Dealing with debt: Sonoma County borrowers climb out from under mountain of debt

In the spring, the arrival of the coronavirus pandemic thrust the Sonoma County economy into its worst freefall since the Great Depression.

In two dizzying months, 39,000 people — 1 in 6 workers in Sonoma County — lost their jobs as public health officials ordered businesses to shut down and residents to stay home. More people were thrown out of work in March and April than in two full years during the county’s last major recession, the 2008 financial crisis.

The shocks have been devastating to individuals who lost their income or their business, forcing them to turn to a mixture of government aid, savings and borrowed money to make ends meet. As the pandemic enters its eighth month, it is increasingly revealing the economic disparities that existed long before the virus was detected in the county and began taking a disproportionate toll on Latinos and low-wage workers unable to do their jobs from home.

But amid the heartbreaking financial losses are reasons to be optimistic about the strength of the Sonoma County economy and its eventual recovery.

Going into the pandemic, Sonoma County residents had reduced the debt they owed on their homes, credit cards, cars and other loans to the lowest level in nearly two decades, The Press Democrat found during an analysis of 20 databases and interviews with 30 economists, banking executives, financial experts and ordinary citizens confronting the most tumultuous economic year in nearly a century.

The debt reduction represents years of tragedy, hard work, sacrifice, self-discipline and good luck. It can be a firm foundation for the Sonoma County economy as it emerges from the pandemic and tries to recapture the prosperity that was setting 21st century records when COVID-19 hit, experts said.

“I appreciate that small businesses are suffering. But the big thing to remember is that demand will come back. Don’t listen to the miserablists. Don’t give up hope,” said economist Christopher Thornberg, who delivered the fall forecast for the county Economic Development Board last month. “This isn’t the Great Recession. The pandemic hit a fundamentally sound economy, and that means a quick recovery once the virus is brought under control.”

The Federal Reserve Bank of Atlanta reported this month the U.S. economy may have had a 35.3% growth rate in the third quarter, Thornberg noted, though other Fed studies are somewhat less bullish. Thornberg expects the improvement in the U.S. economy to continue unless there’s a serious pandemic setback.

“There’s a huge amount of new wealth out there,” said Thornberg, founding partner of Beacon Economics in Los Angeles. “Yes, we had the worst quarter in our history in the second quarter. And we’re going to have the best quarter for growth in the third quarter.”

A different view

But the view can be starkly different at the personal level, where the pandemic is brutally dividing Sonoma County further into those who have resources, savings and manageable debt and those who don’t.

The optimistic forecast for the post-pandemic recovery is an elusive mirage for many: People in the hardest-hit industries, like hospitality, where economists say some businesses and jobs will never come back. People who don’t have savings and investments to help them ride out the storm. People burdened with too much debt. People who have never learned how to manage money in good times much less through crises. People who don’t have substantial equity in a home, now soaring in value.

“They can’t pay their rent or mortgage. They have several thousand dollars in credit card debt they’ve used to pay for utilities and food. For many, paying 50% or more on rent, it doesn’t leave much money for anything else. How do they survive?” asked Kathy Kane, assistant director of Community Action Partnership of Sonoma County, a nonprofit that gives assistance to about 11,000 mostly low-income people annually.

No one knows how many people in Sonoma County have been thrown into desperation by the pandemic. The first to feel the financial impacts were the 39,000 people who lost their jobs last spring, though half have returned to work in some capacity. Close behind were those who have struggled to survive even in good economies. More than 1 in 10 of the county’s almost 400,000 adults have no high school diploma, with few options beyond low-wage jobs, and 38,000 live in poverty. By some estimates, 31,000 of the county’s adults are undocumented immigrants, ineligible for government aid. A similar number of households are thought to spend more than 35% of their income on rent, leaving little margin for financial emergencies. Many of these vulnerable groups living on the fringes of the economy overlap, analysts caution. And there are untold numbers of people who appear to be prosperous but have no savings and are drowning in debt.

Also unknown are how many people who entered the pandemic in good financial shape will now be forced by COVID-19 into a ruinous financial path just to survive. How many will have to turn to credit cards or personal loans, smashing years of budgeting and prudent financial planning and dreams? How many will tap into or cash out their 401(k)s, endangering their secure retirement?

“I’m seeing there’s a tremendous amount of resilience right now, but how long is it going to last?” asks Cynthia Riggs, a Sebastopol business consultant.

That resilience, built over hard times, is the cornerstone for an economic rebound. But even a vigorous recovery won’t fully repair the damage overnight, some economists caution.

“Both California and Sonoma County have experienced unprecedented losses of jobs across all industries; while jobs are slowly returning, this recession’s depth and breadth likely makes recovery a matter of years and not months,” said Sonoma State University economist Robert Eyler in a September report for the county’s Economic Development Board.

More savings, less debt

To overdose on debt now would be particularly tragic.

Thirteen years ago, mortgage mania and skyrocketing debt thrust the county and the nation into a punishing recession, 2007-2009, one that took seven years for Sonoma County to overcome. But at the beginning of the current coronavirus downturn, residents had their bills down to much more manageable levels, according to a Press Democrat analysis.

At the time of the 2007-2009 downturn, household debt in Sonoma County was more than four times household income, according to a Federal Reserve report that compares the balance of all debt owed by consumers in Sonoma County with annual income earned by all workers in Sonoma County.

But by 2019, the county’s residents had cut their debt in half, reducing it to just slightly more than twice household income. It was still almost double the debt levels in much of middle America and 30% higher than California as a whole, but it was much healthier than in 2007-2009.

More savings and less debt — a critical barometer of economic health — mean Sonoma County households today may be able to endure longer periods of lost income, according to economic studies and Sonoma County financial counselors. They could face fewer home foreclosures, evictions, auto repossessions and student loan defaults. They’re less likely to have to borrow at onerous interest rates. They can be better positioned to participate in the eventual recovery when it arrives.

That’s certainly how Adriana Wilson sees it.

Six years ago Wilson — wife, mother of three little boys and a hairstylist and makeup artist at Powder Room Salon in Santa Rosa — found that she did not have the money she needed to contribute to her family expenses during her industry’s slow winter months.

“I had no money set aside to help me in a crisis. I had no emergency fund,” Wilson said.

At that time she heard about Financial Peace University at her church, Hope Chapel Santa Rosa. Its message, about the need to have a household budget and an emergency fund, made so much sense to her. She started saving.

“I started with any extra money I had, even if it was just $5, I tried to deposit it in my savings,” she said.

By 2018 she had saved about $15,000. And then at age 37 she was diagnosed with thyroid cancer. An independent contractor, she had no unemployment pay during her surgery and five-month recovery. But she had about a month’s help from family and friends, and she had savings.

“With my savings, we paid for all of my medical bills and had some money left over to do things like take the kids out for ice cream,” she said.

Then she immediately started saving again.

Today Wilson is cancer free, and now comes the COVID-19 crisis, with hair salons closed for an extended period. Her family budget required dipping into savings once again. Gratefully, she went back to work last month.

Wilson said she is thankful she has resisted debt, although she hopes one day to have a mortgage and own a home.

“The only debt I’ve had for the last six years is a car payment, and I paid it off this month, so I am currently 100% debt free,” said Wilson. Her rule is, “If I can’t pay for it, I don’t get it.”

Some encouraging signs

Right now, an encouraging number of Sonoma County residents like Wilson seem to be holding their own, proving once again their resilience in the face of unrelenting crises.

“Unfortunately, we have a lot of experience dealing with disasters,” said Ron Felder, chief financial officer of Redwood Credit Union in Santa Rosa.

Many people appear to be taking prudent steps, such as putting aside savings, taking advantage of the loan payment deferrals widely offered by local lenders, refinancing loans with today’s historically low interest rates, holding back on credit card charges or even paying down credit card debt and seeking advice from financial experts.

They’re bolstered by Sonoma County’s robust pre-COVID economy, which between 2010 and 2019 saw a 47% surge in gross county product, a 56% rise in taxable sales, a 43% increase in median household income and a 24% jump in jobs.

The expansion created 41,500 jobs in Sonoma County, pulling the local economy out of its 2007-2009 slump and improving the personal finances of many of its residents. Unemployment declined, from a peak of 10.8% in 2010 to 2.7% in 2019, the lowest level this century, while incomes rose, sending the median household income from $58,703 in 2010 to an estimated $83,700 in 2019. Mortgage burdens fell dramatically, helping both owners and renters.

“All of my clients seem to be in a stronger situation than they were in 2008. People are more prepared emotionally and financially,” said David Lawrence, an investment adviser with Willow Creek Wealth Management in Sebastopol.

The county economy may also be benefiting during the pandemic from having slightly higher numbers of people age 65 and up, at 18% compared to the national 15% according to the U.S. Census, because much retirement income continues to flow during crises. And unparalleled government aid early in the pandemic has been a game changer.

“So far government programs have really taken some of the sting out of this,” said Michael Sullivan, chief credit officer at Exchange Bank. “But we’re kind of in the top of the second inning. We don’t know how the game is going to go. This is something that will deserve a new chapter every month or two.”

So much depends on more help from Congress, COVID-19 case control, a vaccine, household savings and, at the end of the day, jobs.

“People are going to have to get their jobs back and earn a wage. That’s the great unknown factor right now,” said David Williams, chief marketing and human resources officer for Community First Credit Union in Santa Rosa.

On that job front, conditions are improving. By September, Sonoma County residents had regained 20,300 of the 39,000 jobs they lost in March and April when the pandemic hit. But since February 7,900 people have left the Sonoma County workforce of about 250,000, a sign they may have become discouraged and stopped looking for work.

Playing defense

Residents who can are playing defense, cutting back on spending, paying off debt and bolstering their savings for an uncertain future.

For example, high-income consumers in Sonoma County reduced their spending by 10.7% between January and September, and low-income consumers cut their spending by 4%, economist Thornberg reported.

Many Sonoma County residents became savers when federal and state governments tried to offset the economic damage from the pandemic by distributing one-time stimulus checks of up to $1,200 per person, boosting state unemployment benefits by $600 a week, and creating forgivable Paycheck Protection Program loans to businesses. At the same time, many lenders began letting people defer payments for months on their mortgage and other loans.

“One of the interesting things we were seeing was that deposits were waaaaaa up,” Williams at Community First Credit Union said in an email. “Stimulus checks and the $600 per week augmented unemployment were, for many, being parked. They still are, but to a much lesser extent than during spring and early summer.”

Nationwide, banks experienced the same phenomenon, with FDIC-insured banks in the second quarter reporting the highest annual deposit growth rate ever.

"As individuals and businesses sought safety during the uncertain economic environment, banks experienced their second consecutive quarter of over $1 trillion in new deposits, increases that far exceed any deposit growth the FDIC has seen in the past," FDIC Chairman Jelena McWilliams said in a statement.

“We were also seeing credit card balances down 10% since the beginning of the year,” said Community First chief executive officer Todd Sheffield. “They were taking some of these payments and using them to pay down debt.”

Several financial institutions said about 20% of their borrowers took advantage of 90-day loan deferrals, where monthly payments were deferred but not forgiven.

At Community First, about two-thirds of the more than 3,500 customers who got 90-day deferrals on their monthly consumer loan payments also increased their deposit balances during that time.

“Which tells us it was the uncertainty about the future that led them to request deferral, and not their ability to pay,” Williams said. Since then 90 percent of the customers who got those loan deferrals have resumed payments, Sheffield said.

Bankers at Exchange Bank are seeing a similar trend. “We haven’t noticed a run-off in deposits, they still seem elevated. People are just moving into cash,” said chief credit officer Sullivan. Part of the cash increase comes from the 2017 fire insurance proceeds and much from the nearly $260 million in Paycheck Protection Program loans arranged by the bank, he said.

“Savings levels have been increasing for our members,” said Felder at Redwood Credit Union. “We’ve been looking closely at how many people are running up their credit cards, as an early indicator they may be headed for trouble, and we haven’t seen a lot of that. We’re actually seeing more of a reduction. That’s encouraging. But the more prolonged this gets, the situation may change.”

Playing defense is not an option for everyone.

“On the one hand the massive government stimulus caused deposit balances to increase, and credit card balances to decline,” said CEO Sheffield at Community First. “But there is a group of people — we’re talking to them every day — that the stimulus did not reach. They are not eligible for unemployment, or they’ve applied for unemployment but still haven’t received any funds, or they seem to be having trouble navigating the system.

“This group is probably smaller than headlines and concerns about evictions suggest, but they are out there. And, with the $600 federal unemployment ended, this group will be growing.”

Among lower-income residents, the financial impact of COVID-19 was muted at first but for many it’s now intense, said Kane at Community Action Partnership.

“With COVID, we’re seeing people did have a few more resources than after the 2017 fires, but people ran through their savings very quickly,” Kane said. “In March people did not come in right away. But as time has gone on, they have no money left, they’ve exhausted their resources, and it’s a much more dire situation.”

“We have members who are in a good position, with enough cash flow,” said Felder at Redwood Credit Union. “We also have members who are not spending as much, sheltering in place, and maybe their cash flow position has actually improved. And, of course, we have people who have lost their jobs, don’t have the necessary reserves, and they’re really struggling.”

Different than the Great Recession

So far today’s recession is different from the Great Recession that upended the local economy from 2007 to 2009, when the housing market collapsed, said economist Eyler, who is dean of the School of Extended and International Education at Sonoma State University.

Instead, this is what Eyler called a “classic” recession affecting jobs and incomes,

“It seems people are not in an enormous financial panic yet,” Eyler said. He cited several reasons: record low interest rates, the stock market recovery, government stimulus programs and the stable, even strong, housing market.

Unrestrained mortgage lending proved devastating to homeowners and the local economy during the Great Recession, but subsequent prudent borrowing is a rock that so far is supporting the economy during the 2020 pandemic, research shows.

The Great Recession occurred in a housing bubble and destroyed massive amounts of wealth, said economist Thornberg. “This time it’s the opposite. There is no collapse of wealth. This is a completely different kind of recession.”

Bankruptcies, which surged after the Great Recession, aren’t rising during this downturn, according to bankruptcy court records. But they’re a lagging indicator, reminds Craig Burnett, a Santa Rosa bankruptcy attorney since 1988.

“None of my clients go to bankruptcy court as a first resort,” he said.

It’s too early to know if the COVID-19 crisis will cause a rise in bankruptcies, Burnett said. “It’s hard to predict because of the stimulus. But that’s all temporary, and we’ll see how it settles out. Right now we’re near an all-time low in bankruptcy filings.”

From March through September, the first seven months of the COVID-19 recession in Sonoma County, 246 individuals and businesses sought protection from their creditors in U.S. Bankruptcy Court. A year ago, 360 filed bankruptcy during the same period. A seven-month comparison to the Great Recession is not published, but there were 1,550 filings in the 12 months after the start of the 2007-2009 slump.

“This crisis is more catastrophic than the Great Recession, but we’re in a better position,” said Williams at Community First. “We had lots of propping up by the government, giving people time to manage their resources. People are being very conservative, not taking vacations, not doing remodels. They’re hanging onto their money just to be safe because they don’t know what the future is going to be.”

Felder at Redwood Credit Union agreed that today’s recession differs in important ways from the financial crisis a decade ago. “There are so many unique things with this. There’s the incredible swiftness with which the economy shut down, obviously unprecedented. Then, a key difference is what’s going on with housing. We had a housing crash last time. I think we’re not going to see that this time. And another key difference is all the government assistance and stimulus.”

Whether those differences will pave the way for an easier recovery than after the Great Recession is a real possibility but not yet certain.

“We’re not out of the woods yet,” said Eyler at Sonoma State University. “We’re just hoping the housing markets remain stable. But we have to start turning the job market around soon.”

Mary Fricker is a retired Press Democrat business reporter. You can reach her at mfricker@sonic.net.