“While Wall Street firms can comfortably borrow billions at 2.28 percent of interest, their smaller counterparts have no such arrangement. Tens of thousands of small businesses will fail this year due to government inaction and lack of credit availability. With 60 percent of national jobs to its credit, small business industry is clearly an economic engine, which is on the verge of imploding.”
Screw The Big 3, struggling small business owners with subprime and ALT-A mortgages will be the next foreclosure bombs to hit Main Street and this may be the mother of all economic explosions. If not properly addressed, these mortgages and their laid off employees will devastate local economies like we have never seen before.
Back in August of 2007 I had first written about the ALT-A mortgage has the next crisis and wave of massive loan defaults to wreak havoc on our economy. In the article I explained how mortgage brokers and lenders targeted high price and affluent areas to sell these loans by the boat load to unsuspecting borrowers.
The article garnered lots of attention in the blog sphere and was later picked up by Slate Magazine and then Business Week who quoted me extensively in their magazines. Now, it looks like the ALT-A toxic wave has hit our shores and we now know who will be wiped out by the foreclosure tide.
Many small business owners were sold on low payments and extra cash flow to help their businesses during economic down turns. The most famous mortgage choice for Small Biz CEO’s was the negative amortization mortgage that is infamous for these payment options and is also known as the Pay Option ARM or Pick A Payment.
The problem now is that these loans are now reaching their maturity/reset points and these owners have only made these bare minimum payments driving them deep underwater.
Small business owners comprise of 500 or less employees and are our nation’s biggest employers. Not Ford, and not GM. Small biz owners are the life blood that feeds and flows through every community in America. Without these local economy boosting entrepreneurs, most cities would be ghost towns and everyone would live in Detroit and work for GM if we didn’t have these great thinkers and contributors to our society.
And guess what? They are not paying their mortgages according to this Money CNN article that covered an Experian survey:
Which baby do you love more, your home or your business? When times are tight, small business owners are more likely to pay their business expenses than their mortgage, according to a new study by credit rating agency Experian.
Experian studied the financial behavior of 2.7 million business owners from April 2007 to April 2008, focusing in particular on those with a “severe mortgage delinquency” of payments more than 90 days past due. The agency found that when owners fall behind on their home payments, most remain diligent about their business obligations. While the delinquency rate for consumer transactions reached as high as 59% among individuals with severely overdue mortgages, the delinquency rate for commercial transactions never rose above 8%.
The past week a friend, Samuel D. Bornstein, Professor of Accounting and Taxation form the School of Business, Kean University in Union, NJ sent me an email of a survey he had conducted in association with the National Association for the Self-Employed (NASE) that sheds a frightening light on the correlation between small business owners, toxic ALT-A mortgages and an impending foreclosure crisis and possible community economic destruction like we have never seen before.
In fact I believe that this small business owner data is so spot on, that if it is not properly addressed by the Obama Administration, then all good intentioned foreclosure plans will fail miserably.
Let’s take a look at this survey courtesy of Prof. Bornstein’s.
According to this survey, it is estimated that 3,709,800 small business owners hold Alt-A and “toxic” mortgages that are scheduled to “Reset” beginning in 4th Quarter 2008 and continue through 2012. These small business owners will be at-risk for “payment shock” and default as their monthly mortgage payments skyrocket.
According to Inside Mortgage Finance, a trade publication in Bethesda, Maryland, approximately 3 million people hold toxic mortgages totaling $1 trillion. The magnitude of this Alt-A and “toxic” mortgage crisis exceeds the subprime mortgage crisis which had $855 billion of subprime loans outstanding.
Not only do small biz owners have issues with their mortgages, they also are having big problems getting paid. According to this Intuit survey.
The reason many small business owners not paying their mortgage is because getting paid is getting harder for many small businesses. In a sign that may reflect the troubled economy, 22 million of the nation’s smallest businesses are waiting for $1,500 in overdue payments each month, creating a collective $33 billion strain on their cash flow.
It also found that the worry of not getting paid quickly by customers keeps 42 percent of business owners up at night. At the same time, 33 percent of business owners stated that they are chasing more overdue payments today than they were last year.
Moe’s Struggling Small Business Research Links:
Mortgages Targeted At Small Businesses Deemed “Toxic” National Association of the Self Employed – “These small business owners will be at-risk for “payment shock” and default as their monthly mortgage payments skyrocket during the “resets” that are scheduled to begin in 4th Quarter 2008 and continue through 2012,” said Prof. Samuel D. Bornstein of Bornstein & Song, CPAs and Consultants. “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.”
Intuit Survey – November 13, 2008 (PowerHomeBiz) – Mountain View, CA — Getting paid is getting harder for many small businesses. In a sign that may reflect the troubled economy, 22 million of the nation’s smallest businesses are waiting for $1,500 in overdue payments each month, creating a collective $33 billion strain on their cash flow.
Credit crunch hits small businesses CNNMoney – “But the banks stalled on her,” McKinley said. “Every time we called, it was something different – lost paperwork or required documents that had never been asked for. It seemed that their tactic was to see for how long she could survive without the loan before considering her.”
Here Comes the Next Mortgage Crisis Slate Magazine – Option ARM loans were heavily marketed to upper-tier home buyers in California. It’s hard to know how bad the option ARM crisis will be before it actually happens, but Moe Bedard,
The Next Real Estate Crisis Business Week: Moe Bedard, founder of LoanSafe.org in Corona, Calif., a free online forum that helps homeowners negotiate loan modifications, said the larger problem is that banks, many of which laid off scores of loan officers, are so swamped that many borrowers can’t get the attention they need.
“A lot of people are just walking,” Bedard said. “It’s just a business decision; they don’t have a lot of skin in the game.” But for many others it will be devastating.