Could the sub prime debacle bleed into the overall economy - and take your small business along with it?
Probably not -- but a little education can go a long way in preparing
for any negative impact that the collapsing real estate market may have
on your business.
First some fresh facts. The Wall Street Journal reports that the
Securities and Exchange Commission's enforcement division is
investigating whether any securities regulations were broken in
connection with recent problems in the sub prime mortgage industry.
Wall Street analysts point to New Century Financial Corp., an Irvine,
Calif.-based home lender that recently cut off funding to bank lenders,
as the first and primary stop by federal regulators looking into the
sub prime mess. The Journal reports that the SEC is probing the events
leading up to its announcement that it would restate financial results
for the first three quarters of last year.
Congress is also getting into the act. Senate Banking Committee
Chairman Christopher Dodd, D.-Conn., has invited the chief executives
of New Century and four other sub prime lending companies to testify
before his committee this week.
Why all the hoopla? For starters, the growing number of delinquencies
and foreclosures means a skidding stop to the once-roaring real estate
market. According to a recent report from First American CoreLogic
Americans borrowed $2.2 trillion from 2004 through 2006 in the form of
adjustable loans, which start with low monthly payments that reset to
higher rates. As those loans reset, 1.11 million people will lose their
homes.
Analysts say that as home prices appreciated quickly, home buyers
swarmed to lenders offering option-heavy adjustable-rate loans that
made it simpler for borrowers to buy more expensive homes. But a
declining real estate market means that buyers who took out the loans
as the housing explosion was coming to an end made little or no money
off their investments. According to the CoreLogic report, it's those
borrowers who are most likely to wind up in default because they won't
be able refinance or sell their homes at profit to cope with higher
monthly payments.
"This isn't just sub prime," Christopher Thornberg, an economist with
the consulting firm Beacon Economics in Los Angeles, told The
Associated Press. "This problem is starting to occur in most of the
adjustable- rate mortgages. Even for prime borrowers, we're seeing a
big spike in delinquencies among adjustable-rate mortgages."
Small business owners who own adjustable-rate mortgages have limited
options. You can try and refinance to a lower fixed rate, but check
first for any language in your mortgage contract that says you can or
cannot refinance over a specific period of time. For example, some
option-arm deals prevent you from refinancing for one, two, or even
three years. If you see your mortgage rate skyrocketing, that’s your
best option. If you can manage to swing the payments for a year, even
as they rise, chances are the real estate market bust will peter out
and prices will go back up again.
No matter what, the sub prime debacle is bad news for millions of
homeowners, and by extension, the businesses they buy from. Common
sense tells us that if cash-strapped Americans have less money to
spend, it's the small business guy who gets hit first -- and hardest.