Here’s an interesting fact. I’ve never met one of my customers face-t0-face. Back when I started Distressed Loan Advisors back in 2009, I assumed I would one day have a store front, where local business owners who were struggling to make ends meet would come to me. I’d give them a bang-up song and dance about how I could help save them from peril, then we’d sign a contract, stand up, exchange firm hand shakes and start our relationship. So did it turn out that way? Not so much. What ACTUALLY happened is pretty interesting too, and about the polar opposite of what I was expecting. I was getting tons of phone calls, from mostly outside my town. Actually, they were also outside my county, state, zip code, area code, and even time zone! I was getting TONS of calls from small business owners from California who were struggling to pay their SBA loans.
So, why California? Think real estate.
In 2008, when the you-know-what hit the fan, home prices all over the country were all all time highs. Residential mortgages were easy to get, and when people tapped out their home equity lines of credit, they simply got another appraisal and increased the limit on their home equity line. Nowhere was this more prevalent than good ole Golden State. So when the merry-go-round stopped, people started defaulting on their residential mortgages like it was a bodily function. You don’t need to a PhD in economics to know that when millions of people are losing their homes to foreclosure, and all of a sudden hardly anyone can qualify for a mortgage, that home prices are going to drop. And drop they did, like penny to the bottom of a wishing well. Except instead of a wish coming true, people were experiencing their worst nightmare.
Ok, ok, so what does any of this have to do me getting a lot of distressed calls from California? When people take an SBA loan, you see, the frequently have to pledge their home as collateral. So when Bob and Suzie, first took their $200,000 SBA loan, they had a residential mortgage of $300,000, and their home was worth $500,000. The banks and SBA assumed that in maybe a year or two, the home would be worth $600,000, and the loan would be well secured. Well, you know what happens when people assume things. It all came crashing down. The $600,000 home was worth $300,000 overnight. And Bob and Suzie’s business? In the toilet. So when it came time to figure out how they were going to get paid, Banks all over California were saddled with worthless collateral. In Bob and Suzie’s case, there was not equity for the SBA lender to fall back on, and as a result, there was an opportunity to settle Bob and Suzie’s personal guaranties for less the the $200,000 that they still owed.
Because California was hit so much harder than other parts of the country, it soon followed that is was a hot bed of defaulted SBA loans. Compare that with the area I live in NJ, where home prices simply leveled off so the home that was pledged had the same amount of equity as when the SBA loan was originated, meaning that there was at least some collateral value in those properties. A key element to any SBA settlement is a lack of collateral, and the epicenter of such a situation was California.