Tuesday, June 9, 2009

LA Times: Some Owners Who Used Homes to Buoy Finances are Sinking

We posted a story or two like this in 2008 when trying to explain why the housing bust was going to take far longer and be far deeper than the pundits acknowledged (many of whom denied housing prices could ever fall nationally in the first place). [Dec 8, 2007: Analysis - What Should Housing Prices Be Today?] [Jan 24, 2008: They Said it Could Never Happen. Ever.] It was also why I choked on my Kool Aid a few times when I hear certain economists say "what's the big deal about housing anyhow? It's only 4.5% of GDP". They simply did not understand how pervasive use of the house ATM had become as a replacement for actual savings or in lieu of traditional loans (in the case of small business)... and I think people still do not understand it. We posted stories about how people were serial refinancers - extracting equity from their homes every 18-24 months to pay for their lifestyle, while others were using it as a place to refinance credit card debt (which essentially is just a transfer of debt from 1 shell to another).

We will bottom in housing eventually, but until housing prices begin to re-appreciate at a meaningful pace Americans are going to be stuck doing things the old fashioned way... saving. And that's just a complete change in national mindset.

This story deals more with the small business side of things - taking care of cash flow problems that will inevitably come up via the house ATM. Via LA Times
  • In better economic times, Santa Clarita mortgage broker Fred Arnold relied on a home equity line of credit if his cash flow was uneven and he needed to cover payroll. But when home sales crumbled last fall, there was no such backstop for the business. His home was still worth more than the mortgage, but his bank was retrenching and had shut down the credit line. So Arnold sold his house, used some of the proceeds to keep his business afloat and bought a smaller home. "I thought about cashing out my retirement money and the college savings for the kids, but that wasn't the way to go," Arnold said.
  • That makes Arnold, president of the California Assn. of Mortgage Brokers, a lucky guy compared with hosts of small-business owners who relied on their housing wealth to start companies, buy equipment and manage payrolls. No longer buoyed by the housing boom, many now find their businesses and homes sinking in the backwash from the easy-money era.
  • ... using home equity credit lines and cash-out refinancings for business purposes was widespread during the good times. After all, 95% of small-business owners also own their own homes.
  • To get cash for business expenses, one-third of California small-business owners took out exotic, high-risk products, such as those that required little proof of income or allowed borrowers to pay so little that their loan balances rose. (the latter are called option ARM loans and many still wait out there - when I read about these in BusinessWeek in 2006, I was shocked & realized this would end badly) [Aug 13, 2008: Option ARMs- Who Thought Up these Time Bombs?]
  • Bornstein, who has studied the issue extensively, predicts the business owners, many now far underwater on their loans, could shed 2.1 million jobs in the state over the next four years, creating even more problems than the initial wave of subprime mortgages. (mmm... that does not square with green shoot analysis) "The second tsunami is particularly going to inundate small businesses," Bornstein said. (I thought small businesses were creating 200K jobs a month? My government tells me that in the birth death model of their monthly employment report... hmmm. You are trying to imply small businesses are in trouble - certainly you should be reading government reports to get your facts straight)
  • "People were saying that if you don't do it you are crazy, you don't know what's going on," he said. "And they said if you can't pay when the loan resets, you just refinance again." (lovely - I am sure these loans were AAA rated as well, and now as a taxpayer we're all on the hook for them. I love the ethos though: "Can't pay back your loan? Refinance!")
  • What Sokhom calls the "foreclosure crisis" among his clients started last year, when gasoline prices shot up. "Many of them came to us and said, 'We cannot do any more deliveries because every trip out we lose money.' Many of these people, when they bought a truck, used their home equity or an equity loan outright to buy the truck," Sokhom said. "Now when the business goes sour, they cannot pay the mortgage also."
  • The National Federation of Independent Business survey found that of the small-business operators who owned homes, 26% had mortgaged the residences to provide capital for the business. Answering a separate question, more than 10% said they had pledged their homes as collateral to buy other business assets.
  • That's a far greater number than those who use SBA loans, the government-guaranteed loans made by banks and credit unions. (clearly it appears the SBA actually has standards unlike mortgage originators - why bother with an SBA application process when all you need to do is call Chuck the mortgage guy who'll get your refinance approved in 48 hours or less) "Only about 5% of people seeking business loans use SBA," said Robert A. Borden, an SBA regional spokesman in San Francisco.

[Apr 8, 2009: Recession Causes Relatives to Move in Together & Sharp Drop Off in Divorces. Housing Bubble 2.0? (Not)]
[Jan 19, 2009: WSJ - Would You Pay $103,000 for this "Fixer Upper"?]

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