The Housing Chronicles Blog: Next wave of defaults to take down small business owners?

Thursday, December 18, 2008

Next wave of defaults to take down small business owners?

I recently read a comment regarding my post on the IRS relaxing their rules on tax liens that was so compelling that I felt I should re-print it as a separate post. Submitted by Professor Samuel D. Bornstein, it warns of the potential fall-out from small business owners (and those they employ) who could often only obtain Alt-A or Option ARM loans because they didn't have the traditional W2 forms to submit:

I would like to bring a very important bit of information to your attention that relates to this economic crisis that was overlooked until now. On Sunday, 12/14/08, CBS 60 Minutes aired a segment "The Mortgage Meltdown". Scott Pelley's piece on the 2nd Wave of Foreclosures overlooked a critical fact.

The segment missed the fact that this next wave of Foreclosures in 2009 Will Take Self-Employed and Smaller Businesses who have these TOXIC mortgages. In fact, ALT-A, Option ARMS, Interest-Only, the TOXIC Mortgages that are considered the "Troubled" assets in TARP were specifically marketed to the self-employed who fell prey to them. The upcoming defaults on these risky "Toxic Mortgages" will result in an increase in foreclosures. But worse, once these small businesses fail, the resulting loss of jobs will cause millions to add to the ranks of the unemployed.

Note that self-employed business owners (16.2 million according to the SBA) employ between 1-10 employees.
An NASE survey at www.nase.org , was the first to provide compelling evidence of small business involvement in the upcoming toxic mortgage crisis.

The survey was created by Prof. Samuel D. Bornstein and Jung I. Song, CPA of BornsteinSong Consultants in Oakhurst,NJ,and was conducted by the National Association for the Self-Employed (NASE) which issued a Press Release on November 21, 2008.

According to this survey, it is estimated that 3,709,800 small business owners hold Alt-A and other toxic mortgages, and 1,279,800 are already delinquent as they have missed one to three or more monthly mortgage payments at mid-November, before the expected Resets that are scheduled to begin in 4th Quarter 2008 through 2012.

These small business owners will be at-risk of payment shock and default as their monthly mortgage payments skyrocket. Small business owners were especially targeted for these Alt-A loans which required little or no documentation of income which appealed to many small business owners who previously were unable to qualify.

The resulting defaults will be the cause of the upcoming second tsunami wave of foreclosures that will dwarf the subprime crisis and will take many homeowners and small business owners. I would be happy to discuss the implications of the NASE Survey, since I created it and NASE ran it to its national membership (250,000). See the NASE website www.nase.org under NASE NEWS for the Toxic Mortgage Survey.

Also from the survey:

Survey Highlights:

• 22.9 % (3,709,800* At-Risk) of all self-employed business owners used risky or "toxic" mortgages or refinancing that are scheduled to "Reset".

• 19.2 % (3,110,400* At-Risk) of all self-employed business owners are at-risk of "payment shock". They do not know the monthly mortgage payment that they will be required to pay at "Reset".

• 18.4 % (2,980,800* At-Risk) of all self-employed business owners are very worried about the monthly mortgage payment due at "Reset".

• 7.9 % (1,279,800* Immediate Risk of Default) of all self-employed business owners have already missed one to three or more monthly mortgage payments at this date before expected resets in 2009 to 2012.

Small Business Financing

Each type of financing has inherent risks for the small-business owner and their firm. In this financial meltdown, home equity financing and lines of credit have been frozen or withdrawn, while credit card debt has been subjected to extra fees and higher interest rates. These forms of financing may become unavailable or too expensive to maintain, leading to cash flow problems and business failure for small entrepreneurs.

• 33.9 % (5,491,800* At-Risk) of all self-employed business owners used their home for mortgage or refinancing to get cash for personal or business expenses.

• 49 % used various forms of debt (mortgage, home equity, credit card, etc) to start their businesses. Credit Card Debt was 28 percent of total debt.

• 66.9 % used various forms of debt (mortgage, home equity, credit card, etc) for additional cash for their business operations. Credit Card Debt was 39 percent of total debt.

1 comment:

Prof. Samuel D. Bornstein said...

Thank you for highlighting the NASE survey. I am glad that the mainstream media is addressing the 2nd Wave of Foreclosures which are expected to begin in 2009 and continue through 2012. The NASE Survey asked small business owners about the impending resetting of their mortgages. Note that 3.1 million were unaware of the size of the new monthly mortgage at reset, and 3 million were "very worried" that they would not be able to afford the new payment. 1.3million are already delinquent, having missed from 1-3 or more payments.

On Sunday, 12/14/08, CBS's "60 Minutes" had a segment on the "Mortgage Meltdown". They warned of the resets that will cause this wave of foreclosures. This wave of foreclosures will hit our economy at its most vulnerable time. The foreclosures will result from the resetting of the ALT-A, OPTION ARMs, Interest-Only, Etc. "TOXIC" Mortgages. The 60 Minutes piece OVERLOOKED THE FACT THAT SMALL BUSINESSES WILL BE TAKEN IN THIS TSUNAMI. The NASE survey confirmed my research that small businesses hold millions of these risky mortgages. This next wave will take these small businesses and the 1-10 employees that they currently employ.

This must be brought to the attention of Senators Landrieu, Dodd, Frank, Velazquez.

We always seem to be "reactive" to crises. In this case, we must be "proactive" and address these small business owners before it is too late.