Prof. Samuel D. Bornstein

'Bad Bank' Model Is Disastrous - This Approach Is Needed

The Bad Bank and the 2 Ton Elephant in the Room

Under the "Bad Bank" scenario, the taxpayers will own these “Troubled Assets” which are comprised of "Toxic" mortgages.

In effect, the US government (taxpayers) will be bearing the loss on these “toxic” mortgages. The growing concern is that these losses will continue to materialize as defaults increase with the projected 8 million foreclosures expected over the next four years. It seems that the key to this crisis IS THE BORROWER!

The underlying “troubled assets” are the “toxic” mortgages such as Alt-A, Option ARMs, Interest-Only, etc. that are interwoven into the Mortgage Backed Securities, Collateral Debt Obligations, and other derivative investments that are leveraged into investments valued in the trillions of dollars worldwide.

Since the valuation of these “toxic” assets depends on the Borrower’s ability to make the monthly mortgage payments, the key to a solution of this Economic Crisis is the Borrower!

Everyone is ignoring the “2 Ton Elephant in the Room”. Many agree that the contributing factor to most of our problems is the consumer's lack of financial understanding. He is like a "Boat without a Paddle" when it comes to managing money and making money choices. Everyone is betting that the Borrower will default and foreclosures will follow. The high rate of foreclosure should have been expected because the Borrower has no concept of managing money.

It can be argued that the Borrower’s lack of knowledge in financial management was the primary cause of the Subprime Mortgage Crisis which precipitated the Credit Crunch and our current economic woes.

We have tried foreclosure moratoriums, loan modifications, bailouts, in the belief that these initiatives will save the Borrowers. The fact is that these measures have failed and are not working! These measures are only postponing the inevitable defaults. The evidence is that Re-default is occurring anyway at a rate of 60% within 6-8 months.

Let's finally address the real issue which requires developing a program of "Immediate and Specific Financial Guidance" to help the Borrower understand how to manage his financial affairs.

The Borrower is in desperate need of "Financial Guidance" in this complex economic environment that requires "informed" financial decision-making. The Subprime Mortgage Crisis, out-of-control consumer spending and credit card usage, and the spike in foreclosures and bankruptcies provide evidence of that fact. Loan modification or "Bailout" will not work. Even after loan modification, the re-default rate was 60% within 6 months!

The solution is a program of Immediate and Specific Financial Guidance that will help the Borrower "naturally" be able to make the monthly mortgage payment, without "bailout" or extensive loan modifications which have proven to be a failure. This program is NOT the so-called Financial Literacy initiative that simply disseminates "information", but rather it is a program that will help the Borrower "understand" how to manage money and avoid the pitfalls that have previously caused financial
distress.

Borrowers, both small business and individual, require Immediate and Specific Financial Guidance in order to avoid default and foreclosure. As the Borrower is successfully guided to avoid default, the financial and housing markets will respond favorably. The result will be a reversal of the downward trend in the valuation of the “troubled assets”.

If we are successful, we can turn this crisis “all around” and stimulate the economy “naturally” rather than by “bailout” which does not guarantee success.

As part of the Bad Bank solution, the US Government can mitigate the losses on these “Troubled Assets” by providing a program of “Immediate and Specific Financial Guidance” which will help guide the Borrower to avoid default and make the monthly mortgage payments.

Instead of the expected losses, the US government (taxpayers) will benefit from the unexpected gains that will result as these investments grow in value.

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

Is More Financial Advice Really the Solution?

Most Americans are like a “Boat without a Paddle” when it comes to the ability to use Financial Understanding for sound financial decision making affect our lives. Our level of Financial Literacy has lagged far behind the pace of the complexity of financial matters. This is the cause of our problems.

Traditional Financial Literacy has been shown to be a failure because it soley presents "information" but not "education". Learning is the key to education. There is a need for “financial guidance” as is evidenced by the Subprime Mortgage Crisis, the growing number of personal bankruptcies, the dangerously high level of credit card debt, the low savings rate, the lack of retirement planning, etc. Financial guidance will be especially effective for the Subprime Mortgage borrowers who are currently at risk of mortgage default, foreclosure, and financial distress.
We will repeat our financial errors, UNLESS we direct our national attention to addressing this weakness in our national character.

I have been an educator for the past 30 years as well as a CPA/Consultant. I have researched this issue for the past 8 years and have concluded that the "Delivery System" for education is flawed. We require a new means of delivering Education that delivers "Understanding and Comprehension".

There is a Chinese proverb..TELL ME AND I FORGET, SHOW ME AND I REMEMBER, INVOLVE ME AND I UNDERSTAND. We need a delivery system that follows this proverb.
Samuel D. Bornstein
Professor of Accounting & Taxation
Kean University, School of Business, Union, NJ
Tel: (732) 493 - 4799
Email: [e-mail]

U.S. Housing: A False Dawn Recovery in 2009?

RE: 2nd Wave of Foreclosures, Small Business, The Housing Market, Foreclosures, and Job Loss:

On December 14, 2008, CBS’s 60 Minutes had a segment on the 2nd Wave of Foreclosures. They indicated that experts were expecting another wave of mortgage defaults on ALT-A and Option ARMs mortgages which will dwarf the Subprime Mortgage Crisis. CBS MISSED A VERY IMPORTANT FACT!

Many fail to realize that there are millions of self-employed smaller businesses, who employ from 1-10 employees, that are holding the mortgages that are going to reset in 2009 through 2012. 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-Elect Obama is stressing the need to create 3 million new jobs, we must understand that “JOB RETENTION IS AS IMPORTANT AS JOB CREATION”.

I authored a survey which was conducted by the National Association for the Self-Employed (NASE) to its national membership. The NASE Survey disclosed disturbing facts. The NASE survey is at www.nase.org . See the NASE News for the Survey on Toxic Mortgages. Please read 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.

The solution lies in the hands of Congress as they meet in January to structure an economic stimulus package. Congress should take note of this survey and be “proactive” in addressing the situation, rather than “reactive” as the case has been in the Subprime Mortgage Crisis.

We can’t afford another shock to our economic system at this time. This 2nd Wave of Foreclosures which will be caused by the ALT-A and Option ARMs will not only result in Foreclosures, but also Job Loss.

Option ARMs: The Banking Backdrop of 2009

RE: 2nd Wave of Foreclosures, Small Business, Foreclosures, and Job Loss:

On December 14, 2008, CBS’s "60 Minutes" had a segment on the 2nd Wave of Foreclosures. They indicated that experts were expecting another wave of mortgage defaults on ALT-A and Option ARMs mortgages which will dwarf the Subprime Mortgage Crisis. CBS MISSED A VERY IMPORTANT FACT!

Many fail to realize that there are millions of self-employed smaller businesses, who employ from 1-10 employees, that are holding the mortgages that are going to reset in 2009 through 2012. 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-Elect Obama is stressing the need to create 3 million new jobs, we must understand that “JOB RETENTION IS AS IMPORTANT AS JOB CREATION”.

I authored a survey which was conducted by the National Association for the Self-Employed (NASE) to its national membership. The NASE Survey disclosed disturbing facts. The NASE survey is at www.nase.org . See the NASE News for the Survey on Toxic Mortgages. Please read 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.
The solution lies in the hands of Congress as they meet in January to structure an economic stimulus package. Congress should take note of this survey and be “proactive” in addressing the situation, rather than “reactive” as the case has been in the Subprime Mortgage Crisis.
We can’t afford another shock to our economic system at this time. This 2nd Wave of Foreclosures which will be caused by the ALT-A and Option ARMs will not only result in Foreclosures, but also Job Loss.

Solving the Housing Crisis in Bankruptcy Court

I agree with the proposal, which was originally proposed by Senator Durbin, to allow bankruptcy judges to modify mortgages in foreclosure, but I am coming at it from a different direction.

I recently concluded a national survey which was conducted by the National Association for the Self-Employed (NASE). The survey results confirmed my research that these small business owners (16.2 million in 2007 according to the SBA) fell prey to the "toxic" mortgages that are expected to "Reset" in 2009 and may result in foreclosure. It is a tragedy when a homeowner loses his/her home, but the tragedy is magnified when that homeowner is also a small business owner employing 1-10 employees.

I believe that these small business owners should have priority as their mortgages are modified because these small business hold the fate of our economy. As small business goes, so goes our economy.

Dubious Statistics of the Day, Toxic Mortgage Edition

In rebuttal to Mr. Felix Salmon, I wish to state that in our telephone conversation, Mr. Salmon never identified who he was, nor his purpose in calling. In fact, he called unannounced. I took his call, not knowing his intent. Had I the time, I would have resolved his concerns and doubts. Of what I did say, he clearly edited many of my comments in order to diminish the foindings of the survey. There is ample basis for the NASE survey results and conclusions. Any concerns that he may have can be explained to his satisfaction. I never believed that I was being interviewed as if in an Inquisition.

Prof. Samuel D. Bornstein

Our Clueless Congress Strikes Again

I would like to bring a very important bit of information to your attention that relates to this economic crisis that was overlooked until now. As you read this, keep in mind that the borrower whether a small business or individual has been proven to be like a "boat without a paddle" when it comes to financial understanding. There is need for immediate and specific financial guidance for all borrowers if we want to get out of this crisis. Loan mods will not work, unless the borrower has a financial understanding. This must be addressed, immediately.

On Sunday, 12/14/08, CBS 60 Minutes aired a segment "The Mortgage Meltdown".

Scott Pelley's piece on the 2nd Wave of Foreclosures overlooked a critical fact. The next wave of Foreclosures in 2009 Will Take Self-Employed and Smaller Businesses who have these TOXIC mortgages. In fact, ALT-A, Option ARMS, Interest-Only, the TOXIC Mortgages that are considered the "Troubled" assets in TARP were marketed to the self-employed who fell prey to them. The upcoming defaults on these risky "Toxic Mortgages" will result in an increase in foreclosures. But worse, once these small businesses fail, the resulting loss of jobs will cause millions to add to the ranks of the unemployed. Note that self-employed business owners (16.2 million according to the SBA) employ between 1-10 employees.

An NASE survey,nase.org, was the first to provide compelling evidence of small business involvement in the upcoming toxic mortgage crisis. The survey was created by Prof. Samuel D. Bornstein and Jung I. Song, CPA of BornsteinSong Consultants in Oakhurst,NJ,and was conducted by the National Association for the Self-Employed (NASE) which issued a Press Release on November 21, 2008.

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. These small business owners will be at-risk of payment shock and default as their monthly mortgage payments skyrocket. Small business owners were especially targeted for these Alt-A loans which required little or no documentation of income which appealed to many small business owners who previously were unable to qualify.

The resulting defaults will be the cause of the upcoming second tsunami wave of foreclosures that will dwarf the subprime crisis and will take many homeowners and small business owners.

I would be happy to discuss the implications of the NASE Survey, since I created it and NASE ran it to its national membership (250,000). See the NASE website nase.org under NASE NEWS for the Toxic Mortgage Survey.

Thank you,
Prof. Samuel D. Bornstein