RISMEDIA, February 19, 2009-Some things seem so obvious that simple folks like me have started to question our own common sense. Like the idea that the best way to help the average American, who has lost 40% of the value of his retirement nest-egg and half the equity in his real estate, is to GIVE billions of our dollars to the people who caused this fleecing of America. Huh?
By last report, none of the money had made its way to where it is needed and where it was supposed to be headed. Banks gobbled up the money and refuse to disclose what they did with it; but, they, apparently, haven’t been lending it. They won’t say where it went and tell us they don’t have to. They concluded with the statement that they really couldn’t track it anyway because all revenue goes together and its source is unaccounted for.
Again, huh? If I got even just a single billion from somewhere, I’m sure the IRS would make me account for its source. But, a statement like that raises the even larger question-do these people know even the basics of business? You track where your money comes from so that you can do more of what is profitable and less of what is not. No wonder some are already coming back for more. And, one exec at Bank of America, John Thain, spent $1.2 million on drapes for his office. Drapes! Why aren’t we marching in the streets?
The two things the bailout was intended to do, free up lending and stop foreclosures are nowhere near occurring. It should have started with bailing out small businesses not the banks. Banks don’t make money; they use money that is earned by people who have jobs. People need decent paying jobs and confidence in their ability to keep them. With businesses downsizing, buildings being boarded up, and business related bankruptcies rising, consumer sentiment and spending will continue to decline. The banks aren’t doing what the tax payers paid them to do anyway–loosen money and stop foreclosing…working with people.
The underlying problem of foreclosures must be addressed or unemployment won’t be halted. Once foreclosure activity reaches a tipping point, it will be hard to turn back the tide of more job losses, less consumer spending, and the collapse of communities ranging from small towns to entire states. This is going to affect everyone. Let’s hope the President’s plan unveiled yesterday will begin to address the housing crisis.
The hardest hit in all of this mess are not the CEOs and politicians, but America’s real heroes-small business owners. The Small Business Act defines a small business concern as “one that is independently owned and operated and which is not dominant in its field of operation.”
Small business provides half of all private sector employment but, more importantly, created 60 to 80% of all new jobs annually over the last decade.
And, right now, we are facing a triple whammy: decline in business, reduction of credit to restock and bridge revenue gaps, and houses that are over-leveraged and under-value.
The first step is to stop foreclosures immediately. I know that many people feel that homeowners in-over-their-heads deserve to go under, but many businesses get their startup and expansion funds from the equity in their homes. No one wins when jobs are lost and families are uprooted just to punish the entrepreneurial spirit.
The last thing we need is any more people abandoning their homes. The very idea conjures up visions of The Grapes of Wrath and the Joad family. At least they were on there way to somewhere. Where are we all going to go?
Up to now, almost nothing has been done. This is like the response to Katrina; lots of talk and not much action. Most of the people talking are either lying or don’t know what they are talking about.
Most mortgage “modification” is just a scam to hold out false hope while punitive forbearance agreements only forestall the inevitable.
All this talk about mortgage modifications is a bunch of hooey. Nobody has any real incentive to make this work because the alternative is way too profitable.
Most subprime loans are subprime loans because the borrower cannot show sufficient income to qualify. Now, remember all of those small business owners? The people who, by Washington’s own admission, are the back bone of the economy and the leading creators of new jobs? Well that’s us. We don’t have pay stubs and a company health care plan; we provide them.
Nobody talks about this, but most subprime loans are in the control of “Mortgage Servicing Companies.” Somebody has to collect the payments and forward the funds to the holders of the mortgage pools. For this, they get chump change. However, collecting late fees, penalties, and coercing borrowers into onerous forbearance agreements is where the real money is, and it is all theirs to keep.
The servicing companies make more money by forcing people into default and collecting unlimited fees. They specifically targeted subprime borrowers loan pools because they do have a higher rate of delinquency due to the often fluctuating income of the borrower. But, these borrowers can frequently get access to larger amounts of cash than a wage worker so they tend to be able to pay huge amounts to avoid foreclosure. Why would the mortgage servicer want to modify a usurious loan?
Let’s not forget that subprime lending is a very profitable business.
What Needs to Be Done Now
No more money for big business, it’s time for a rescue plan for Main Street.
By stopping foreclosures, we stabilize the housing market. Despite the current glut of developed real estate, we are really facing a long term shortage in America’s 10 fastest growing regions. Real estate and construction drove a prosperous economy for several years, and those jobs and the associated spending touch every area of regional and local economies.
Free up credit by directly funding Small Business Administration loans.
Reduce taxes across the board. Anything that stimulates spending helps small business. No sacred cows. Let’s rethink capital gain taxes and expand the MITD to include other types of real estate.
The National Federation of Independent Business is pushing a six-month “payroll tax holiday,” allowing both employees and employers to stop paying the 6.2% of payroll that they each contribute. For an employer, those tax payments can be crippling and discourage hiring.
Reform the health care system. We all know something is wrong here and it is another obstacle for small business to overcome.
These are the steps that this administration needs to take now if they want to save Main Street.
George W. Mantor is known as “The Real Estate Professor” for his wealth building formula, Lx2+(U²)xTFP=$? and consumer education efforts. During a career that has spanned more than three decades, he has amassed experience in new home and resale residential real estate, resort marketing, and commercial and investment property. He is currently the founder and president of The Associates Financial Group, a real estate consulting firm.
Mantor can be reached at GWMantor@aol.com.