The Mortgage Meltdown – Should You Worry?

What does the mortgage meltdown that’s emerged over the last few weeks mean for health and wellness businesses?


First, here’s the background, in case you missed it:

In a nutshell, mortgage lending to subprime borrowers (those with poor credit records) has dried up. Also dried up: Alt-A mortgage financing (a step below prime lending, which is lending to the borrowers with the very best credit). No-doc and low-doc loans — which did not require income or employment documentation – are a thing of the past for most residential borrowers, at least for the time being.

How serious is it? American Home Mortgage, a major mortgage lender, has declared bankruptcy. Opinions vary as to whether Countrywide, the nation’s largest lender, will survive the mess. Numerous smaller mortgage bankers have failed, and many others have severely limited or halted lending – even to borrowers literally headed to closing meetings to sign their final loan documents. Foreclosures are up dramatically as well – through the end of June, one foreclosure filing for every 134 U.S. households (per RealtyTrac).

This morning, Wal Mart warned investors that its profits for 2007 will be lower than expected, thanks to….you guessed it, slowing home sales and less availability of credit, plus higher energy prices.

When you hear messages like this from Wal Mart, you can bet that the same issues are affecting lots and lots of other businesses – and that in turn affects the money your customers have to spend and their willingness to spend it when they have it.

Potential problems to watch for:

1) Cuts in non-essential spending. Most health and wellness expenditures are discretionary – particularly outside traditional healthcare. So nervous consumers, even if they haven’t been directly affected by these events, may cut back their spending on non-essentials.

2) Local employment disruptions. When mortgage lenders scale back their operations, they typically lay off thousands of employees with little to no warning. For example, one mortgage lender laid off 9,000 employees, essentially overnight. Call centers which employ these folks are often located in smaller cities where the sudden economic hit is dramatic. Same thing goes for the major builders, who have cut back on new homes dramatically.

Think about your customers and who they work for and with, whether as employees or contractors or vendors. If your business might be at risk, develop a contingency plan.

3) Local home sales and home building disruptions. In many parts of the U.S., new home sales and new home building activity have collapsed. That affects everyone who supports those activities, from real estate agents to yard and pool services to tradespeople to title companies to home supply and hardware stores. And as these folks cut back, they stop spending elsewhere.

Again, consider your local economy and if you’re likely to be affected, get your contingency plan together.

4) And of course, the root cause of the meltdown – overextended homeowners. These folks fall into two buckets. First, those who have defaulted (or will default) and stop making payments on their mortgages. And second, those homeowners who have scaled back their spending so that they can continue to make payments. The implications for your business are obvious.

Especially likely to fall into this category: first-time homeowners, consumers who jumped into real-estate investment as a hobby thanks to the now-vanished housing boom, those with troubled credit histories who used the easy credit of recent years to buy, and folks who bought using adjustable rate mortgages whose payments will readjust this year or next to levels they can’t afford.

5) The ripple effect. That carpenter who’s out of work because building has ground to a halt? He cancels his cable. When the cable company feels the pinch, it lays off administrative people. When those administrative folks lose their jobs, they cancel their health club membership….stop getting massages…stop buying supplements…and on and on.

While the housing collapse won’t last forever, it may well depress spending for the next couple of years or so. As a business leader, you can’t control any of this.

What you can – and SHOULD – do is grit your teeth, make a realistic assessment of your customer base and how it’s likely to be affected by these developments, and put together a contingency plan so you know how to handle your worst-case scenario.

It’s also a good time to look at your product and service mix. Should you add some more economical options? Do you need a policy that allows members to suspend memberships until they’re back on their feet?

And a word to the wise – if your knee-jerk answer is that your customers and business won’t be affected, check your facts. It’s easy to kid yourself about things like this.

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