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Security deposits can be a high-cost hurdle to affordable housing

Jeneya Lawrence and her daughter Jy'rah Watson, 9, stand outside their apartment in Cincinnati, Ohio. Lawrence is a home health aide and community health worker with two children. She had to turn down an apartment because she couldn’t afford to pay the security deposit upfront. (Luke Sharrett/for the Washington Post)

CINCINNATI — When her landlord abruptly raised her rent, Kendra Davis discovered that she couldn't afford to stay. But she couldn't afford to move, either — not because she couldn't pay the rent elsewhere, but because local landlords required security deposits of up to $1,800 just to get in the door.

Despite working two jobs — one in retail at a hospital gift shop, the other in customer service for an airline — Davis said there was no way she could come up with that kind of money all at once. Priced out of her own apartment and blocked from securing a new one, she wound up homeless. She slept on a friend’s couch for nearly four months.

Jeneya Lawrence had hoped to find an affordable rental with enough space that her school-age son and daughter would no longer be shoehorned into the same tiny bedroom. When she finally found a place with a monthly rate she could afford, she was ecstatic — until the landlord told her the security deposit was $1,100, upfront.

As a home health aide and community health worker with two children to feed, Lawrence said she knew she couldn’t come up with that much money at one time. She had to turn it down. It took months to find another place.

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For low-income families, security deposits pose an often ignored but significant barrier to safe, decent, affordable housing. With household budgets stretched thin under the best of circumstances, the added challenge of coming up with a lump sum of hundreds or even thousands at one time is often more than low-income families can manage, preventing them from accessing housing, or trapping them in substandard housing even when they could otherwise afford to move.

In a nation where six out of 10 of the most common jobs pay less than $28,000 per year, 40 percent of Americans say they would struggle to come up with the funds to cover an unexpected expense of only $400, according to a May 2018 Federal Reserve study. For many more, an expense of $1,000 or more is out of the question.

But in Cincinnati, new legislation could help low-income renters like Davis and Lawrence. A first-in-the-nation law aimed at removing the barrier of security deposits will soon give renters payment choices to pay their security deposits in several more affordable ways. Cincinnati Council Member P.G. Sittenfeld (D), who drafted the measure that took effect April 14, said he hopes to see the concept spread nationwide.

Under the new law, renters will be able to either pay the deposit in monthly installments spread out over at least six months; pay a reduced security deposit upfront, equal to no more than half of one month’s rent; or purchase low-cost security-deposit insurance provided by a certified, licensed insurance provider who would cover any damage to the rental.

Housing advocates and renters have applauded the measure.

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Security deposits are “definitely an obstacle — low-income renters don’t have the resources sitting around to be able pay a deposit up front and then make another payment for the rent on top of that,” said Andrew Aurand, vice president for research at the National Low-Income Housing Coalition. “This legislation is an important step, and it’s good to see this barrier being addressed.”

Low-income renters “have so little income left over each month after paying the rent, it’s hard for them just to meet basic needs, let alone put down a first month’s deposit on a new unit,” said Whitney Airgood-Obrycki, research associate at the Joint Center for Housing Studies at Harvard University.

And the coronavirus has only compounded the problem, causing many workers to lose their jobs entirely, particularly in low-wage industries like food service, retail and travel. “Many of the households with earners in at-risk industries were already struggling with housing affordability,” says Airgood-Obrycki, “and the pandemic has only made the situation worse.”

“There was a woman who literally had tears streaming down her face” the day the council passed the measure, said Sittenfeld. He added that when he spoke with her afterward, she said that the new law would enable her to move into a unit that would have otherwise been inaccessible.

Renters Lawrence and Davis said they had similar reactions. “When I wanted to rent that home, I asked the landlord if he could do a payment plan and he said no,” Lawrence said. “If this law had been in effect then, I would have been able to move into that home.”

Under the new legislation, the renter has the choice to opt for an alternative security deposit generally; if they do, the landlord gets to choose which of the three options to accept. Landlords with fewer than 25 units are exempt.

Sittenfeld said his “North Star” throughout crafting the legislation was removing the upfront barrier to housing access posed by the security deposit. “But we also need responsible landlords to help us meet the housing needs of our community, and they need to feel confident that their incomes and properties are protected,” he said.

While the initial legislation involved only security deposit insurance, the final law offered three options, and Sittenfeld said it is better as a result. “So they can say, ‘You know what, I’m kind of a traditionalist, I want a full cash deposit,’ and they can go with the installment option,” he said. “Or they can say, ‘My priority is, I want the most money in cash immediately,’ and take the up-front deposit, capped at 50 percent of the monthly rent. Or if they say, ‘Hey, I want immediate protection, equal to a full month’s rent,’ then they can go for the insurance option, which takes effect upon payment of the first premium.”

The idea of tackling the barrier of security deposits is garnering interest across the country and from both sides of the aisle, from New York City Mayor Bill DiBlasio (D) and state lawmakers in Pennsylvania, North Carolina and New Hampshire, to HUD Secretary Ben Carson.

Virginia Gov. Ralph Northam (D) signed a measure into law in April allowing renters to use security deposit insurance in place of traditional security deposits. The law goes into effect July 1.

Security deposit insurance is a “win-win” concept, said Virginia Del. Mark L. Keam (D), who introduced a bill in February. “It’s a win for the landlord who can find more tenants that can move into their properties right away, it’s a win for the tenant who can’t come up with all that money at one time but wants to move, and it also unleashes billions of dollars that are currently locked up in escrow accounts all around the country,” he said. “If you free up those funds and people use that money, that could be a big boost to the economy.”

For now, the law would enable the use of the insurance as an option, rather than requiring landlords to offer it, but Keam said he hopes a future iteration of the measure would require it. In light of the economic crisis stemming from the coronavirus, he said the law “could be another tool for tenants to find stable housing in the future.”

In New York City, the Rent Stabilization Association, a trade organization representing 20,000 landlords and 1.1 million apartments in the New York metropolitan area, launched a partnership with security deposit insurance provider Rhino to offer the product to the association’s members. “It’s a creative solution to what is clearly a problem,” said RSA membership director Michael Tobman. “We’re excited to be able to offer it as an option to our members.”

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Cool reaction to concept

In Cincinnati, the reaction to the law among landlords has been chilly.

“We are opposed to this legislation,” said Don Brunner, president of the Greater Cincinnati/Northern Kentucky Apartment Association, and vice chair of the National Apartment Association based in Arlington, Va.

Brunner and others expressed concerns about being required to use a new, unfamiliar product of a for-profit company (when the initial version of the law stipulated security deposit insurance as the only option); about the renter’s inability to move to a month-to-month lease while using security deposit insurance; about the fact that renters using security deposit insurance never get their money back, as they would with a traditional deposit; and about the fact that the renter could be held responsible for non-covered damages or charges upon move-out, even after paying premiums for years.

Ankur Jain, co-founder of New-York-based security deposit insurance provider Rhino, doesn’t dispute the latter claims, but suggests that renters are more than compensated by the benefit of not having to pay a significant deposit upfront.

“If you took a sledgehammer to the wall or skipped out on the rent, then yes, you’d be on the hook for that, but that’s standard for any kind of insurance — just like you can’t set fire to your couch and then file a renter’s insurance claim,” he said. Accidental damages and wear and tear are covered, he said; intentional, negligent damage is not. Given the low cost— monthly premiums can be as low as $4 a month — a tenant would have to rent for 20 years before the cost of premiums matched the cost of a $1,000 deposit.

“What we’re doing here is not that different than any other kind of insurance,” he said. “When you go to Hertz and pay to rent a Toyota Camry, you don’t put down a $20,000 cash deposit in case you get in an accident. You buy insurance, as a way of managing risk. This is the same thing — and again, it’s an option: The renter always has the choice to stick with a standard deposit.”

Still, whether one supports the measure or opposes it, it’s important to keep the new law in context, said Aurand of the low-income housing coalition. “The majority of renters with extremely low incomes can’t find an affordable rental home at all, because nearly every community across the country lacks an adequate supply,” he said.

“So while it’s good that we’re trying to address this barrier of security deposits, we still have a really large structural issue, that there isn’t enough affordable housing to begin with.”

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“There simply isn’t enough housing,” said David Howard, executive director of the National Rental Home Council, a trade association for the single-family rental home industry. “Until we start to create meaningful incentives that lead to an increase in the supply of housing, we will continue to be stuck in the same situation.”

Since 2011, the stock of low-cost rental housing has decreased by 4 million units nationwide, leaving only 7.4 million units for the country’s 11 million extremely low-income renters. Nearly half of the units are more than 50 years old, making them prime targets for demolition or renovation — and rising rents.

And while the new law helps low-income families with the final hurdle in the process of hunting for housing, they have to climb a mountain before they get there, Aurand pointed out.

In many cities, low-income families wait for months or years just to get on the waiting lists for subsidized affordable housing units or Section 8 vouchers (portable vouchers that help a family afford a modest market-rate rental). Once families get on the list, they wait additional months or years to receive assistance; three out of four applicants never get to the front of the line, according to the Center on Budget and Policy Priorities, a Washington-based nonpartisan think tank.

If a family manages to get a voucher, they have to find an apartment that meets voucher guidelines for affordability, and then find a landlord who will accept the voucher (in many jurisdictions, landlords can refuse). “And then, after all that, they have to make sure they have a security deposit to give to the landlord,” Aurand said. “So they really are climbing a mountain of obstacles before they even get to that last hurdle.”

These days, Kendra Davis has a roof over her head and a job that earns a bit more money. But she said she still dreams of a less cramped, freshly painted place, without dents in the door or cracks in the linoleum, with a little space outside to plant flowers, and maybe, if she can ever afford a car, a place to park it out front.

Given the myriad barriers, she’s not sure when — or if — she’ll achieve that dream. But at least there’s one less obstacle in the way.