Getting Out of Poverty

8/8/2019 Getting Out of Poverty

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The U.S. subprime mortgage crisis has been receivingextensive media coverage lately. But many news reportsmiss a big part of the story: Our countrys poorest areas

are the epicenter of the crisis and hardworking low-incomeborrowers are facing an ever more uncertain future.

More than three million homes are expected to gothrough foreclosure in 2007 and 2008. When families losetheir homes to foreclosure, many will simply be forced outon the street. Most have already cut back on their livingcosts and exhausted their savings in an effort to preventforeclosure. With their credit rating ruined, they may notqualify for rental housing. The result will be deeper povertyand hunger, especially in communities where poverty isalready widespread.

Today more than 12 percent of the U.S. population livebelow the poverty line, which was $17,170 for a family ofthree in 2007. Researchers have found that families need

about twice the poverty level to meet the actual costs ofhousing, food, and other necessities. More than 90 millionAmericans work at low-wage jobs and live on the edge ofpoverty.

It is low-income and minority borrowers that becamethe target of subprime mortgage lenders. In high-povertycounties, those with a poverty rate of 20 percent or more,subprime mortgages make up an abnormally high share ofall home mortgages. According to the Center for ResponsibleLending, among African American families, 52.4 percentof all mortgage loans are subprime loans, and for Latino

families the level is about 41 percent, compared to 22 percentamong Caucasian families.

Needed: Financial Assets

Families cannot achieve nancial security simply bygoing to work at low-wage jobs. In fact, many people whowork full time are living in poverty. Poor families, like otherfamilies, need to build up nancial assetsa bank accountwith emergency funds, a place to live, savings for the future.Financial assets are not the only kind of assets people need.

A close-knit family and good health are just two amonmany other valuable assets. But there is no question thanancial assets are important. Such assets are resources thahelp people support themselves in good times and bad.

It takes time to build nancial security, especially for thosstarting with few resources. And many low-income peoplewho benet from food stamps, cash assistance, subsidizedchild care, and other federal services are children, seniors

Getting Out Of Poverty For Good

Background Paper

by Michele Learner and Todd Post

Bread for the World Institute

April-May 2008, No. 196

With stagnant wages and a rising cost o living, buying a home is a

way amilies can provide or their utures.


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Nationwide, 13 percent of all U.S. households, the vasmajority in low-income areas, do not have a checking osavings account. Without a relationship with a bank, manydoors are simply closed: free check-cashing, direct depositinterest-bearing savings accounts, lines of credit, loans.

In short, people in low-wage jobs are more vulnerablewhen life takes a bad turn.

Costly HelpPoor people are both underserved and exploited by the

countrys nancial services system. They often have to turnto unregulated companies that offer payday or Refund Anticipation Loans (RAL). These companies make loanthat promise to get you through to your next paycheckand help you get your tax refund faster. When peopleare vulnerable or desperate, they are more susceptible toexploitation and deception.

In his book Shortchanged: Life and Debt in the Fringe Economy

Howard Karger points out that to most Americans, paydaylenders and check-cashing outlets are invisible, but they arepart of the landscape that makes up poor neighborhoods.In fact, the United States now has more payday lenders andcheck-cashing outlets than all McDonalds, Burger KingsTargets, Sears, and Wal-Marts combined.

Payday lenders are right in the neighborhood, and theyoffer cash without credit checks, which take time and mighdisqualify some borrowers from traditional loans. But theconvenience comes with a high price tag. If you take out apayday loan for $300, you receive $250 in cash and pay a $50

nance fee. You must pay back the $300 within two weeksIf you cannot, you renew the loan and pay more stiff feesStudies of the payday lending industry nd that borrowerare charged the equivalent of 450-600 percent annual interesrates. The Center for Responsible Lending estimates thapayday lenders cost American families $4.2 billion everyyear in predatory fees. These funds could instead be usedto improve families quality of life and accumulate savingsfor the future.

A Refund Anticipation Loan (RAL) works along the sameprinciples as a payday loan. It is offered by tax preparation

rms so clients can get their money right away. Studiesof RAL borrowers show that some do not realize that theyare getting a loan, i.e., money that must be paid back evenif they do not receive their anticipated refund. Rather, theybelieve theyre getting an advance on their own money.

Many RAL borrowers qualify for the Earned Income TaxCredit (EITC), which rewards work by giving low-income workers cash refunds. In fact, the EITC functions as thlargest federal anti-poverty program; families who le for ireceive an average of $1,900 that they can potentially putaside in savings. But the EITC also brings in money for

and people with disabilities. They will continue to need help.The opportunity to build up nancial assets is a complementto an essential safety-net programa part of whats neededto make long-term, permanent reductions in poverty.

Life Is Unpredictable

People who are living in poverty or near-poverty are forced

to plan more carefully than those with more resources. Breadfor the World Institutes 2008 Hunger Report, Working Harderfor Working Families, includes the story of Renee, who spentseveral years living in poverty with her young daughter:

We saved by buying food on clearance that had passedthe expiration date. I cooked from scratch and never ateout; it took a lot of time but it sure saved a lot of money. Ishopped carefully, using coupons, looking for the specials inthe newspaper. I made lists before going to the supermarket.If it was not on the list, I didnt buy it. I taught my daughterto do math by shopping for groceries. If it was in the basket,

she could add up exactly how much the bill would be before

we got to the checkout line.Despite all efforts to plan ahead, though, life without a

nancial cushion means that even minor setbacks may haveserious, sometimes long-lasting effects. Staying home withthe u may mean losing several days pay. If a childs asthmaares, the family may not have grocery money for the week.If someone hits the family car in a parking lot, a parent maylose her job because she cant get to work.

In such situations, many people can turn to paid sickleave, health insurance, savings accounts, and bank loans.But low-wage jobs seldom provide sick leave or benets suchas health insurance or a matching retirement contribution.Low-income neighborhoods do not have many banks.

GraceyStinson

While careul budgeting can help, oten the numbers just dont add up

or low-wage workers.


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tax preparation rmsmore than $1 billion in prots eachyear. The National Consumer Law Center describes RALsas usurious; annualized interest rates run as high as 700percent on a loan of $200.

Lending money to nancially strapped people at excessiveinterest rates exploits the vulnerability of people who arecompelled by necessity. Thats why Christian social teachingcondemns this usury. Locking poor people into loans they

cannot repay diminishes human dignity and twists humanrelationships.

Home Mortgages: Earning LessBut Paying More

How did so many poor families become trapped insubprime mortgages and foreclosure? Since wages havebeen at in recent years, lower-income families have seenbuilding home equity as one of the best options for nancialsecurity. But they often cannot qualify for traditional prime-rate mortgages. Enter the subprime mortgage lender, willingto assume higher-risk loans if borrowers pay a signicantlyhigher interest rate. In many cases, borrowers accept the

Payday loan stores are disproportionately located in Arican-American

neighborhoods and around military bases.

RickReinhard

disadvantages of these loans because, with a weaker credihistory, it is their only chance to become homeowners. Thereduction in home equity is considerable: Over the courseof a 30-year mortgage on a home loan of $107,500, forexample, a 13 percent subprime loan will cost the borrower$184,977 more than the same loan at a 7 percent prime rate

It takes a long time to earn that much at a low-wage job .Taking out a subprime loan means taking a chance. But

when housing prices were headed steadily upward, th

risks seemed minimal. Even so, some borrowers clearlyhave not used good judgment. Some did not understandwhat could happen to their mortgage payments if interesrates rose, and some lenders took advantage of their lackof experience. Since 2004, 90 percent of the subprimeloans made have included adjustable interest rates. Manysubprime borrowers face an increase of 40 percent or morein their monthly payments when their initial teaser ratesexpire and are reset to higher adjustable interest rates.

Bread for the World Institutes recent reportHomeownership, Subprime Loans, and Poverty, shows

that this type of lending is heavily concentrated in lowincome communities. Nationwide, counties whose povertyrates are higher than their states average also have higherrates of subprime mortgages. The most reliable predictorof high subprime lending is whether theres a pocket ofpoverty. (Read more about the report by visiting www.breadorg/institute and clicking on Asset Building).

Responding to Debt and Foreclosure

in Poor CommunitiesLow-income families are paying a heavier price than

most as a result of the meltdown in U.S. credit markets. InCalifornia, one of the hardest hit states, foreclosures are upby about 238 percent in 2007. In the poorest counties, 36percent of all mortgages are subprime, compared with thestatewide average of about 15 percent.

Homeownership is one of the ways that poor people canbuild an asset base for the future. But subprime lenderssold risky loans to vulnerable Americans, and 30 percent ofsubprime borrowers now owe more on their mortgages than

Lending money to fnancially strapped

people at excessive interest rates exploits

the vulnerability o people who are

compelled by necessity.


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This paper may be reprinted at no charge or ordered at a rate of $1.00 each. Contact Bread for the World for bulk rates.Bread for the World Institute / 50 F Street NW, Suite 500 / Washington, DC 20001 / Phone: 1-800-82-BREAD / Fax: (202) 639-9401 / www.bread.org

their homes are actually worth. Housing ofcials estimate that8,000 homes are being foreclosed every day. Astoundingly,this leaves 43 percent of recent subprime loans endingin foreclosure, with an additional 40 million neighboringhomeowners seeing their property values decline as a result.

As federal and state governments respond to the subprimemortgage crisis and the larger credit crisis that has shakenthe U.S. economy, they need to also focus on the practices

of lenders and nancial services that target low-incomefamilies and communities. Families working to provide fortheir futures need strong consumer protections and accessto transparent, well-regulated nancial services.

Families also need assistance getting through this current

While more than 12 percent of the U.S.population lives below the poverty line, many moreare not ofcially poor but are nonetheless on theedge of a nancial emergencythe proverbial onepaycheck away from being unable to pay the rentand buy food. They are asset poor, meaning thata sudden halt in their income would have seriousconsequences right away. People who have lessthan about $5,000 in savings are considered assetpoor because if they lost their jobs or become ill,

they would not have enough savings to live on atthe poverty level for12 weeks. This is the reality formore than one-fth of all Americansincluding 39percent of all children in the country.

Vivian, who is proled in Thomas Shapirosbook The Hidden Cost of Being African American, is awelfare-to-work success story. In addition to raising threechildren as a single mother, Vivian works full-time at aclerical job for the county where she lives. She earns a littleless than $20,000 per year, so her family is slightly abovethe poverty line. She describes her neighborhood as not

where I really wanted to be. She faces signicant obstaclesto her long-term ambition of buying a home: debt, weakcredit, and a history of low-salary jobs.

Vivians family is no longer in poverty, but the roadto nancial security will be long without job training,affordable daycare, and at least a modest savings account.Shapiro notes that Vivians family illustrates how muchharder it is to get out of asset poverty for good than it is toearn an income above the poverty level.

crisis. The Center on Budget and Policy Priorities found thastates experiencing economic distress, including as a resulof foreclosures, had a substantial increase in enrollmentin the Food Stamp Program. The U.S. Department o Agricultures preliminary data show that the number opeople participating in the Food Stamp Program in Nevadawhich has been at the center of the subprime mortgage crisis jumped 15.6 percent last year. Nationwide, the number o

households participating in the Food Stamp Program grew5.6 percent last year. Clearly, poor people are turning to thenational nutrition programs to keep from going hungryThese programs will be vital to helping families cope andeventually get out of poverty for good.

One Paycheck Away:Lack of Assets Reaches Far Beyond People Living Below the Poverty Level

Looking at poverty through an asset lens magniesthe inequality which is already a signicant problem inthe United States. The lowest-earning 40 percent of U.S.workers take home 10 percent of the nations income andown just 1 percent of wealth-building assets. In addition,

the degree of racial inequality is startling: A typical AfricanAmerican family earns 66 cents for every dollar earned bya Caucasian family, but African American families ownjust 7 cents for every dollar owned by Caucasian families.

Modest nancial security continues to elude manyfamilies who work full-time. Creating more jobs that payhigher wages is clearly essential. But better access to ourcountrys nancial services system and other strategies tohelp lower-income workers build assets are just as critical.

Without savings to cover a ew weeks o emergency expenses, amilies are

not fnancially secure.

EugeneMe

bane,

Jr.

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Getting Out of Poverty