Background Paper Bread for the World Institute

April-May 2008, No. 196

Getting Out Of Poverty For Good

by Michele Learner and Todd Post

T
he U.S. subprime mortgage crisis has been receiving
extensive media coverage lately. But many news reports
miss a big part of the story: Our country’s poorest areas
are the epicenter of the crisis and hardworking low-income
borrowers are facing an ever more uncertain future.
More than three million homes are expected to go
through foreclosure in 2007 and 2008. When families lose
their homes to foreclosure, many will simply be forced out
on the street. Most have already cut back on their living
costs and exhausted their savings in an effort to prevent
foreclosure. With their credit rating ruined, they may not
qualify for rental housing. The result will be deeper poverty
and hunger, especially in communities where poverty is
already widespread. 
Today more than 12 percent of the U.S. population live
below the poverty line, which was $17,170 for a family of
three in 2007. Researchers have found that families need
about twice the poverty level to meet the actual costs of
housing, food, and other necessities. More than 90 million
Americans work at low-wage jobs and live on the edge of
poverty.
It is low-income and minority borrowers that became
the target of subprime mortgage lenders. In high-poverty
counties, those with a poverty rate of 20 percent or more,
subprime mortgages make up an abnormally high share of
all home mortgages. According to the Center for Responsible
Rick Reinhard
Lending, among African American families, 52.4 percent
of all mortgage loans are subprime loans, and for Latino
families the level is about 41 percent, compared to 22 percent With stagnant wages and a rising cost of living, buying a home is a
among Caucasian families. way families can provide for their futures.

Needed: Financial Assets A close-knit family and good health are just two among
many other valuable assets. But there is no question that
Families cannot achieve financial security simply by financial assets are important. Such assets are resources that
going to work at low-wage jobs. In fact, many people who help people support themselves in good times and bad.
work full time are living in poverty. Poor families, like other It takes time to build financial security, especially for those
families, need to build up financial assets—a bank account starting with few resources. And many low-income people
with emergency funds, a place to live, savings for the future. who benefit from food stamps, cash assistance, subsidized
Financial assets are not the only kind of assets people need. child care, and other federal services are children, seniors,
and people with disabilities. They will continue to need help. Nationwide, 13 percent of all U.S. households, the vast
The opportunity to build up financial assets is a complement majority in low-income areas, do not have a checking or
to an essential safety-net program—a part of what’s needed savings account. Without a relationship with a bank, many
to make long-term, permanent reductions in poverty. doors are simply closed: free check-cashing, direct deposit,
interest-bearing savings accounts, lines of credit, loans.
Life Is Unpredictable In short, people in low-wage jobs are more vulnerable
when life takes a bad turn.
People who are living in poverty or near-poverty are forced
to plan more carefully than those with more resources. Bread
for the World Institute’s 2008 Hunger Report, Working Harder
Costly “Help”
for Working Families, includes the story of Renee, who spent Poor people are both underserved and exploited by the
several years living in poverty with her young daughter: country’s financial services system. They often have to turn
“We saved by buying food on clearance that had passed to unregulated companies that offer payday or Refund
the expiration date. I cooked from scratch and never ate Anticipation Loans (RAL). These companies make loans
out; it took a lot of time but it sure saved a lot of money…. I that promise to “get you through to your next paycheck”
shopped carefully, using coupons, looking for the specials in and “help you get your tax refund faster.” When people
the newspaper. I made lists before going to the supermarket. are vulnerable or desperate, they are more susceptible to
If it was not on the list, I didn’t buy it. I taught my daughter exploitation and deception.
to do math by shopping for groceries. If it was in the basket, In his book Shortchanged: Life and Debt in the Fringe Economy,
she could add up exactly how much the bill would be before Howard Karger points out that to most Americans, payday
lenders and check-cashing outlets are invisible, “but they are
part of the landscape that makes up poor neighborhoods.”
In fact, the United States now has more payday lenders and
check-cashing outlets than all McDonald’s, Burger Kings,
Targets, Sears, and Wal-Marts combined.
Payday lenders are right in the neighborhood, and they
offer cash without credit checks, which take time and might
disqualify some borrowers from traditional loans. But the
convenience comes with a high price tag. If you take out a
payday loan for $300, you receive $250 in cash and pay a $50
finance fee. You must pay back the $300 within two weeks.
If you cannot, you renew the loan and pay more stiff fees.
Studies of the payday lending industry find that borrowers
Gracey Stinson

are charged the equivalent of 450-600 percent annual interest

rates. The Center for Responsible Lending estimates that
payday lenders cost American families $4.2 billion every
While careful budgeting can help, often the numbers just don’t add up
for low-wage workers.
year in predatory fees. These funds could instead be used
to improve families’ quality of life and accumulate savings
for the future.
we got to the checkout line.” A Refund Anticipation Loan (RAL) works along the same
Despite all efforts to plan ahead, though, life without a principles as a payday loan. It is offered by tax preparation
financial cushion means that even minor setbacks may have firms so clients can “get their money right away.” Studies
serious, sometimes long-lasting effects. Staying home with of RAL borrowers show that some do not realize that they
the flu may mean losing several days’ pay. If a child’s asthma are getting a loan, i.e., money that must be paid back even
flares, the family may not have grocery money for the week. if they do not receive their anticipated refund. Rather, they
If someone hits the family car in a parking lot, a parent may believe they’re getting an advance on their own money.
lose her job because she can’t get to work. Many RAL borrowers qualify for the Earned Income Tax
In such situations, many people can turn to paid sick Credit (EITC), which rewards work by giving low-income
leave, health insurance, savings accounts, and bank loans. workers cash refunds. In fact, the EITC functions as the
But low-wage jobs seldom provide sick leave or benefits such largest federal anti-poverty program; families who file for it
as health insurance or a matching retirement contribution. receive an average of $1,900 that they can potentially put
Low-income neighborhoods do not have many banks. aside in savings. But the EITC also brings in money for
tax preparation firms—more than $1 billion in profits each disadvantages of these loans because, with a weaker credit
year. The National Consumer Law Center describes RALs history, it is their only chance to become homeowners. The
as “usurious;” annualized interest rates run as high as 700 reduction in home equity is considerable:  Over the course
percent on a loan of $200. of a 30-year mortgage on a home loan of $107,500, for
Lending money to financially strapped people at excessive example, a 13 percent subprime loan will cost the borrower
interest rates exploits the vulnerability of people who are $184,977 more than the same loan at a 7 percent prime rate.
compelled by necessity. That’s why Christian social teaching
condemns this usury. Locking poor people into loans they
cannot repay diminishes human dignity and twists human
relationships.
Lending money to financially strapped
people at excessive interest rates exploits
the vulnerability of people who are
compelled by necessity.

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, the
risks seemed minimal. Even so, some borrowers clearly
have not used good judgment. Some did not understand
what could happen to their mortgage payments if interest
rates rose, and some lenders took advantage of their lack
of experience. Since 2004, 90 percent of the subprime
loans made have included adjustable interest rates. Many
subprime borrowers face an increase of 40 percent or more
in their monthly payments when their initial “teaser” rates
expire and are reset to higher adjustable interest rates.   
Bread for the World Institute’s recent report,
“Homeownership, Subprime Loans, and Poverty,” shows
that this type of lending is heavily concentrated in low-
income communities. Nationwide, counties whose poverty
rates are higher than their state’s average also have higher
rates of subprime mortgages. The most reliable predictor
Rick Reinhard

of high subprime lending is whether there’s a pocket of

poverty. (Read more about the report by visiting www.bread.
org/institute and clicking on Asset Building).
Payday loan stores are disproportionately located in African-American
neighborhoods and around military bases.
Responding to Debt and Foreclosure
Home Mortgages: Earning Less in Poor Communities
But Paying More Low-income families are paying a heavier price than
most as a result of the meltdown in U.S. credit markets. In
How did so many poor families become trapped in California, one of the hardest hit states, foreclosures are up
subprime mortgages and foreclosure? Since wages have by about 238 percent in 2007. In the poorest counties, 36
been flat in recent years, lower-income families have seen percent of all mortgages are subprime, compared with the
building home equity as one of the best options for financial statewide average of about 15 percent.
security. But they often cannot qualify for traditional prime- Homeownership is one of the ways that poor people can
rate mortgages. Enter the subprime mortgage lender, willing build an asset base for the future. But subprime lenders
to assume higher-risk loans if borrowers pay a significantly sold risky loans to vulnerable Americans, and 30 percent of
higher interest rate. In many cases, borrowers accept the subprime borrowers now owe more on their mortgages than
their homes are actually worth. Housing officials estimate that crisis. The Center on Budget and Policy Priorities found that
8,000 homes are being foreclosed every day. Astoundingly, states experiencing economic distress, including as a result
this leaves 43 percent of recent subprime loans ending of foreclosures, had a substantial increase in enrollment
in foreclosure, with an additional 40 million neighboring in the Food Stamp Program. The U.S. Department of
homeowners seeing their property values decline as a result. Agriculture’s preliminary data show that the number of
As federal and state governments respond to the subprime people participating in the Food Stamp Program in Nevada,
mortgage crisis and the larger credit crisis that has shaken which has been at the center of the subprime mortgage crisis,
the U.S. economy, they need to also focus on the practices jumped 15.6 percent last year. Nationwide, the number of
of lenders and financial services that target low-income households participating in the Food Stamp Program grew
families and communities. Families working to provide for 5.6 percent last year. Clearly, poor people are turning to the
their futures need strong consumer protections and access national nutrition programs to keep from going hungry.
to transparent, well-regulated financial services. These programs will be vital to helping families cope and
Families also need assistance getting through this current eventually get out of poverty for good.

“One Paycheck Away”:

Lack of Assets Reaches Far Beyond People Living Below the Poverty Level
While more than 12 percent of the U.S.
population lives below the poverty line, many more
are not officially “poor” but are nonetheless on the
edge of a financial emergency—the proverbial “one
paycheck away” from being unable to pay the rent
and buy food. They are asset poor, meaning that
a sudden halt in their income would have serious
consequences right away. People who have less
than about $5,000 in savings are considered asset

Eugene Mebane, Jr.

poor because if they lost their jobs or become ill,
they would not have enough savings to live on at
the poverty level for12 weeks. This is the reality for
more than one-fifth of all Americans—including 39
percent of all children in the country. Without savings to cover a few weeks of emergency expenses, families are
Vivian, who is profiled in Thomas Shapiro’s not financially secure.
book The Hidden Cost of Being African American, is a
welfare-to-work “success story.” In addition to raising three Looking at poverty through an asset lens magnifies
children as a single mother, Vivian works full-time at a the inequality which is already a significant problem in
clerical job for the county where she lives. She earns a little the United States. The lowest-earning 40 percent of U.S.
less than $20,000 per year, so her family is slightly above workers take home 10 percent of the nation’s income and
the poverty line. She describes her neighborhood as “not own just 1 percent of wealth-building assets. In addition,
where I really wanted to be.” She faces significant obstacles the degree of racial inequality is startling: A typical African
to her long-term ambition of buying a home: debt, weak American family earns 66 cents for every dollar earned by
credit, and a history of low-salary jobs. a Caucasian family, but African American families own
Vivian’s family is no longer in poverty, but the road just 7 cents for every dollar owned by Caucasian families.
to financial security will be long without job training, Modest financial security continues to elude many
affordable daycare, and at least a modest savings account. families who work full-time. Creating more jobs that pay
Shapiro notes that Vivian’s family illustrates how much higher wages is clearly essential. But better access to our
harder it is to get out of asset poverty for good than it is to country’s financial services system and other strategies to
earn an income above the poverty level. help lower-income workers build assets are just as critical.

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