What if you could take out a loan to pay rent?

May 17, 2019 (1366 words) :: What if you could overthrow the socioeconomic system that forces you to resort to taking on debt in order to have a place to live?
Tags: financialisation, housing, startups

This post is day 137 of a personal challenge to write every day in 2019. See the other fragments, or sign up for my weekly newsletter.

Here’s an article that recently appeared in the Wall Street Journal: As More Millennials Rent, More Startups Want to Lend to Them (the original WSJ link is paywalled, but it’s reposted by Mansion Global)

It’s a puzzling headline: first, why would anyone lend to someone who’s a renter? They’re not buying anything, as in a mortgage; there’s no collateral that the bank can seize if the renter defaults on their payment. And second, why would a renter need to borrow money in the first place?

Of course, we know the answers:

  1. We live in a truly unprecedented era of financialisation, especially in the US, where things like housing, healthcare and education (provided as public services in other countries!) are seen primarily as opportunities for securitisation. Debt-fueled consumption becomes the norm, which means it’s a huge market.
  2. As real estate becomes more and more commodified - to the point where it comprises more than 60% of global assets - it becomes more expensive to live somewhere if you don’t already own. In places where demand significantly outstrips supply, and there isn’t sufficient tenant protection regulation, power lies with landlords and developers, not renters.

Where financialised capitalism meets startups, we get the proverbial hammer-nail situation: when you have a hammer, everything looks like a nail. When you’re a wannabe fintech founder with access to capital, every hole in our decaying social fabric looks like an opportunity to be monetised—I mean, fixed—with an app. Hence the recent surge of fintech companies that lend money to people to help them afford things that shouldn’t be so expensive in the first place. Affirm, consumer financing startup founded by PayPal co-founder Max Levchin, will help make those $11k Cartier earrings practically affordable by turning it into 24 monthly payments of only $510; SoFi, a San Francisco-based startup valued at $4.3b, will refinance your student loans. There’s even a company that will let you sell a stake in your future earnings in return for the money to attend college. And let’s not forget the payday loan startups I mentioned in previous fragments.

This is the grand bargain of neoliberalism: your wages might be lower, and things like housing/healthcare/education might be more expensive, but look how easy it is to borrow money! There’s no shortage of offers for financial products: credit cards with exclusive perks and lucrative rewards program; a subprime mortgage for a place that’s overvalued but still preferable to paying rent on someone else’s place; a low-APR financing scheme to entice you to buy those $400 pants. Every consumer transaction you have can be turned into one based on credit, and ideally, securitised, so that some feckless traders on Wall Street can profit from them, too. That’s the real American Dream.

Here’s an especially remarkable quote from the Wall Street Journal piece:

“As rents have gone up, we get more and more emails and phone calls where people would ask us if they could pay their rent over time,” said Tony Diamond, founder of StayTony, which manages upscale apartments in the Los Angeles and Atlanta areas.

The company recently began allowing tenants to finance up to three months of rent over a 12-month period, joining with the loan vendor Uplift, which made a name for itself financing family vacations.

To recap: a property management company is partnering with a lending company to address the needs of renters who cannot necessarily pay their rent on time. And maybe this property management company doesn’t actually have a choice over what their rents are - maybe they don’t own their own properties, and would lose clients if they mandated lower rents or forgave late payments - but I don’t think this is a problem that’s best solved by lending money to renters at 20% APR. I think the problem is that rent is too high, and the terms of payment too onerous. Bringing in a random Silicon Valley startup that has raised several hundred million dollars in funding as an intermediary here seems weird.

In a way, you can’t really blame any of the parties here: maybe startups that do ‘payday loans but for rent’ are actually the most immediately available option. If you apply the typical startup mindset to the problem of “people not being able to pay their rent”, of course you’d come up with something like the partnership between StayTony and UpLift. The point is that the startup mindset isn’t what’s needed here, because the problem is political (low wages, rents having comparatively low power compared to landlords). It’s a bad situation in toto - a local maximum, as I’ve written in a previous fragment.

Imagine this: there’s a sudden outbreak of rats in the city. Rats in the streets, rats in your house, rats in the McDonalds licking up spilled drops of McFlurries on hot days.

At first, everybody freaks out, but after a few days of rat hell, an exterminator startup shows up promising to take care of any rats that show up for a low hourly fee. Everyone who can afford it pays for the exterminator service, because they don’t want to live with rats, while those who can’t afford it simply learn to live with gnawed cables and mysteriously vanished leftovers.

No one knows exactly where the rats are coming from, but there are rumours that there’s a nearby factory that breeds rats for some weird profitable reason, and they’ve just been releasing them afterwards because it’s cheaper than killing them. That factory is apparently doing well, because there are more and more rats everyday, but at least people who have the exterminator company’s app on their phone don’t have to deal with them at home.

Meanwhile, the exterminator company is growing massively, and has quickly become one of the most valuable companies in the city. They’ve expanded operations, hiring a ton of new people (as independent contractors) and buying up a bunch of new equipment (they actually make their independent contractors buy them, but same thing). They’re even thinking of going public, with an initial valuation of several billion dollars just on the back of recent growth rates.

What happens when the rat factory shuts down or figures out a cheaper way to dispose of rats? What happens when the shitty situation that has buoyed up a startup’s business model vanishes? If it wants to ensure the continued success of its business, it has to make sure there are always rats to kill. That means hoping that the rat factory continues operating, but if the rat factory ever shuts down, it could start surreptitiously unleashing its own rats around town. You could even argue that the exterminator company has a fiduciary duty to do so, if they want to do right by their investors.

Hopefully you see where I’m going with this: the problem with these ‘monetising the rot’ startups is that their business models depend on the continued existence of the rot. However lofty their vision, however earnest their founders, the incentives of a business model like “payday loans for rent” are not aligned with actually helping these people get out of their shitty situation (i.e., having an unpredictable income but a predictable, relentless, and unyielding landlord). If the core MO of a startup is to somehow get money out of customers, that forecloses an entire swathe of solutions that don’t involve people giving more money to private corporations. Solutions like: cheap and widespread public housing; stronger rent controls; better housing benefit payments. Those would all be bad solutions from the startup’s perspective, because they would shrink the total addressable market.

In the meantime, we still live in a highly financialised world, and there will likely continue to be startups founded in recognition of this fact. These startups may be rational endeavours in our current world, but there is no place for them in a more economically just world; and if these startups get powerful enough, they may even become obstacles to us getting there. Perhaps the best outcome for these startups is a quick, painless death as soon as their services are no longer necessary.

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