Sub-Prime Financial Impact Comes Into Focus
For those of you who thought the sub-prime mortgage mess was worse than we knew Banc of America has just put some numbers on it and it’s bad. When it comes to sub-prime mortgages we ain’t seen nothing yet. The current rate of foreclosures due to mortgage resets is low compared to the next two that will hit in ‘o8 and about the same as the one that will hit in min-’09. The flippers and the speculators have been cleaned out. Next up are the actual homeowners. It adds up to over $1 trillion in mortgages when you add in the Alt-A loans with the sub-primes.
It also now comes out that back in ‘03 mortgage insurers were backing off the sub-primes and refusing to pay claims. Seems they were insuring under the assumption that the mortgagee’s income as stated on the mortgage application form was use as a guide line by the originators and underwriters. The insurer’s thought an applicants income was part of the calculation in determining their qualifications for the mortgage in question. In retrospect that was big news in ‘03. When the professional insurers start to back away that is a big red flag. (Think about home owner’s insurance in Florida.)
What does this mean to the small business person? First and foremost, loans of all types will be more expensive and more difficult to get. Remember, a lease is a different type of loan. Second, the value of your house will suffer on the open market. Banks sell foreclosed homes at below market rates just ot unload them. That drives the price of all homes in that market down. Third, lending institutions will have to keep more cash in reserve. Of course, that means less to lend to all borrowers. Fourth, suppliers to your business will tighten their credit arrangements with you at every level.
How do yo proceed with your business? Do anything except spend your cash. Your corporate liquidity is king. Don’t borrow unless you absolutely can’t help it. If you feel you have to spend some money think about it twice. See if you can get away with spending less. Volume purchases become less of a good idea.
Bottom line; credit is going to get tighter and the housing market is going to get much worse before it gets better. Think 2010.
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