participants undergo a formal assessment that identifies at least one characteristic that would cause most landlords to view them as higher-risk. Landlords are eligible to participate as long as they are legally renting out their properties and have never had their rental licenses revoked.

While tenants qualify for Beyond Backgrounds through a formal process, matching with landlords is more casual. Caseworkers from HousingLink and its partner organizations ask landlords with vacancies if they’d be interested in the Beyond Backgrounds guarantee. If a landlord agrees, he or she meets the tenant.

In some cases, the meeting yields a lease-signing with no guarantee required.

“We’ve had more than 90 cases where a landlord meets a tenant eligible for Beyond Backgrounds and they tell us they don’t even need the guarantee,” said Sue Speakman-Gomez, the president of HousingLink. “They tell us to save that ‘spot’ in the program for someone else.”

“We’ve had more than 90 cases where a landlord meets a tenant eligible for Beyond Backgrounds and they tell us they don’t even need the guarantee. They tell us to save that ‘spot’ in the program for someone else.”
—Sue Speakman-Gomez, HousingLink

In other words, she says, landlords meet people who might look “high-risk” on paper, but once they’ve met, the landlords decide that they aren’t so risky after all.

As a landlord herself, Speakman-Gomez empathizes with the need for landlords to make quick decisions about how to fill their units, and believes rental guarantees offer a win-win for tenants and landlords alike. With its grasp of the landlords’ end of the equation, she said, HousingLink was also able to set a reasonable cap on maximum reimbursable costs. Beyond Backgrounds pays up to $2,000 for lost rent and damages beyond a typical security deposit—an amount that Speakman-Gomez believes is enough to entice landlords to participate while also fairly compensating them.

Since January 2018, more than 100 landlords have housed a total of 238 renters through Beyond Backgrounds. Only three of those landlords filed for reimbursements, asking for about $6,000 total.

Since January 2018, more than 100 landlords have housed a total of 238 renters through Beyond Backgrounds. Only three of those landlords filed for reimbursements, asking for about $6,000 total.

Speakman-Gomez says HousingLink’s program is much larger than a typical rental guarantee program, and names a state investment in the guarantee as a key first step. “The State of Minnesota created the opportunity for us to be able to show we were having success,” she said. “Now that we’ve demonstrated the program works, we’ve built some philanthropic support.”

At first, Beyond Backgrounds held reserves to cover its reimbursement expenses for 30 percent of its cases. Over time, the reserve rate has run closer to 20 percent. In other words, HousingLink runs Beyond Backgrounds as though 20 percent of its landlord-tenant relationships won’t work out. Since the maximum reimbursable amount is $2,000, this allows the program to serve roughly five tenants for every $2,000 in the bank.

Results from smaller pilots indicate that a 10 percent reserve rate is reasonable, Speakman-Gomez noted. In her view, the only limit on the program’s enrollment for the foreseeable future is the resources available. As HousingLink gets further into the project, she and her colleagues anticipate being able to lower the reserve to the 10 percent threshold.

“We’d love to see a market develop for this, so that any tenant with barriers could access an insurance-like product that serves the same function as a rental guarantee,” she said. If tenants could purchase such a policy, said Speakman-Gomez, landlords might be less likely to require high security deposits.

Helping young renters meet long-term goals

When St. Paul-based Lutheran Social Service of Minnesota (LSS) had an opportunity to set up a rental guarantee program in the area around Brainerd, Minnesota, it opted to focus on renters aged 24 or younger. About 15 percent of individuals experiencing homelessness around Brainerd are 18–24 years old, even though that age group makes up only 10 percent of the region’s population overall.

“We heard from landlords that they were more likely to rent to young people if they were connected to services,” said Michele Fournier, a program director overseeing housing services at LSS. And, she said, caseworkers with LSS reported that it was often more difficult to place their young clients in stable housing.

LSS’s youth-focused Landlord Risk Mitigation Fund (LRMF) began about three years ago. The enrollment process is similar to that of Beyond Backgrounds: young renters are formally assessed, and if they have a barrier to renting, often qualify. Like Beyond Backgrounds, the initial money for LRMF came from a Minnesota Housing fund for rental guarantee pilots.

After tenants enroll in the Landlord Risk Mitigation Fund, Lutheran Social Service staff members work with them to develop a case plan featuring goals that support tenants’ long-term housing stability.

Participating landlords have yet to file a claim. Feedback from landlords and tenants has been positive, and Minnesota Housing recently extended its initial grant from three years to five, enabling LSS to expand services from about 35 to about 45 households.

After tenants enroll in the LRMF, LSS staff members work with them to develop a case plan featuring goals that support tenants’ long-term housing stability. The planning process can identify features of housing beyond price that are critical to a tenant’s success.

“If a client doesn’t have transportation, we want to make sure they can get food, access services, and make it to school or work,” said Jessica Kvistad, a housing coordinator for LSS in Brainerd. “For example, we may help them find a place close to the bus.” Without LRMF, she said, their clients may just rent the first place available, regardless of how well it suits their needs for employment or education.

Improving communication, relationships—and access

Aside from their eligibility criteria and general approaches, Beyond Backgrounds and the LRMF share common features that staff members highlight as vital to their success.

For example, both programs require monthly check-ins with tenants. Those check-ins offer an opportunity to connect tenants with needed resources. Caseworkers also work with both parties as an intermediary, improving landlord-tenant relationships and nipping potential problems in the bud.

“Caseworkers might hear about someone who lost hours at work, or who needed to pay for a car repair, who is going to have a hard time making their rent,” said Speakman-Gomez. “We can help them come up with a plan to pay late with their landlord.”

In a survey of landlords, LSS heard that case management through the mitigation fund improved landlord-tenant communications. “They particularly liked that aspect of the program,” said Kvistad.

Speakman-Gomez said that HousingLink has heard similar things through the Beyond Backgrounds program.

“If the landlord feels they’re being supported along with the tenant, it builds support on both sides,” added Fournier. “You’re not ending up in court, or having people leave and trash places.”

Staff from both organizations regularly attend events geared toward landlords. Attendance helps them recruit landlords as rental guarantee participants and gain an understanding of landlords’ needs.

Recruitment often relies on such one-on-one outreach because the landlords accessing rental guarantees typically manage only a few units. Larger housing providers often claim they are unable to adapt their processes to account for the rental guarantee benefit, Speakman-Gomez said. And many large, affordable housing buildings already carry long waiting lists, lessening the benefit of a quick landlord-tenant match that LSS and HousingLink can offer.

Recruitment of smaller landlords is aided by the perception that rental guarantee programs are fairly simple relative to federal Housing Choice Vouchers and other renter supports. Ease of participation may help not just with recruiting landlords, but also with encouraging a substantial share of landlords to remain in the program after an initial lease runs its course, or accept multiple tenants backed by guarantees.

As their experience with rental guarantee programs grows, caseworkers are finding that the programs’ benefits can extend beyond the immediate parties.

As their experience with rental guarantee programs grows, caseworkers are finding that the programs’ benefits can extend beyond the immediate parties. For example, the relationships built with landlords through the LRMF help LSS place people who have a hard time finding housing but may not be eligible for rental guarantee programs. That’s because landlords contact the agency when they have an open unit, before they even advertise it anywhere else.

“If landlords have an opening, they’ll wind up calling LSS first to see if we have any youth to fill it,” said Kvistad. “Even if we don’t have anyone eligible for LRMF, we offer case management services with all of our programs, so we may be able to connect them with people who aren’t eligible for LRMF but need housing.” In other words, opening up housing access for one group of people is helping others through the door as well.


Endnote

* For a summary of this research, see the February 2019 Urban Institute article, “Can Housing Interventions Reduce Incarceration and Recidivism?

Ben Horowitz
Senior Project Manager, Community Development
Ben Horowitz writes about policies and programs impacting affordable housing, early childhood development, and investments in low- and moderate-income communities. He is a Senior Project Manager in the Minneapolis Fed’s Community Development department.