Economic Disaster - Are You Next?

Economic Disaster

Are You Next?

Michael Collins

The human costs of the U. S. financial crisis are coming into clear focus.  Family members lose their jobs, then their homes, and the cascade of ruin begins in earnest.  Health problems are ignored, anxiety and depression increase, and domestic violence is more common.  Many are on the edge, anticipating their worst fears:  losing their home or apartment then struggling to find the next meal.  The biggest issues right now are about basic needs -- food and shelter.

There's a rational, reasonably immediate solution to a good part of the economic disaster.  The banks won't like it but you will.   But first the sad facts.

There were 2.3 million default notices to homeowners in 2008, up 80% over 2007.  It will be worse in 2009 with Option ARMs coming due (those favorites of Alan Greenspan).

Typically the nation's economic leader, California, saw foreclosures increase by 160% in 2008.  As a result three percent of California homes, 240,000 in all, became bank properties.  These are the same banks that slithered up to the bar and demanded a double shot of the new elixir for failed financial institutions, federal bailouts.  Put it on the tab.

To understand the full extent of the economic collapse, consider this.  The current official unemployment rate is 7.2%.  This includes those out of a job who have actively sought employment in the past four weeks.  But this figure understates the level of economic distress.  There are 1.9 million unemployed "marginally attached" workers not counted and 8.0 million underemployed workers seeking full time employment.

The total unemployed and under employed figure is 21 million U.S. workers.

Michigan, Florida, Ohio, and South Carolina are facing hard times similar to those in California.  Your state is next.  It's a phenomenon.

Despite hundreds of billions in give aways to the banks, there are no reports of a single U.S. citizen or family receiving a bailout from Washington to help them stay in their home.

What happens when you're thrown out of your home or apartment and you have no job?

To begin with, you're poor.

You can live on the street, move in with relatives, or seek to rent a home or an apartment.   After a foreclosure, your credit rating will probably disqualify you from most opportunities at the outset.   If you're in a warmer climate, you can live in a tent city which began springing up across the country last September.

You can and will enter an entirely new world where you're exposed to a variety of risks that will make it very difficult to put your life back together again.  Crime, infectious diseases, underpayment for work, and increasing social isolation are routine.

You can become a crime victim.  In your new world, that of the poor, you will find that you're among the group with the majority of violent crime victims.

You can seek and receive occasional "subprime" medical care in hospital emergency rooms.  But the days of serious attention to an ongoing condition, arthritis for example, are over for you.

You can watch your life melt away and your family suffer, all without the prospect of any real assistance.  Homeless shelters are full in most places.  Public health programs have been overflowing for years.  The "welfare state" simply doesn't exist.  You're screwed.

Wall Street welfare was supposed to save us from all of this according to the Bush-Cheney scam artists.  Those two and their henchmen doubled the national debt in just a few short years of concentrated looting.  Somehow, the most recent Wall Street donations were supposed to secure failed financial institutions and generate a stimulus for the economy.  No deal.

To add insult to that injury, a $140 billion tax cut for banks was written "into law" by a Treasury Department bureaucrat, a move that everyone consulted said was clearly illegal.  Nothing was done about it.  In fact, a key congressional staffer explained it this way:  "We're all nervous about saying that this was illegal because of our fears about the marketplace," Nov. 10, 2008

Crime pays.  Deception pays.

But the money to pay working people isn't there thanks to the financial manipulations that made the very wealthy even wealthier and left the rest with little to nothing in return.   There is no room at this inn for people who need a helping hand.

When do the People Collect?

California passed a law that cut into foreclosures by requiring that the banks actually give a reasonable notice of default prior to tossing families onto the street.  This program had an impact for a few months but foreclosures bounced back and kept growing.  .

Representative Marcy Kaptur, (D-OH), responded to the economic collapse of Toledo, Ohio (11% unemployment) with a sensible idea.  Foreclosures and evictions are a commonplace event.  Kaptur tells citizens to stay put, don't leave your home if a foreclosure notice is issued.  "Produce the Paper" is the theme.  Due to the complexity of many bad loans, it can be very difficult to figure out which bank actually holds the mortgage or to even find a true loan document.  Without that information, there are legal challenges that can force banks to delay or forgo eviction.

Time for a Nationwide "Cramdown"

The easiest solution, the most immediate, is a cramdown.  What's that?

In bankruptcy court, a judge can take the total amount of a mortgage and divide it into two parts.  The appraised home value becomes the "secured claim" and "the amount over the current appraised home value" becomes the "unsecured claim."  The unsecured amount is discarded.  The secured amount, i.e., current appraised value, becomes the homeowner's only debt.  This debt can be amortized over the life of the loan.  Thus monthly payments go down, people have a much better chance of staying in their homes, and they have some disposable income for essentials. Link

Congressional Democrats and President Obama are arguing over legislation that would give bankruptcy judges greater options for "cramdowns."  Both sides of the argument are out of touch with the accelerating harsh realities of the U.S. economy as experienced directly by the citizens.

There's no court that needs to hear this case.  The nationwide cramdown should be negotiated directly by the Obama administration, in behalf of all citizens and the remaining banks.  Obama's two financial system insiders, Treasury Secretary Timothy Geithner and chief economic advisor Larry Summers, would all of sudden become the good cop - bad cop negotiators shoving the banks in a corner and forcing them so submit to the plan.

Both President Obama and Congress resisted a comprehensive program to benefit the millions facing foreclosure.  On Feb. 14, 2009, the Washington Post wrote of the Obama program to loosen options for bankruptcy courts to perform limited "cramdowns" for individual home owners through bankruptcy courts.  

There are not enough bankruptcy courts to handle the millions impacted by this economic crisis.  Many in need can't afford lawyers for court and judges would have latitude rather than a mandate to help homeowners.

The people will bring them back to reality very soon, just as they did on the specific issue of having someone in the cabinet so rich and aloof that he forgets to pay $146,000 in income taxes.  In the mean time, the opportunity to help those in need is passing.

Meeting the urgent need for people to have a home means less social and economic disruption.  There would be an immediate stimulus with more money available to spend in the real economy.  This stimulus program would put money back in the economy in months not years.

Now is the time.


This article may be reproduced in whole or in part with attribution of authorship and a link to this article.

Thanks to those who provided feedback on cramdowns and to Susannah Pitt for her very helpful comments.



Welcome to EP Michael

I think you will find a lot of support for modifications on the principle amount of a home here, seemingly just getting out of subprime ARMS is still near impossible.

I have a hard time in some respects giving someone a house when they signed up to buy a half a million dollar home with a $9/hr job and 6 kids.

There are limits here but on the predatory loans, the subprime, the ARMs resetting, those assuredly should be renegotiated.

Home prices fundamentally need to come down to match wage levels.

CNBC has a documentary called house of cards and they interview Greenspan. It's a good documentary but when Greenspan is on you just want to throw something at the screen because he just denies all responsibility in the whole Ponzi scheme.

Very nice post!

Thanks, nice to be here

The market is so artificial that the meaning of home prices depends on where you're located. In NYC, Los Angeles, and the DC suburbs, you can barely buy a home for $500,000. The salaries are higher but the relative position of the purchasers is still at the lower end of the pay scale. If it's Little Rock or Topeka, that's an entirely different story.

The system is truly dead, it just needs to fall over. In the mean time, imho, we need to push forward with temporary measures to keep people as whole as possible.

What's happened to the people in the 2.4 million homes that were taken back by the banks in 2008? Hard to find that information and that says a lot about our political system and the heavy censorship that we endure to keep a few in power.

this is an issue

home prices need to fall to when they are in alignment with real incomes and I fear they are going to try to re-inflate the bubble to stop the pain.

Bubble's R' Us

"Warning folks: Wall Street's happy-talking bulls are now hyping economic recovery and a new bull this year. That's a slower, but equally lethal 2009 version of that famous 1720 trick."  Paul B. Farrell

They're relentless. 


Small Business, 2nd "Tsunami" Wave of Foreclosure, and Job Loss

Many fail to realize that there are millions of self-employed small businesses, who employ from 1-10 employees, that are holding the mortgages that are going to reset in 2009 through 2012. Many experts believe that this will constitute the 2nd Wave of Foreclosures that will dwarf the Subprime Mortgage Crisis. The tragic aspect is that these borrowers are Prime and Near-Prime borrowers who hold ALT-A, Option ARMs, Interest-Only mortgages. There are $1 Trillion ALT-As, and $500-600 Billion Option ARMs.

So, here we have a major problem… Not only will these small business owners lose their homes, but there will be the resulting JOB LOSSES on their business failure. Note, although President Obama is stressing the need to create 3 million new jobs, we must understand that “JOB RETENTION IS AS IMPORTANT AS JOB CREATION”.

An NASE Survey sheds light on this critical issue. The NASE survey is at See the my Commentary.

According to this survey, it is estimated that 3,709,800 small business owners hold Alt-A and other toxic mortgages, and 1,279,800 are already delinquent as they have missed one to three or more monthly mortgage payments at mid-November, before the expected Resets that are scheduled to begin in 4th Quarter 2008 through 2012.

I am Prof. Samuel D. Bornstein, the author of the NASE Survey.

I welcome any questions that you may have.

Thank you,

Samuel D. Bornstein
Professor of Accounting & Taxation
Kean University, School of Business, Union, NJ
Tel: (732) 493 - 4799

Welcome to EP Prof. Bornstein

If you would like to write up a blog post on small business, 1099-misc, consulting and surrounding employment and support issues to gain more awareness via EP, we'd love to have you. Just create an account on the upper right hand corner.

Economic, housing crisis, taxes with respect to small business, sole prop, LLC, small C corp etc.

On the self-employment to the small businesses, I agree, they are being seriously ignored and usually are ignored by Congress.

Yes, if they are sole prop, I will assume if their residence goes down they also lose the business. But how many are running a business out of their home as well?

That's the leading edge of the black hole

This is a key point you make. I'm going to read the survey now and come back with questions. The Option ARMs are a nightmare with interest only payments and "betting on the come" by borrowers. When this wave hits, the working poor and "entry level" middle class will no longer be the subject of ridicule. You're right, small business owners, rising mid thirties executives, etc. will be in the midst of it. Their homes will go and they'll be in major debt on top of that. What a fraud we've seen committed on the public, initiated by Greenspan while he had many warnings that this was a scam.


That's an excellent survey.

Question 18: Which statement best describes your business? A career that presently supplies the main source of income in my household. 71.9%

It seems to me that these are the key people in terms of job creation and retention. Do you have cross tabs for this group for questions 5, 6, 10, 14, 16?

Also, do you have an estimate of possible job losses among the survey population and/or extrapolations about wider job losses from this economic crisis? This is very sobering.

"Main street" is still waiting or a hand but they've already had the arm put on them.

I earn $36/hr and have a house, but I resemble this:

 You can seek and receive occasional "subprime" medical care in hospital emergency rooms.  But the days of serious attention to an ongoing condition, arthritis for example, are over for you.

Heck, I earn $36/hr, my wife runs a daycare out of our home, we're rightside up on our mortgage, but thanks to the way insurance companies treat "pre-existing conditions" and the fact that I'm only a "marginally attached" worker, I can't get serious attention for my asthma, my Aspergers, or my kid's Cerebral Palsy (luckily Shriner's is helping on that last, vaguely).



Maximum jobs, not maximum profits.