The Housing Crisis and Home Business

Given the number of American entrepreneurs who run their businesses from a home office, the current problems in the housing market could have a major impact on American small business.

“In addition to being a place of business for over 50% of entrepreneurs in our nation, many micro-businesses utilize the equity in their home as financing to start and grow their firms,” commented the Executive Director for the National Association for the Self-Employed, Kristie Darien. “Therefore the current housing crisis, particularly falling home values is of great concern to the small business community.”

According to Darien, forty percent of micro-business owners said they were unsure about their ability to afford their home now or in the next few years due to the type of mortgage they have. Continuing to think about future plans, sixty-two percent reported being troubled about the resale value of their home and property. Knowing that reform is needed, entrepreneurs ranked the following proposals as their most favored:

  • 67% support reform and increase funding to government housing agencies and corporations in order to give homeowners a chance to trade in their current adjustable loans for stable rate loans.
  • 65% of micro-business owners favor increase regulation on the mortgage industry.
  • 57% support changing the bankruptcy laws to allow judges the ability to modify the mortgage loans on a debtor’s principal residence for homeowners who meet strict income and expense criteria.

Housing Crisis Graph

New regulations on mortgage lending do appear to be in the works. The sticking point between the Bush Administration and Congress is over whether the new programs under consideration will bail-out struggling homeowners. According to Nightly Business Report anchor Susie Gharib, the Bush administration proposal includes a series of reforms designed to prevent another mortgage crisis. These reforms include tougher disclosure requirements for banks and Wall Street firms, a nationwide licensing system for mortgage brokers and improvements in the way credit rating agencies perform due diligence.

“The objective here is to get the balance right,” said Treasury Secretary Henry Paulson. “Regulation needs to catch up with innovation and help restore investor confidence, but not go so far as to create new problems, make our markets less efficient or cut off credit to those who need it.”

While focusing on the mortgage industry and the future is important, there are still a lot of people—including many small business owners working from their home—that are suffering, and that is where Congress is placing its focus. “If you insist on each one of those who made an imprudent decision getting the full measure of punishment for that,” said Rep. Barney Frank, Chairman of the House Financial Services Committee, “then the whole economy suffers.” Along with Senator Chris Dodd, Chairman of the Senate Banking Committee, Frank is proposing billions of dollars in new Federal loan guarantees that could help as many as a million homeowners save their homes. “It’s time to aggressively use government loan guarantees, even if it means some borrowers who made mistakes get Federal help.” While the Treasury Department has not ruled out the Congressional plan, the Bush Administration is hardly enthusiastic about using taxpayer dollars to bail out struggling homeowners.

The problem is that many of these struggling homeowners are also running small businesses from those threatened homes. In the NASE Member Survey, out of 393 respondents, 85% identified themselves as homeowners and 40% said they were concerned about being able to afford their home. That is a sizeable number and it very likely reflects the views of many home-based small business owners. With an election coming up, let’s see what the candidates have to say about the crisis.

John McCain
On March 25, 2008, John McCain addressed the Orange County Hispanic Small Business Roundtable. This is what he had to say about the housing crisis in America:

I have always been committed to the principle that it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers. Government assistance to the banking system should be based solely on preventing systemic risk that would endanger the entire financial system and the economy.

In our effort to help deserving homeowners, no assistance should be given to speculators. Any assistance for borrowers should be focused solely on homeowners, not people who bought houses for speculative purposes, to rent or as second homes. Any assistance must be temporary and must not reward people who were irresponsible at the expense of those who weren't. I will consider any and all proposals based on their cost and benefits. In this crisis, as in all I may face in the future, I will not allow dogma to override common sense.

When we commit taxpayer dollars as assistance, it should be accompanied by reforms that ensure that we never face this problem again. Central to those reforms should be transparency and accountability.

Homeowners should be able to understand easily the terms and obligations of a mortgage. In return, they have an obligation to provide truthful financial information and should be subject to penalty if they do not. Lenders who initiate loans should be held accountable for the quality and performance of those loans and strict standards should be required in the lending process. We must have greater transparency in the lending process so that every borrower knows exactly what he is agreeing to and where every lender is required to meet the highest standards of ethical behavior.

Policies should move toward ensuring that homeowners provide a responsible down payment of equity at the initial purchase of a home. I therefore oppose reducing the down payment requirement for FHA mortgages and believe that, as conditions allow, the down payment requirement should be raised. So many homeowners have found themselves owing more than their home is worth, because many never had much equity in the house to begin with. When conditions return to normal, GSEs (Government Sponsored Enterprises) should never insure loans when the homeowner clearly does not have skin in the game.

In financial institutions, there is no substitute for adequate capital to serve as a buffer against losses. Our financial market approach should include encouraging increased capital in financial institutions by removing regulatory, accounting and tax impediments to raising capital.

I am prepared to examine new proposals and evaluate them based on these principals. But I think we need to do two things right away. First, it is time to convene a meeting of the nation's accounting professionals to discuss the current mark to market accounting systems. We are witnessing an unprecedented situation as banks and investors try to determine the appropriate value of the assets they are holding and there is widespread concern that this approach is exacerbating the credit crunch.

We should also convene a meeting of the nation's top mortgage lenders. Working together, they should pledge to provide maximum support and help to their cash-strapped, but credit worthy customers. They should pledge to do everything possible to keep families in their homes and businesses growing. Recall that immediately after September 11, 2001 General Motors stepped in to provide 0 percent financing as part of keeping the economy growing. We need a similar response by the mortgage lenders. They've been asking the government to help them out. I'm now calling upon them to help their customers, and their nation out. It's time to help American families.

Hillary Clinton
In a March 31, 2008 statement, Hillary Clinton called for six immediate steps to strengthen financial markets regulation and address our immediate housing and credit crises.
  • Establish a federal minimum standard for mortgage originators, including subjecting mortgage originators to minimum licensing, supervision and capital requirements, and bringing mortgage bankers more fully under the scope of the Community Reinvestment Act.
  • Immediate action to enable more effective near-term management of systemic risk, which would, at minimum, subject all institutions that are eligible to access the Federal Reserve’s credit to regulations equivalent to commercial banks.
  • More transparency and oversight of new, exotic financial products like complex derivatives that have exploded in recent years, including ensuring that financial institutions which hold, or are parties to, complex instruments like collateralized debt obligations and credit default swaps are subject to minimum capital requirements.
  • Strengthen the independence of, and reduce conflicts-of-interest for, rating agencies.
  • Strengthen consumer protections for credit cards and student loans with an immediate annual interest rate cap of 30 percent on all credit cards - and a directive to regulators to work toward a lower cap.
  • Immediate action to keep families in their homes by pushing forward on Representative Frank and Senator Dodd’s legislation to expand the FHA’s capacity to guarantee restructured mortgages and by standing ready to have the Federal Housing Administration purchase at risk mortgages to help unlock our mortgage market and keep families in their homes.

Senator Clinton also called for immediate action to both strengthen regulation in the financial markets and help keep families in their homes. Her proposals in these areas include:

  • Establish a federal minimum standard for mortgage originators.
  • At the heart of the current housing and credit crisis is the widespread practice of mortgage brokers and mortgage bankers who made bad loans and passed them off their books with little responsibility to borrowers or the communities in which they operate. We should solve this with:

1. Legislation to subject all mortgage originators to the same type of regulations that banks are subject to, including minimum licensing, supervision and capital requirements;

2. A new affirmative duty on mortgage originators to determine whether a borrower has the capacity to repay;
3. Minimum requirements for state investments in enforcement capacity to ensure that those standards are actually enforced;

4. Bringing mortgage bankers more fully under the scope of the Community Reinvestment Act to strengthen their ties to the communities in which they operate.

  • Immediate legislation to enable more effective near-term management of systemic risk should include:

1.Immediate action to provide the Federal Reserve and Secretary of the Treasury with temporary authority to require reports, promulgate regulations and guidelines-including capital and margin requirements and guidelines on leverage and risk management-and take appropriate enforcement actions with respect to not only institutions accessing the Fed’s credit but also those that pose a systemic risk.

2. A requirement that the Treasury and Fed issue new rules within 90 days. These rules should, at minimum, subject all institutions that are eligible to access the Fed’s credit to regulations equivalent to commercial banks.

3. This action would address our immediate crisis while allowing adequate time for careful consideration of proposals for broader and more permanent management of systemic risk. Such proposals should be designed in consultation with global regulators to ensure that the new rules both contain global systemic risk and maintain the international competitiveness of U.S. financial services institutions and other US businesses.

  • More transparency and oversight of new, exotic financial products like complex derivatives that have exploded in recent years.
  • Ensure that financial institutions that hold, or are parties to, complex instruments like collateralized debt obligations and credit default swaps are subject to minimum capital requirements. Action should be based on the principle that capital requirements related to risk should be applied to all bank-like institutions that issue credit. In addition, we should consider subjecting the buyers of complex financial instruments to margin requirements similar to those that already apply to the buyers of stocks.
  • Strengthen independence and reduce conflicts-of-interest for rating agencies. We should do more than simply study conflicts of interest involving rating agencies. The SEC should take immediate action to either:
1. Change the existing compensation structures where rating agencies are paid by the institutions they rate; or

2. Require new, affirmative steps to enhance rating agency independence and accountability. Such action could include requiring rating agencies to certify that their rating practices adhere to independence standards adopted by the SEC; empowering an independent Risk Committee with no financial incentive to rating agencies to review rating decisions; or establishing independent rating agency Ombudsman approved by the SEC.

  • Strengthen consumer protections for credit cards and student loans. Congress should take immediate action to:

1. Immediately impose a national annual interest rate cap of 30% on all credit cards - not just the stated rate, but the effective rate.

2. Direct the OCC to work toward an even lower interest rate cap.

3. Enact a Student Borrowers’ Bill of Rights that will require lenders to clearly state in easy-to-understand language: the annual interest rate and what that means over the life of the loan; monthly payment; length of the loan; and fees and interest rate increases that will occur if a student fails to make on-time payments.

  • Take immediate action to keep families in their homes. We cannot let a discussion about rearranging the deck chairs of financial market regulation distract us from the fact that right now the value of families’ most valuable asset is falling and thousands of families are receiving foreclosure notices.

1. We should push forward on legislation designed by Representative Frank and Senator Dodd to expand the FHA’s capacity to guarantee restructured mortgages. But given the depth of the crisis, the Federal Housing Administration should be ready to purchase at risk mortgages to help keep families in their homes.

2. We need a second stimulus with $30 billion for states and localities to help fight concentrated foreclosures.

3. We need to immediately pass legislation to clarify the legal obligations of mortgage servicers that help at-risk borrowers restructure their mortgages.

Barack Obama

Barack Obama believes that it is time to reconsider how we oversee financial markets in this country. Much of our regulatory apparatus was invented in the 1930s — in a world where the financial system was centered on banks and easy to understand. Obama believes that our existing patchwork of federal and state regulation is not sufficient to provide the rules of the road in a 21st century economy. We need to update our regulatory oversight framework to prevent future crises. While the details of these changes should be developed only after adequate analysis and public debate, Obama believes that the following six principles are necessary for reform.

  • Provide the Federal Reserve with basic supervisory authority over any financial institution to which it may make credit available as a lender of last resort.
  • Capital, liquidity and disclosure requirements should be developed and strengthened for all financial institutions.
  • End our balkanized framework of overlapping and competing regulatory agencies.
  • Regulate financial institutions for what they do, rather than who they are.
  • Crack down on trading activity that crosses the line to market manipulation.
  • Identify systemic risks to the financial system, no matter where they arise.   

Regarding the housing crisis specifically, Obama holds that the implosion of the subprime lending industry directly threatens over two million households nationwide with foreclosure, and is spreading devastation to the economy as a whole. According to Obama, over the past several years, while predatory lenders were driving low-income families to financial ruin, ten of the country’s largest mortgage lenders were spending more than $217 million lobbying Washington to weaken oversight and regulation. In 2007 alone, the industry spent $32 million on lobbying expenses and campaign contributions and donations to block responsible reforms. His proposals include:

  • Creation of a new FHA housing security program.
  • Calling upon lenders to write down loan amounts on more conventional borrowers at risk.
  • Close the bankruptcy loophole for mortgage companies.
  • Lower people’s interest payments by creating a new mortgage interest tax credit.
  • Provide an additional $10 billion of mortgage revenue bond authority.
  • Combat mortgage fraud and predatory subprime loans.
  • Mandate accurate and easy to understand loan disclosure. 

Obama would also enact a $30 billion economic stimulus package to address the mortgage crisis, protect vulnerable families and strengthen the economy. Components of this package would include:

  • A $10 billion foreclosure prevention fund to help Americans keep their homes.
  • $10 billion in relief for state and local governments hardest-hit by the housing crisis to prevent cuts in critical services.
  • A extension and expansion of unemployment insurance.

Ultimately, there is little difference between the candidates on this. They all want regulation reform and they all want—or are at least open—to helping struggling homeowners while turning away from speculators who will, no doubt, end up sharing the blame for this mess with the regulators who were supposed to watchdog them. McCain says he’ll be pragmatic rather than ideological, like Clinton and Obama, and wishes to work with the industry to create reform. Clinton and Obama would solicit industry buy-in, but with them the focus will be on the heavy hand of government. We don’t know how much McCain’s plan would cost, but each of the Democrats would spend at least $30 billion on this. No one is talking about how they’d pay for it all.

If you are a small business owner working out of your home, this is something you need to be keenly aware of. One of the reasons our nation’s founders tried to protect farmers from taxation and debt was that their home and their livelihood were connected. To lose one meant losing the other. If you work out of your home, you are in the same situation; your home is where you make your living. This is, perhaps, the most personal election season we’ve had in ages. With the various crises we face as a nation—housing, energy, healthcare, war and terror, the economy—coming to a head as we approach the general election, our lives will likely change once the new president is seated. It’s time to do your homework on the candidates, not only for president but for Congress as well, and pick the one that you think will do the most to keep you in your home and in business and America working.