Sramana Mitra: If I understand correctly, what’s happening right now is that the mortgage companies are giving some relief to the property owners and the property owners are giving some relief to the renters.
Then you have all the other factors like credit card payments and deferred payments that are getting saturated in this market. Globally, it’s a pretty dire situation. How long can this go on?
Karthik Manimozhi: It’s a valid question. It goes down to how the systems are set up and how the institutions are set up. Even prior to COVID, 78% of Americans and 53% of Canadians were living paycheck to paycheck. An unexpected $300 to $400 spend would have thrown them into a financial spin.
It’s a very valid question. It’s one that we should all think about. Last year alone, the US collected over $500 billion and Canada collected over $53 billion in rent and utilities. There are an estimated 50 million renters – 43 million in the US and four million in Canada. That indicates that about one in three households are renting.
You’re right about some of the relief that came in. It’s a cash flow issue for the landlord. Rent feeds the mortgage. The relief was mainly a wave two phenomenon. Today, $21.5 billion is the past due rent outstanding. The conversation has shifted to how do we secure that.
Some of the States have passed anti-eviction laws. Even in places like California, landlords are allowed to proceed with eviction procedures, but there is a moratorium on evictions till January. This is scary.
An estimated five million renters in the US have said that they are having difficulty in affording the November rent. That’s over 10% of the renters. That is something that we need to keep in mind. The second issue is that 63% of renters have taken drastic steps in the last two months. For example, they’ve dipped into their savings or sold off their assets. This is very fickle.
Let’s talk about the second part of the issue which I think is going to put the population under a tremendous strain. It is a fact that most of the lending and the borrowing opportunities are based on credit scores. Credit-score-based lending could take different forms. Your prime lending could go up to 39.99%. Subprime up to 99.99%.
It exposes a lot of these families. A lot of these families are having to make tough decisions between feeding the kids, fixing their car, or keeping a roof over their heads. This is a very dramatic situation we are in. There is a record percentage of people who are either underbanked or outside the banking system.
That, I believe, is where we are. This is where the institutions have to consider bringing in new solutions and maybe start questioning standard practices. How reliable is credit score in determining credit-worthiness. It is feared that one in five credit scores have a default. We already know that credit scores can discriminate against young immigrants and people who have had bad incidents in their life.