Why personal debt looks healthy despite the worst year for jobs
California experts say mainstream indicators have failed to capture the true toll of the pandemic, warning of a much more complicated – and uneven – debt history.
On paper, the Golden State appears to have escaped 2020 without a personal debt crisis. Despite an unprecedented 2.4 million jobs lost in the spring, Californians joined with fellow Americans in paying off interest-heavy debts such as credit card bills while acquiring wealth-building loans by taking out mortgages. In California, new mortgages have jumped ten% Even like house prices have skyrocketed, suggesting unexpected resistance to a protracted pandemic.
Economists and financial researchers across the country see no telltale signs of financial trouble in the Federal Reserve Bank of New York reports consumer debt, such as devastating spikes in defaulted debt, bankruptcies and foreclosures during the Great Recession. In fact, they are seeing near record lows.
But appearances can be deceiving.
The large gains of affluent Californians seem to mask the experiences of suffering segments in debt records that are not easily broken down by race, income or geography. Additionally, millions of Californians experiencing job losses have racked up crippling debt levels that go unrecorded in many national metrics: unpaid rent, utility bills, borrowed money from loved ones and, in some cases, predatory loans.
The opacity of the debt data poses a problem for the government’s response. Even in california extends an eviction ban, considering additional stimulus aid and press for additional unemployment assistance, it is not known whether this relief will be sufficient to prevent a debt crisis or simply postpone it.
“Once the dust settles, it will be a story of inequality,” said Matthew Harding, professor of economics and statistics at UC Irvine.
A counter-intuitive trend
Economic city centers usually trigger high levels of debt distress.
“Debt is what fills the void,” said Taylor nelms, senior research director at the Filene Research Institute, a national think tank working with hundreds of credit unions.
After the 2008 financial crisis, credit card debt skyrocketed. The same goes for the part of American borrowers who are in arrears on their debts, which can hurt credit scores. At the end of 2009, around 12% of US household debt was in arrears, the highest rate ever.
A rate below the average of 3.4% of Americans’ personal debt was in arrears at the end of September. California, one of the states hardest hit by delinquency in the Great Recession, now has the lowest rates in the country, according to an interview with researchers at the Federal Reserve Bank of New York.
In another surprising twist, U.S. credit card debt – which, unlike mortgages, economists often consider an unhealthy form of debt because it doesn’t create wealth – fell $ 76 billion in the spring, falling the stronger since the country’s banking system began analyzing debt. records in 1999.
It’s a sign, experts say, that Americans are spending less due to travel restrictions, business closures and lost income. But this is also due to the active debt repayments of those who have benefited from additional financial cushioning through increased unemployment benefits and stimulus checks of $ 1,800. About half of Californians who received the latest round of stimulus checks say they mainly used them to pay off outstanding debt, according to January Census Bureau surveys.
How could a disease nicknamed the ‘inequality virus“Not generate alarming signs of household debt?
State of suspension
Maybe it’s just pending. Federal injections of funds helped many people through the year. California lawmakers have banned evictions until the end of June and Newsom has banned water and power cuts during the pandemic. While ensuring access to basic needs during the crisis, these moratoria darken the true level of Californians’ debt problems.
“If the protections were extended permanently, the data would align with reality,” Nelms said.
Lawmakers have taken steps to reduce past due debts. The federal government, with some private lenders, offered people the option to defer payments on their student loans and mortgages, a process called forbearance. But these relief efforts have also created mixed signals about the state of delinquency in California.
A working paper written by researchers at Stanford and USC, among others, found that Americans were forborne on roughly $ 2 trillion in loans between March and October, including $ 1.1 trillion. came from delayed mortgage payments. Study co-author and USC assistant professor Erica Xuewei Jiang believes this sets a record.
Abstentions largely explain the difference between the 2008 crisis and the pandemic, said Giacomo De Giorgi, director of the Institute of Economics and Econometrics at the University of Geneva in Switzerland, including why the foreclosures – when a lender repossesses a house after the owner has failed to pay the mortgage – have all but ceased.
“We’ve never seen this before,” De Giorgi said. “It is very difficult to know if this is an optimistic image.
A story of inequality
Another reason debt levels look deceptively healthy is growing inequality.
“When we worry about averages, we miss a lot of things,” said Harding of UC Irvine.
The rich are distorting the Fed’s debt measures. For example, people with a credit score above 760, who tend to make more money, are responsible for 85% of the nation’s new mortgage debt boom, taking out $ 329 billion more in home loans since March. . The mortgage balances of borrowers with scores below 620 have declined.
Harding is also concerned that the data, which he says cannot be disaggregated by race, may hide alarming trends among specific demographics.
Ernesto Martinez said he was witnessing “possibly the biggest wealth stripping event of our lives” among the families he serves as director of asset building programs at the Mission Economic Development Agency.
Before the pandemic, the nonprofit helped about 8,000 families, mostly immigrants, who earned an average of $ 30,000 a year in the Bay Area to build wealth through job training, a financial coaching, income tax services and affordable housing.
Now, his team is scrambling to help clients retain “what little wealth” they may have developed.
Desperate debt is not counted
Federal Reserve data also fails to measure some of the more distressing forms of debt, often affecting those who have endured long months without assistance because they are undocumented or their unemployment benefits have been frozen or delayed.
It only counts debtors with social security numbers, excluding undocumented immigrants. That doesn’t include the increase in utilities and rental debt, which “has the potential to be pretty catastrophic,” said Marisabel Torres, California policy director for the Center for Responsible Lending, a non-profit organization. profit that fights predatory loans.
It doesn’t capture the 14% of Californians who told the Census office in January that they borrowed money from family or friends over the past week. This ignores people who turn to high interest financial services, like payday loans or title loans, because they have limited or poor credit histories.
a Google search analysis by the Federal Reserve Bank of Kansas City found evidence that demand for securities and payday loans has plummeted. However, experts fear that these often predatory types of services will skyrocket when financial protections expire. The use of payday loans doubled in the years following the Great Recession, hitting people with limited or poor credit the hardest.
Until recently, Erica Wood of San Diego had dealt primarily in cash, leaving the 44-year-old pharmacology researcher-turned-small-business owner with little credit history.
The pandemic has wiped out Wood’s booming mobile drilling business. Being behind on May’s rent, she became desperate. Through an online lending agency, she took out a title loan of $ 4,000 at an annual interest rate of 400.87%, with her 2015 Lincoln MKZ as collateral. When the end of the pandemic still seemed near, Wood figured she would pay off the loan immediately.
But the pandemic continued, and interest grew faster than she could pay it back. Wood cashed in his 401K, refinanced the loan, sold stocks and a precious classic truck.
She might have paid off the loan sooner, if it weren’t for the chaotic crackdown on fraud by the California Department of Employment Development, which led to Bank of America to freeze its benefits card in September. After countless hours on the phone with representatives, Wood still hasn’t seen a dime of his pandemic unemployment assistance of $ 598 every two weeks.
Two months behind on the loan repayment of the title, she still owes about $ 4,300.
Although Wood’s financial crisis doesn’t show up in the national debt statistics, her boyfriend’s relative success may soon be. An electrician, his annual income rose from about $ 55,000 to over $ 80,000 as the business boomed and he worked weekends.
“He wants to buy a house now because the mortgage rates are so high,” Wood said. “But I’m panicking.”