The Mortgage Crisis

Are the nation's current mortgage industry crisis and home care connected? You bet. And the really frustrating thing about the situation is that HME companies had nothing to do with the cause but must deal with the aftershock.

Recall the advertising from only two or three years ago when the cost of a house was rising. Mortgage companies offered below-market rates, non-amortizing loans, lower equity requirements and other inducements to home buyers. Interest rates went up, delinquencies followed, and now the country is awash in foreclosures.

Think about who owns those bad home loans: mortgage companies, commercial banks and other equity investors. Many of the mortgage companies are themselves owned by commercial banks, and the banks are to some extent among the other equity investors.

Home care gets a lot of its capital from commercial banks. Some of the leasing companies are owned by commercial banks, and the others borrow from commercial banks. These are the same banks that have seen the increase in bad loans from their mortgage investments.

Beginning in 1988, bank regulators adopted risk-based capital requirements. This means that the risk associated with the bank's assets (loans and investments) are ranked. As the risk associated with assets increases, so does the requirement for equity. If the equity doesn't increase appropriately, the bank and the regulators have issues to deal with.

Lately, the risk associated with mortgage-related assets has gone up. So to avoid issues with regulators, bank managers will offset this increased risk with a decrease in the risk they accept in their other assets. Those other assets include (but are not limited to) small business loans, equipment leases and consumer loans.

To achieve a lower risk level, the banks will do a few things: They will likely hold more cash (pretty low risk). But the increase in cash will decrease the funds available for loans and leases of any type. They will also require a higher standard for new small-business loans and equipment leases. So, when a small business — an HME company, for instance — applies for a loan, it will have to be of higher quality to be approved. When a small-business loan comes up for renewal, the standard for approval will be higher, too.

Proactive HME providers will be sure their company's financial condition allows them to be viable in the credit markets. To prepare, these are the things you should do before your next request for a loan or lease: