(CALMATTERS) – 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 their fellow Americans in paying down interest-heavy debt such as credit card bills while acquiring wealth-building loans by taking out mortgages. In California, new mortgages jumped 10% even as real estate prices soared, suggesting an unexpected resistance to a prolonged pandemic.

Economists and financial researchers across the country aren’t seeing tell-tale signs of financial hardship in the Federal Reserve Bank of New York’s reports of American consumer debt, like the devastating spikes in defaulted debt, bankruptcies and foreclosures suffered during the Great Recession. In fact, they’re seeing near-record lows.

But looks can be deceiving.

The large gains of well-off Californians appear to be cloaking the experiences of suffering segments in debt records that aren’t easily broken down by race, income or geography. Plus, millions of Californians suffering job losses have accumulated crippling levels of debt that go uncounted in many national measures: unpaid rent, utility bills, borrowed money from loved ones and, in some cases, predatory loans.

The murkiness of debt data poses a problem for the government’s response. Even as California extends an eviction ban, considers additional stimulus aid and presses for additional unemployment support, it’s unclear whether that relief will be enough to prevent a debt crisis, or simply postpone it.

“Once the dust settles, this is going to be a story of inequality,” said Matthew Harding, professor of Economics and Statistics at UC Irvine.

A counterintuitive trend
Economic downtowns usually trigger high levels of debt distress.

“Debt is what fills the gap,” said Taylor Nelms, senior director of research at Filene Research Institute, a nationwide think tank working with hundreds of credit unions.

After the 2008 financial crisis, credit card debt spiked. So did the share of U.S. borrowers late on debt payments, which can ravage credit scores. By the end of 2009, roughly 12% of American household debt was delinquent, the highest rate ever recorded.

Yet that’s not happening now, despite the U.S. losing more jobs in 2020 than were lost in the entire Great Recession.

A below-average 3.4% of Americans’ personal debt was delinquent as of late September. California, one of the states hit hardest by Great Recession delinquencies, now has among the lowest rates nationwide, 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 build wealth — dropped by $76 billion in the spring, the steepest decline since the country’s bank system began analyzing debt records in 1999.

That’s a sign, experts say, that Americans are spending less due to travel restrictions, business closures and lost income. But it’s also due to active debt repayments from those who enjoyed extra financial padding from boosted unemployment benefits and $1,800 stimulus checks. About half of Californians who received the latest round of stimulus checks report that they mostly used them to pay off outstanding debt, according to January Census Bureau surveys.

How could a disease dubbed the “inequality virus” not generate alarming signs of household debt?

State of suspension
It may just be on hold. Federal cash infusions have helped many pull through the year. California lawmakers barred evictions through the end of June and Newsom banned water and electricity shutoffs during the pandemic. While ensuring access to basic needs during the crisis, those moratoria cloud the true level of Californians’ debt troubles.

“If the protections were extended permanently, then the data would align with reality,” said Nelms.

An estimated 1.6 million California households are late on water payments. Estimates for the number late on rent range from 90,000 to 700,000. At some point, those bills will come due.

BY LAURENCE DU SAULT AND JACKIE BOTTS | CALmatters