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The great majority of businesses are adversely affected by recessions. A lot of individuals are, but not as high a percentage. If we are getting ready to go into a recession, and we probably are, there are differences between now and 2007.Homeowners are stronger. Credit scores are higher going in. Almost all home buyers had the income to repay their homes, at least they did when the home loan was originated. Back in 2007, that was not true. For 2 or 3 years, I prepared my banks ALLL - Allowance for Lease and Loan Losses. Back in 2008-2009, I probably reviewed the Call Reports of 40% of the US banks that failed in those years. Sub-prime home loans were not a major cause of bank failures in the GFC. What caused most banks to fail back then were loans in two areas. The first area that caused the most failures was Residential Construction and Development Loans. These included loans for subdivisions and construction of residential structures of 1-4 units. Subdivisions were the worst, in my area and many others you could not give away an empty lot back then. Home construction could be divided into two categories: spec homes where the borrower were builders building homes for resale and custom homes where the borrower was going to be the actual occupant of the home. While problems occurred with custom homes they were minor compared to spec homes. Spec homes and subdivisions cratered a lot of banks. The second area that hit the failed banks hard, but normally less than residential development, were two forms of residential loans - HELOCs and 2nd mortgages. Closed-end 1st mortgage loans, which at most banks included investment properties and homeowners with weaker credit, were not a major problem. Why did banks equivalent of sub-prime borrowers cause less problems than those securitized by most mortgage brokers? We ate our own cooking (ie kept the loan on the books), and worried about down payments and proving income. As a lender I can assure you that given the choice of making a home loan to a borrower with a 750 credit score and no down payment and making one to a borrower with a 650 credit score and a 15-20% down payment, I would take the latter close to 100% of the time. Today banks have more construction/development loans on the commercial side than the residential side. Those commercial loans could be to a business that plans to occupy the building, this would be the equivalent to the residential loans that were customs. A recession would increase problems, but they would not likely cause great problems. The commercial construction loans that I would worry about would be those where most or all of the property is going to be rented to tenants. This is the area where most real estate loan losses will occur the next time in my opinion. I have noticed that debt levels have increased over the last 3-5 years for most of the companies that I have been looking at this year. This is probably mostly the result of low interest rates and buybacks. Federal and corporate debt have risen in this country over the last few years. This could be problematic in the next recession, which may very well be upon us. While share prices are falling and buybacks kind of make more sense there may be less of them than some might think. I think for most companies, they will have to focus more of their cash resources to keeping operations going and to the balance sheet. For most they should have committed more of their cash over the last few years to the balance sheet and less to buybacks.
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