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Poor Souls’ Invisible Mortgages

5 min read

With all the time that affordable housing property managers spend scrutinizing resident households’ income, owners and managers who want to avoid the quicksand of eviction should invest similar insight into understanding households’ expenses. Rising recurring financial costs erode effective rent-paying ability just as rapidly as employment setbacks do. When the household’s structural costs rise and budgets are stretched thinner, people cope as best they can, playing whack-a-mole with bills that pop up unceasingly, including two ‘hidden mortgages’ within consumer debt: credit cards and buy-now-pay-later (BNPL). 

Personal consumer debt is at epidemic levels and rising:

  • Corrosive credit card debt is rising: 49 percent of cardholders carry debt from month to month, up from 46 percent a year ago.
  • Credit card debt is chronic: 56 million cardholders (roughly 40 percent of all households) have been in debt for at least a year.
  • Over the last 12 months, interest rates on credit card debts have risen 525 basis points, and are now 20.4 percent, the highest rates on record.
  • In the just-concluded holiday season, installment purchases rose 14 percent over last year’s volume. Over the holiday quarter alone, $16.6 billion was spent on BNPL.

At a national scale, total credit card balances in America exceed $1.08 trillion. In people’s terms, this means an average of $8,100 per American household or a little over $3,000 per person. If that debt carried a typical credit card interest rate of 18 percent, and assuming a typical minimum monthly payment of the interest plus a one percent principal paydown, the cost would be $75 a month for 222 months – 18½ years.  

Middle- and lower-income households also face continuous pressure to take on indenture-like structural expenditures:

  • Vendor financing for goods and services;
  • Extended family obligations;
  • Student loan debt;
  • Remittances sent abroad to home countries or relatives’ home countries: for instance, Americans remit out $200 billion a year, of which 26 percent goes to Mexico;
  • Payday-lending debt, whose effective interest rates make credit cards look like charities;
  • Moneylender debt, often called ‘consumer finance;’
  • Hard-to-opt-out-of cable or streaming service packages; and 
  • Small-scale addictive gambling, such as playing the daily lottery. 

All these systems make obligating yourself easy (download the free lottery app and ‘play’ on your phone!) and canceling obligations hard. And a subscription you can’t cancel is economically a loan you never repay.

The result is an explosion of invisible poor souls’ mortgages. That $1.08 trillion is the only one we can track – and in my experience, whenever a financial phenomenon cannot be tracked, it is grossly underestimated. No one knows how much BNPL is outstanding because there is no central repository of BNPL market information. Yet in only two years, from 2019 to 2021, it grew eleven-fold, from $2 billion to at least $24 billion. Today, Wells Fargo estimates that BNPL’s growth may account for fully one-third of the increase in total consumer debt.

Being in chronic debt is corrosive. Debt is bad for people’s health – and unsecured debt is worse. Debt depresses people and their children. Depression is self-reinforcing, and hopelessness contributes to the perpetuation of structural poverty. 

Like the invisible chains that Jacob Marley wore in death after unknowingly forging in life, poor souls’ mortgages are financial and psychic burdens that remain hidden – especially those of households living in affordable housing. They hide their debts because they feel guilty about not being able to escape them. They hide debt because they need the next round of credit to pay for the last round. They hide because they’re afraid that owning up will result in their eviction. Most of all, they hide because they want to get through income scrutinization as safely and anonymously as possible.

The hopeless are distrustful, and before they can regain hope they must regain trust. Trust, in turn, is not forged across the income-verification desk, because that encounter silently shouts distrust: ‘Bring all your documentation for me to pore over and poke through, doubting everything you said and probing for anything you didn’t.’ 

The trust relationship must not be examination but education, not management but resident services, not mandates but choices, such as from:

  • Financial numeracy, especially concerning credit card debt, minimum balances and the value of being a zero-balance payer.
  • Financial literacy to understand the costs of missing payments, late fees, higher Annual Percentage Rates (APRs) for carryover balances and the seductive trap of BNPL debt. “You can bury yourself in low monthly payments,” as Tim Quinlan of Wells Fargo put it.
  • Debt counseling on an entirely confidential basis.
  • Counselors who are native speakers of Spanish, Portuguese, Haitian Kreyol and more. Finance is hard enough in English; asking an English-language learner to understand it is cruel and unfortunately usual punishment.
  • Implementing a Family Self-Sufficiency Plan, preferably in partnership with a capable high-impact provider.

With inflation running higher than anyone wishes to admit, and more people working two jobs than ever before, poor souls’ mortgages are rising. That’s not just their problem, it’s America’s problem. For affordable housing stakeholders, embedding trust-focused residents’ financial services into properties and management practices may be good not just for the struggling residents, but for prudent owners.

David A. Smith is founder and CEO of the Affordable Housing Institute, a Boston-based global nonprofit consultancy that works around the world (60 countries so far) accelerating affordable housing impact via program design, entity development and financial product innovations. Write him at dsmith@affordablehousinginstitute.org.