Our Economy in Peril

Why Hispanic ENtrepreneurs Should care

By David Lizárraga, Chairman, U.S. Hispanic Chamber of Commerce

All business owners, regardless of industry or trade, care deeply about the state of our national economy. That is why we should pay close attention right now. Both the entrepreneurial spirit and assets of our community are threatened by an economic slowdown. There is no longer much doubt that unless extraordinary and effective steps are taken, the U.S. economy is heading towards a period of stagflation or even a recession.
Employment is contracting, the business surveys have weakened, and the negative feedback loops that may spur a recession are now in full swing, especially the links between falling housing prices, rising mortgage credit losses, rising credit restraint, and falling homeownership and employment. Adding to these pressures are high energy costs based on oil prices soaring beyond the unthinkable $100 per barrel.
One key question in the minds of Hispanic entrepreneurs and many Americans is how to avoid or cushion the impact of a contraction in our economy, and how we can best preserve the net worth and assets of our community. That is a very good question, and there are no simple answers.
In times of economic crisis we look to our government for the same safety and support we require after a hurricane or terrorist act. Our elected leaders must provide us concrete and certain remedies that can be prescribed for an economy ailing from a big correction in the housing market and the impacts on a lending industry that used new and unregulated means to diversify the risk, and in some cases to concentrate it as we saw with the rise of lenders specializing on the subprime market.
Why should we be concerned and not let the market correct itself?
The home is often the first type of substantive asset held by members of underserved communities such as ours. Therefore, foreclosures and losses in home value constitute a loss in net worth. This means lack of equity to pay for retirement or our children’s college, lack of collateral for business loans—even for SBA loans—and a general decline in financial security.
Housing prices are currently falling even faster than expected. And, if home prices were to decline at 20 percent in 2008, some estimates predict that there will be about 15 million homeowners—or 30 percent of all households with mortgages—who will have negative equity, or mortgage debt that exceeds the value of the home. Of these, about $1 trillion in mortgage debt will be held by subprime borrowers, but the remaining $2 trillion will be held by others. A significant share of these borrowers—and it is hard to know how many—are likely to default.
In some states like California, where lenders can only seize the home on defaulted mortgages and cannot seek other assets, homeowners may opt to walk away from their properties rather than wait for the storm to pass and their negative equity to become positive.
The cost of this correction is far too great and the consequences far too severe not to call for action from our federal government. States will lose more than $917 million in property tax revenue as a result of the losses in housing wealth caused by subprime foreclosures, and those losses also affect funding for the schools where our children learn, since these are primarily funded by property tax revenues. Ultimately, the upcoming foreclosures may lead to a $2.3 trillion economic loss. This is by all definitions a crisis, and it has greatly impacted low and middle income communities, especially Hispanic households.
As Chairman of the United States Hispanic Chamber of Commerce, I have led our organization’s support for an economic stimulus and will support further investments to reverse the course of our economy and bring us back to economic growth. Some may resist efforts for government intrusion in the economy, as did President Herbert Hoover. Ultimately, if we demand that the federal government bring stability to our economy, we can avoid the mistakes of the past, Hoover Handkerchiefs, and bring stability to the housing market for the good of our economy, net worth, employment, and even the education of our children.