Main Street's soaring sour loans

Eric Greedey makes a smoothie with the help of a s (photo credit: AP)
Eric Greedey makes a smoothie with the help of a s
(photo credit: AP)
As the effects of the economic collapse beganpouring down Main Street, the US government last year was left holdinga record $2.1 billion in write-offs of small-business loans it hadguaranteed. Officials expect the number of defaults to rise as thenation continues to climb out of the recession.

Records obtained under the federal Freedom ofInformation Act show the public is paying to offset bank losses onsmall-business loans across the country, from a convenience store inthe tiny Canadian border town of Houlton, Maine, to a graphic-artsdesign company on the island of Hawaii, more than 8,000 kilometersaway.

Despite having loans written off, little companies such asCaffe Sportivo - an espresso shop and small gym in Redwood City,California - are barely scraping by.

"I just couldn't make any payments. I was barely making rent orpayroll," owner Chris Sakelarios said on a recent afternoon when hercafe stood empty except for two patrons who read as they sipped coffee."The same as everyone else. We're in a hovering pattern."

It's a sign that even as record profits reemerge onWall Street, thanks to massive government loans and guarantees forbanks deemed too big to fail, the pain on Main Street is as profound asit's been in half a century. The companies that were not too big tofail are failing.

Their plight is a shift from previous recessions when smallbusiness bounced back ahead of big employers, said Todd McCracken,president of the lobby group National Small Business Association.

"This could be the first economic recovery we've seen in a long time that hits small business the hardest the longest," he said.

The Small Business Administration purchased $2.1b. in bad loansfrom lenders last year. Agency officials say it's likely that this yearwill see another high as the recession nears two years.

"It's frustrating when [banks] are getting bailed out for baddecisions they made, that there isn't more assistance for the smallbusiness," said Eric Geedey, who manages Caffe Sportivo for Sakelarios.

Sakelarios obtained a $20,000 SBA loan from Union Bank in late2007 to start her business when the economic outlook was more positiveon the affluent San Francisco Peninsula. Within a year, however, shewas scraping by with the help of a landlord and vendors who let heradjust payments. She has reduced the hours of her seven employees andrelies on her brother and a friend to help keep the doors open onweekends. The balance of the loan was written off in early January.

In addition to being dogged by bad credit, the cafe will have to report the loan charge-off as taxable income, Geedey said.

Sakelarios isn't the only recession victim and she won't be the last.

SBA loan defaults generally occur in two stages. The first iswhen the bank decides it won't get its money back and asks thegovernment for the guaranteed portion of the loan. In the second, thegovernment decides it won't receive any more collateral or money fromthe borrower.

Years can elapse between the time that the borrower stops paying and the government writes off the loan.

In 2008, for example, the government concluded it wouldn't beable to recover $1.3b. in defaulted bank loans it had guaranteed. Manyloans were part of a backlog, according to SBA officials.

But an AP analysis found that the time between loan approvals and loan defaults is narrowing. According to the analysis:

• More than $235 million in restaurant loans have been chargedoff since 2007. The 2,586 restaurant charge-offs make up the largestnumber of defaulted loans, according to the SBA. More than 150 loansmade to Quiznos franchises - worth nearly $15.5m. - have been writtenoff since 2007.

• The Gulf Coast fishing industry, battered by two majorhurricanes in 2005, has been hit especially hard. Half of the 10 citieswith the highest industry-specific write-offs are in Biloxi,Mississippi; New Orleans; Ocean Springs, Mississippi; Lafayette,Louisiana; and Abbeville, Louisiana. All told, the shellfish fishingindustry had 45 loans charged off, at a total cost of $19.5m.

• The banks making the loans have also been hit hard by therecession. Bank of America Corp., which has received $52.5b. ingovernment aid, has had nearly 7,000 loans worth $238m. charged offsince 2007. More than 660 loans worth $174m. have been charged off byCIT Group Inc., a major commercial lender forced to turn to bondholdersin an effort to try to avoid bankruptcy protection after the governmentrefused to save the company.

JPMorgan Chase & Co., which repaid $25b. in taxpayer loans last month, has written off nearly 2,300 loans worth $117m.

"I have never seen it as rough as it is right now," said ScottHauge, president of Small Business California, a business advocacygroup.

Small businesses account for half of all private-sector workersand have created roughly half of America's jobs over the past decade.They received some help from the $787b. federal stimulus package inFebruary, including higher micro-lending amounts and federal loanguarantees. Congress also authorized the US Treasury to purchase $ pooled loans to encourage lenders to provide money to smallcompanies. The SBA recently announced it will guarantee short-term bankloans to help small businesses pay off existing bills.

The White House has floated a proposal to take money from a$700b. bailout of the financial system and provide small companies withworking capital, allowing them to add inventory and employees. If ithappens, the White House said, help might arrive by fall.

That's too late for thousands of defunct companies with shuttered windows, disconnected phones and broken dreams.

Diego Garcia's soccer supply store in the modest northernCalifornia city of Richmond has shrunk to one small location after hewas forced to close his two larger stores last year. Garcia started thebusiness after launching a youth program and soccer league ingang-ridden Richmond. He had turned away from his own gang lifestyleafter being shot in the chest at age 18.

Garcia expanded fast, never imagining how quicklyhis booming business would decline. When he couldn't pay up, his bankwrote off nearly all of his $45,000 loan. He lost rental property toforeclosure at the same time.

"It's too much of a loss," Garcia said. "We had to get loans to get bigger. Then everything went the opposite way."

Eric Zarnikow, SBA's associate administrator for capital access,said the bad numbers probably will continue to rise as the agencyreceives charged-off loans in the future from defaults occurring now.

Sakelarios, a breast-cancer survivor without health insurance, tries to stay optimistic.

"Anytime anyone asks me how it's going," she said, "I say the same thing: 'It's going really good.'"