The houses of a growing number of small businesses operators across California have been appearing in foreclosed home search results as more and more of them are losing their businesses and houses to the recession.
Many small business owners across the state had used their homes to obtain loans to expand their businesses.
Even during the boom, it was not easy for small business owners to go to the banks and obtain loans to pay for new equipment or manage payrolls, so they acquired home equity loans and loan refinancings to raise cash.
According to the National Federation of Independent Business, 95 percent of owners of small businesses in the U.S. also own their homes. It is not unusual then that many of them would use their home equities to start or expand their businesses. In the next years, it would become usual to see houses formerly owned by small business owners in foreclosed home search results.
In California, one-third of small business operators obtained highly risky mortgage loans to raise cash for their operations, according to Samuel D. Bornstein, an accounting professor at Kean University of Union. He added that most of the lenders allowed these small business owners to make minimum payments, pushing the loan balances to higher levels. When these balances become impossible to pay, the borrowers walk away, leaving their houses to foreclosed home search lists.
Bornstein, who has been studying home-equity small business loans, said that many of these small business owners with large home equity loans are now underwater. He predicted that more than 2 million jobs in California will be lost over the next 4 years as a result of failed small businesses. One would not like to speculate on how many of these owners would also lose their houses to foreclosed home search lists.
Namoch Sokhom, head of business development at the California nonprofit group Pacific Asian Consortium in Employment, said many immigrants in Southern California refinanced their houses to start small enterprises like home remodeling services and food deliveries.
Sokhom added that banks advised them to take out adjustable rate mortgage loans and high-interest home equity loans because they had no financial records to be able to obtain commercial loans.
Based on data from the NFIB, 26 percent of all small business owners nationwide who owned homes had mortgaged their homes to raise capital and that more than 10 percent of them took out home loans to buy new equipment and other business assets.
With the further tightening of credit because of the mortgage crisis, more small business owners are expected to follow the fate of those who not only lost their small businesses but also lost their houses to foreclosed home search lists.
Comments on this entry are closed.