We are very pleased with how well the notes that HI owns are performing. Should we experience a prolonged recession with large job losses, some of the borrowers on those notes will be affected. That would likely increase the default rate. Although HI is to make monthly payments to the fund each month, regardless of the income it collects, a steady stream of income into HI does help in making those payments.
It would be difficult but not impossible for HI’s income to drop below what it pays to the fund. If that happened, we suspect it would only be temporary until HI was able to foreclose on its non-performing loans and originate new ones. During that temporary period, HI could cover the difference with proceeds it regularly receives from borrowing against new notes. Additional capital could also be funneled into HI from our sizable cash reserves.
Although we are prepared for substantially higher default rates, they seem unlikely because: 1) they didn’t occur during the COVID-19 recession, 2) borrowers are incentivized to keep a property that they are proud to own and that they have put a substantial amount of money into via a down payment, mortgage payments and improvements, and 3) we feel that we have properly screened and selected our buyers with the help of Texas Pride Lending, a licensed loan originator.
More to think about:
This is not needed or even desired to get the fund or our business through a recession, but we have seen a strong willingness by the U.S. government to prop up consumers during challenging economic times. This can mitigate foreclosures in all areas of real estate, including rural land.