Millions of Small Business Owners With Toxic Mortgages in Deep

Posted on December 16th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

Ya ya, I am working on a detailed story on what today means. I will have a summary out tomorrow.

With respect to mortgage, housing and today’s Fed action, we already knew most of what was announced.  If a week from now you can go out and get an Agency Jumbo ($417,001 to $625k) under 6.5% or a bank portfolio Jumbo from $625,001 to $1 million+ under 7.5% I will pay attention.  But as of now it is more of the same. The foreclosure market is the real estate market, higher grade paper defaults are accelerating, negative-equity is epidemic, and higher-end home prices are compressing on lower end prices due to lack of financing and capable buyers.

Will conforming ($417k and below) rates going from 6% a few weeks ago to 5.25% today really have that much impact on the market? What if 4.5% comes around? Remember, home ownership was at 69% a couple of years back.  Combine that with the fact that some 70% of all home owners with mortgages in the most important housing markets in the nation are presently either underwater or near-underwater (within 5% and unable to refi or sell without paying), and there is just not enough active participants to quickly solve this problem through low interest rates. There are millions of units presently on the market and millions more in the foreclosure pipeline that have to be churned through.

Cramer’s prediction of a housing market bottom in June 2009 is a pipe dream.

Where do all of these buyers and refinances come from?  I agree that super low rates is better than not having super low rates in the grand scheme of things, but lets set expectations appropriately so we avoid the constant disappointments over the past year and a half.  Every time a new idea is floated, the media and analysts come out with their pom-poms and yell victory only to be let down time after time. I will get into that tomorrow.

Now for the small business owner story. I think the research numbers are off a bit with respect to the percentages of total Alt-A loans held by small business owners, but I found this story interesting nevertheless. The question is: in this economy, how many are going to spend every penny keeping their business alive before keeping their mortgage current?  Without a business, they can never pay their mortgage and they know it takes up to a year to foreclosure.  This is a sticky wicket.  -Best, Mr Mortgage

Source: Mortgages Targeted At Small Businesses Deemed “Toxic”

Entrepreneurs With Good Credit Scores Enticed By Adjustable Rates

Washington, D.C., November 21, 2008 — The nation’s small businesses own ninety-three percent of all “toxic” mortgages and are at risk of defaulting on their loans/payments. The data, released today by the National Association for the Self-Employed (NASE) in coordination with Prof. Samuel D. Bornstein and Jung I. Song, CPA of Bornstein & Song, CPAs and Consultants, shows that these “toxic” loans did not go to subprime borrowers. Rather, these “toxic” mortgages were targeted to small business owners who were prime and near-prime borrowers and may now find themselves facing sky-high monthly house payments. The results of the study were extrapolated based upon an estimated 16.2 million self-employed small business owners in 2007, according to the Small Business Administration’s Office of Advocacy.

With the majority of the nation’s small businesses being run from a home office, this alarming evidence has significant implications for businesses owners facing foreclosure who may be forced to shut down for good. The “toxic” mortgages that were marketed to prime or near-prime borrowers include Alt-A, Alt-A ARMs, Option ARMs, and Interest-Only.

Based on the NASE survey, approximately 3,709,800 micro-businesses hold “toxic” mortgages. The magnitude of this Alt-A and “toxic” mortgage crisis exceeds the subprime mortgage crisis which had $855 billion of subprime loans outstanding.

“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.”

“The current housing crisis is hurting entrepreneurs because they are unable to obtain important financing, such as home equity loans in order to start, operate and grow their businesses,” said Kristie Darien, Executive Director of the NASE Legislative Office. “Addressing the housing crisis and credit crunch for the small business community must be the first steps taken to minimize our nation’s economic decline.”

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.

For detailed commentary on the results of the NASE’s Housing and Economic Survey: A Micro-Business Perspective provided by Samuel Bornstein, Professor of Accounting and Taxation at Kean University’s School of Business and Bornstein & Song, CPAs and Consultants, please click here.

Full survey results:

More Mr Mortgage


26 Responses to “Millions of Small Business Owners With Toxic Mortgages in Deep”

  1. This looks really bad. If a business owner works out of his home and the mortgage resets and he looses his home – end of business, end of employees, end of payments on all the other things he financed through the business. I see why 2009 is going to be a barn burner. Good luck Obama, I wish us all well!

  2. Small business owners carry the lions share of the overall tax burden. We are not subsidized, bailed out, collateralized, or provided for by the FED or anyone else. It is no wonder we…they are spending every dime they can or saving every place (adj. mortgage) to make ends meet. Yes, that is month to month and most times day to day. The small biz owner is middle class and the middle class is about to sink. Think of the small biz owner as the Titanic. The Gov’t thought we could be taxed into oblivion because WE were American business. That is no more and the current structure has failed. Big biz passes on costs or taxes to consumers. The consumer is dead because of the affore mentioned taxes and the current long term debt levels. Our debts went up in turn to cover the taxation. How many American small biz owners would be suffering so dramatically if they could have saved more profits to get them through this storm? If you made good money during good times…Gov’t got the lions share of your profit. I don’t see them giving any back to keep us afloat. We can BORROW our money and pay the gov’t interest to get by. Is it any wonder why the majority of small biz owners WANT to make LESS money under Obama?….(So they can aviod and potential tax increase)Our economy has morphed into punishing prosperity and sound economics to favor crooks and lazy people. Insert names of banks or companies as you wish. Uncle Sam is killing our dollar, printing deutchmarks for the new Weimar America, floating crazy scheme after crazy scheme with no progress. The latest FED action was done so savers would be punished. I don’t think people would borrow…even if the FED gave you the 1% to take the cash. We are all debt full here and cash poor.

  3. Honest Appraiser, Please….use proper paragraphs. Reading your comments is like chicken scratch.

  4. Something wrong with this…

    The nation’s small businesses own ninety-three percent of all “toxic” mortgages and are at risk of defaulting on their loans/payments.

    So only 7% of toxic loans are non business owners?

  5. I agree Brett – I don’t agree with their numbers but I think the overall story is accurate.

  6. MM, you are the shit I remember when you where getting lamb basted a few months back for giving out the truth. I am one of the lucky ones that got out and closed my biz. sold my house at the beach and now living in my second home in palm springs (now primary)I have Cramer in my ear in the back ground and he sounds like a chear leader for the FED. Maybe the loss of advertising revenue on CNBC is being made up by the FED from the TARP the talking heads are now starting to sound like they work for the FEDS. Think people do your homework. The fed droped its pants today, I feel that we are at the final table and the fed just bluffed god help us I hope the world blinks. Thanks again for all the Info.

  7. MM thanks for the story… as a small business owner I can say Sure glad I don’t have any debt in these lean times.
    Debt is the new business killer….

    Anyone for some Obama Bucks.

  8. Dick Said:
    December 16th, 2008 8:45 pm
    Honest Appraiser, Please….use proper paragraphs. Reading your comments is like chicken scratch.

    chill out Dick……

  9. Hey um…

    Anybody in here got some creamed corn?

    The ‘survivalist’ in me just came out again…

    Couldn’t resist –



  10. First of all, can we stop using the term “toxic mortgage”? It’s a meaningless term coined by the media.

  11. Dont forget who is also the biggest employer in the USA. Not a pretty picture, indeed.

  12. My survival-list:

    1. Return from overseas stint with highly valued foreign currencies.
    2. Buy Jumbo Prime gone bad forclosure offering 30 cents on the dollar for the home.
    3. Hire out of work bank presidents and loan officers for 75 cents a day, (the new minimum wage), have them mow my new big lawn.
    4. Buy my canned goods for half price at neighbors underground bunker/7-11 as his stock is about to reach it’s experation dates.
    5. Look for a ray of sunshine in this mess and work on my tan, oh, and ride out the recession.

  13. Admin:

    The numbers are off, but the problem is the same.

    The latest fiqures quoted are :

    25 million mortgages given consisting of subprime, non conforming, Alt-A, and some form of adjustable rate mortgage out of aproximately 52 million mortgages outstanding, balance is fixed rate prime mortgages.

    The 25 million mortgages equal 4.5 Trillion Dollars. With this group of mortgages being almost eveningly spilt between GSE’s, financial institutions and the investors of MBS.

    Based on the above, my fiqures of 30% of homes near or are underwater can indeed be a low estimate.

    But it doesn’t change the fact that the ONLY way out of this mess is by admitting to the lower values/prices and lowering the principal balances owed on underwater homeowners.

    Check out the proposed Patrick-Taylor Plan, which I feel is the next government’s invention, or one similiar to it.

    And I did get your instruction to cut and paste my resonses in an email to you, unfortunately I do not know how to do that.

  14. The one thing not mentioned along these lines is take most ARMs that were originated in the last 4-5 years are of the 5/2/5 CAP structure, or close for the most part. With the FED keeping rates this low a lot of the homeowners who are underwater or close to negative equity will not have to refi as the majority of the loans used either 1yr CMT or 1yr Libor with a 5% 1st reset cap, which is a non-issue given where rates currently are and a 2% margin. Both 1yr CMT and 1yr Libor are well below 1% so if your mortgage is getting ready to reset you are looking at a rate below 3% for at least the next year, assuming non POA (Pay Option ARM)recast issues. That is a good thing and at the margin will help a lot of the homeowners who are near default. There are clearly a lot of variables with all the loans, IO vs P&I, etc but at the margin this will help, not hurt the homeownwer.

    I am not saying it will save us from the current issues we face but it is a lot better than having 1yr rates at 5%.

  15. I think any business owner who uses credit cards to finance their company SHOULD go out of business and the sooner the better. It is this mentality that gets people in trouble. That and using HELOC’s for trips, cars and fun is absurd in my opinion.

    Your referenced post states that many of these folks are in trouble due to debt and that a large majority used credit cards to finance their businesses. Well if they are using debt avenues with massive interest rates then off course they are going out of business. To make a profit you need to cover the interest on your debt and your debt payment and using credit cards would make that nearly impossible without being the highest priced small business in town. How could you possibly be competitive?

    I agree that the number seems extremely high, but I also agree the story has legs. People during this boom left everything on the table. They foolishly made decisions that looking back now they probably never would have made. These folks are the “Sheeple” that the MSM refers too and they are the ones that will suffer the most pain in this downturn. They are mostly middle class and mostly younger in age. They were bitten by the greed bug and the half truths of the MSM that housing will never go down. Everyone could be a millionaire and everyone could live the life of the rich and famous by simply owning a home or two or three. Everyone could instantly be an entrepreneur and run their own business. The model for this was made easy by simply drawing funds from your ever appreciating asset (home) and funneling them into your small home business. Everyone had money so someone would buy whatever crap you peddled. So now these folks get a wake up call that it really isn’t quite that easy… well duh! Are people really this stupid?

    One good thing from all of this is the weeding out of the people that don’t belong in the game!!! They will be thrust back onto the sidelines where they belong.

  16. Respectfully, this analysis is incomplete.

    The main reason why so many small business owners have these mortgages is because owning a small business is a license to manipulate one’s taxes. Since so many self-employed borrowers could not properly document their net income, they disproportionately sought out limited- or no-doc loans.

  17. Odd, Calpers came out with a PR last month saying that they just had all the properties appraised and were down 30%. I guess that they forgot to mention that they were leveraged against some of those appraisals! Life Insurance companies which are heavy on assets are going to get it too… Let’s see what happens when commercial takes a hit. Insurance companies are pretty much in the same boat as pension funds.

  18. The sad truth is that most people which accept the mods are only thinking about the present and not the futre. They still think realestate will rise once again to the same levels that we saw this decade. .gov is trying to make Joe the Plumber a slave.

  19. 93% of all Alt A loans go to small business owners. Hmm, small business owners do not have a paycheck – do not have easily verifyable income, can have extremely variable income. Alt A loans (as originially drafted) were meant for those who could not easily document their income. Why is this in any way surprising?

  20. I want to thank Mr. Mortgage for running this blog. The fact is that the self-employed micro-businesses (16.2 million in 2007 according to the SBA) fell prey to these ALT-A mortgages that didn’t require income documentation. This appealed to these small business owners. These self-employed business owners were targeted for these loans. To make matters worse, they opted for Option ARMS and Interest-Only mortgages that allowed them to pay the minimum monthly payment thereby conserving cash for their business needs. Once the housing bubble burst, and home values dropped, they were denied any chance of refinancing. This left them with zero equity or negative amortization to the degree that their principle balance far exceeded their home value. The proposal to lower interest rates will not save them. Today, the problem is the principle balance and not the interest rate. According to some stats that I have read…a $600,000 mortgage can grow to $750,000 within a few years of Option ARMs or Interest-Only payments lacking sufficient payment of principle. One can effectively see the problem when the principle must be paid over the remaining term of the mortgage.

    Finally, the second wave of foreclosures has hit the mainstream media in the 60 Minutes piece. But, they missed a very important fact that this NASE survey illustrated..the next wave of foreclosures at reset in 2009-2012 will take these small businesses and their employees. We need to bring this to the attention of the Powers-that-be in Washington ASAP. There is still time. I have researched this issue for the past 8 years and there is something that we can do to PROACTIVELY address this catastrophe.

  21. NASE appears to be a scam operation:

  22. Stu, with all due respect you have your head so far up your ass you don’t know if you are coming or going. I am 43 and free and clear with dough in the bank.You need to stop being a numbers driven guy. You are obviously very smart looking at the numbers and digesting that. I was in the game for a long time and I am not spitting this crap out for my health. Stop trying to point the finger and start trying get how bad this is!!! You can’t blame the guy that put his ass on the line using credit cards 401k or college savings to keep his biz going. That is what AMERICA was founded on. It is so obvious that you never ran your own show, you will never know what it is like to tell your staff you are done. I am not trying to preach but it is what it is. This thing is a shit sandwich and everybody needs to to take a bite. Hanson is a voice of reason in this whole mess. If we don’t do cram downs this will get very ugly…

  23. Stu I degress I want to give you a case in point I am looking to invest in RE here in Palm Spring and I think I know what I am doing. Being a vet I should RIGHT. please look at this and give me your opinion. This is at 34% at peak of market how can you go wrong. Highest on the hill great views and on the golf course. Stu my point is drilling down does not always give you the truth you need to get into the field as I do and see it first hand. With respect Mark

  24. An FHA Secure loan allows for late payments resulting from a reset, but the borrower still has to meet the income to debt ratio, which probably excludes many small business owners.

  25. Oooo yeah, 2009 gonna git ugly. People are going to walk when the realize they are not “homeowners” but instead are renters who are bankrupt.

  26. Okay, so if you can’t refi then there are no options? Right!

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