We entered into what’s known as the COVID-19 recession in early 2020. It was one of the deepest recessions in U.S. history, with 14.7% peak unemployment and a 19.2% drop in GDP. By comparison, the Great Recession resulted in only 10% and 5.1% respectively. (Source)
For about two months, buying activity slowed down and some borrowers didn’t make their mortgage payments due to some misinformation that had spread. These issues were quickly resolved, and we went on to sell over $10M worth of ranchettes that year. This bodes well for this business’s ability to thrive during all market cycles.
In addition, selling on owner financing and collecting on those payments is traditionally seen as a recession strategy. Doug and his colleagues saw this work extremely well during and after the Great Recession when selling houses conventionally proved difficult in many cases.
Should we experience a prolonged recession with large job losses, some or many of our borrowers will be affected. That will likely increase the default rate to some extent. Although Hawthorne Interests (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 that regard.
It would be difficult 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, many of which would be at larger amounts. During that temporary period, additional cash could be funneled into HI from Doug’s other business and personal checking accounts.
Extremely high default rates during a recession seem unlikely, as they didn’t occur during the COVID-19 recession. Moreover, borrowers are incentivized to keep a property that they have put a substantial amount of money into via mortgage payments and improvements and that they have seen increase in value over time.
This is not needed or even desired to get the fund or our business through a recession, but we have seen an extreme willingness by the U.S. government to pump large amounts of capital into the economy to prop it up. This tends to prevent massive waves of foreclosures in all areas of real estate, including rural land.