Equity and the Small Business Owner

We knew that many business owners were using home equity to raise capital during the boom years. What we did not know was that often the capital was raised through the use of an Option ARM. Now the recasting ARMs that are severely underwater may cause the small businesses to fold while the homeowner/business owner potentially loses their property as well.

While it would be nice to blame this all on the bad decisions of bosses using your HELOC for everything became the advice of many financial planners and advisers during the bubble. Unfortunately many workers will be paying the price. First we will take a look at an article from the Sacramento Bee titled Exotic home loans could hurt business owners to see how bad things may get. Lets take a look -

Nearly 35 percent of the [California's] small-business owners used Option ARMs or other exotic home loans to finance their companies during the housing boom, according to a study released Thursday.

As those mortgages reset and monthly payments rise, scores of small businesses will be at risk along with the homes, the study concluded. The study was conducted by MerchantCircle, a Los Altos company that helps small businesses with Internet Marketing.

...

Samuel Bornstein, an accountant and business professor in New Jersey who analyzed the MerchantCircle results, said the use of exotic home loans will haunt business owners for several years. Bornstein, a professor at Kean University in Union, N.J., predicted a wave of foreclosures "that will dwarf the subprime crisis."

From the Map of Misery we know that California was the capital of the Option Arms. However the were taken throughout the country and the percent used by small business owners is unknown.


Following this up is another article about how much the small business owners are really hurting. The crutch is gone and may can not stand on their own. This article from the Wall Street Journal article titled Entrepreneurs Cut Own Pay To Stay Alive illustrates how bad things are getting. Let's take a look -

It's impossible to know just how many owners are affected. But in a sign of the breadth of the trend, 30% of 727 small-business owners and managers surveyed by American Express Co.'s small-business services division said recently that they were no longer taking a salary. That's a troubling sign for small businesses, which have created a significant share of the new U.S. jobs in recent years.

During past downturns, business owners might have turned to a home-equity line of credit, a personal loan or credit cards to shore up finances. But this time, real-estate values have plummeted, leaving many with less equity to tap, and bank credit is virtually nonexistent.

It's not uncommon for owners to give up salaries from time to time to give their companies a temporary lifeline, but business advisers and owners say the prevalence of salary cuts now is unusual even for a recession.

With the equity gone and credit avenues drying up things are getting tighter and tighter for many small business owners. The affects of the housing bubble and subsequent bust onto small businesses will have long-lasting compounding affects.

Citi's Unemployed Mortgage Program

For the recently laid off folks that bank with Citi may get a bit of a reprieve. The lender has started a program that allows for 3 months of reduced mortgage payments while the borrower looks for new employment. If the new employment does not sufficiently cover the older loan amounts they can then be modified. This article titled Citi Launches Program To Help Unemployed Mortgage Holders from CNN Money sounds like it might help a small portion of borrowers. Lets take a look -

"Thousands" may be eligible to take part in the Homeowner Unemployment Assist program in the next two years, Citigroup said, calling it another way in which it can help people avoid foreclosure.

Under the plan, borrowers will be allowed to pay reduced mortgage payments for three months, with the average required payment for most qualifying customers pegged at $500 a month.

"Our Homeowner Unemployment Assist program is intended to serve as a bridge toward a longer-term solution, helping homeowners stay in their homes and in their communities while they get their feet back on the ground," said Sanjiv Das, chief executive of CitiMortgage.

Borrowers with first mortgages whose loans are owned and serviced by CitiMortgage and who meet certain other criteria will be eligible to participate in the program. Borrowers who find employment during the three-month period can either resume their original monthly payments or receive a long-term loan modification.

"If the customer is not employed within three months, Citi will work with customers on a case-by-case basis to explore the best solutions," the company said in its announcement.

Hopefully this will have no impact on the borrowers credit score. This is a program that sounds wonderful on paper but everything depends on the implementation.

Home Equity Troubles Vol. 2

Not only are the credit-worthy in trouble but those that serve the credit-worthy are taking the hit. Talk about a double whammy at Chase. In an article from the Washington Business Journal titled Chase to cut 14,000 jobs as it braces for losses show the relationship between the lenders losing money and the employees then losing their jobs. Now we can a new batch of unemployed that will have HELOC and housing troubles down the road. Lets take a look at the article -

J.P. Morgan Chase expects to eliminate 14,000 jobs, including 2,000 from its investment banking operations and 12,000 from its Washington Mutual unit, the company told investors last week.

...

The bank is seeking to cut costs as the deepening recession fuels unemployment and loan losses. The bank anticipates quarterly losses this year of $1 billion to $1.4 billion just on its home equity loans to more creditworthy borrowers. Those figures exclude loans Chase picked up in its purchase last September of the failed banking operations of Washington Mutual.

The bank expects up to 41 percent of these borrowers will be underwater, or owing more on their homes than the homes are worth, at the end of 2010, up from 27 percent at the end of last year.

And the downward spiral continues. More underwaters. More job losses. More write-offs.

Do tears falling onto granite counter-tops sound any different from those falling onto old Formica? No wonder they call it a depression - a perfect graphical and emotional description of the despair!

A Big Ouch Is Headed This Way

The local market is starting to take the hit we have been afraid of. Still nowhere near the huge super bubble state drops but significant even with the local job cuts that our area is going to feel some pain. But with falling prices along with falling prices things are getting worse. One of the few numbers we have have seen increasing is for unemployment levels. This ever increasing number will only bring the others down. In an article in the Star Ledger titled Keeping afloat, the numbers are put into perspective. What things look like now and where they are going. Lets take a look -

Yesterday, the [National Association of Realtors] groups said existing-home sales fell 12.2 percent in New Jersey, as more homebuyers, discouraged by strict lending standards, steep declines in the stock market and a rise in unemployment, dropped out of the market. Nationally, existing home sales, which generally account for 85 percent of total home sales in this country, fell 7.7 percent during the third quarter.

...
Statewide, home prices fell 5 percent, to $312,437, down from $330, 396 during the third quarter, said Jeffrey Otteau, president of Otteau Valuation Group, a real estate research firm based in East Brunswick, which tracks the New Jersey real estate market.

Otteau said the conditions will deteriorate even further before getting any better.

The third quarter officially ended on Sept. 30. But over the past two months, the housing market in New Jersey has weakened dramatically due to mounting job losses and the slowing economy.

For example, in October alone, Otteau said the number of homes contracted for sale in New Jersey fell 28 percent, compared with the previous year, reflecting the weakening jobs picture and the souring economy.

There were two areas in New Jersey that did not have declines. The Trenton-Ewing area had a price increase average of 4.6%. And Hudson County prices rose just about 1% for quarter. But there seems to be consensus that our area will still have more declines before things start to turn around.

Things are bad and we have have yet to feel the full impact. Remember it takes months for the foreclosures to process through the system. Job losses in October will not reach full impact until next summer. New York and New Jersey unemployment rates are too low for many people to afford keeping up a mortgage, taxes and daily living expenses. People will fall through the cracks. Even with the foreclosure barriers the state is trying to implement will not be enough.

One thing that has often felt strange was reading the blogs and news from California, Nevada, Arizona and Florida, it often seemed like another world so removed from our lives. Watching the trash-outs in California seemed as foreign, incomprehensible, and removed as watching the was in Darfur. The bubble bogs have been bracing ourselves for hard times to come. But friends and acquaintances that live in our area often acted like it was another world and those affects were local and regional issues - not national or global.

Now we all know better.

Job Losses Help Accelerate Foreclosures

Job losses and unemployment levels are on the rise. In high priced areas such as New Jersey and New York unemployment checks are far too low to come close to paying most mortgages - adding the property tax and insurance make the numbers even gloomier. Those not able to pay their mortgages due to job losses face foreclosure issues. In this article CNN Money titled Mounting job losses now fuel foreclosures illustrate the interconnected of foreclosure rates and the employment sector. Lets take a look -

For years, bad loans and their aftershocks have been sending homeowners into foreclosure. Now it's lost jobs that are putting troubled borrowers over the edge.

As the economy tanks, unemployment is the major factor driving a much larger proportion of foreclosures now than in the earlier stages of the mortgage meltdown.

In June, 45.5% of all delinquencies reported by Freddie Mac were due to unemployment or the loss of income, according to the company. That's an increase from 36.3% in 2006.

"The two economic factors that most contribute to foreclosures are falling home prices and rising unemployment," said Richard DeKaser, chief economist for National City Corp (NCC, Fortune 500). "It's hard to pay your mortgage when you don't have a job."

And that's a situation that more and more people are finding themselves in. Nearly one million Americans have lost their jobs in 2008. The Bureau of Labor Statistics reported in early October that 159,000 private sector jobs were lost in September, and on Friday, economists expect the BLS to report that 200,000 jobs were lost in October.

"The rise in job losses will increase and extend the delinquency trend," said Doug Duncan, the chief economist for mortgage giant Fannie Mae (FNM, Fortune 500). Foreclosures spiked 71% in September alone according to RealtyTrac.

As this post being being composed the October numbers came out - unemployment rose to 6.5%, with a cut of 240,000 jobs. This will just add to the foreclosure levels. Probably another spike next month. With the increased unemployment levels and the shaky economy the holiday season is bound to be flat, with probably decline over the past several years growth.

How much of an impact will President-Elect Obama's 90-day foreclosure moratorium have on the spiral downward?