A Crisis Within A Crisis

Following three straight years in the doldrums, the manufactured housing industry is on track to record a 20% increase in sales this year. While that sounds good and is certainly welcome, it would bring annual industry sales up to only about 60,000 units – up from about 50,000 in each of the past three years, but still about one-third short of the nearly 96,000 units it sold in 2007.

This is far from the historic average of about 250,000 new homes a year, according to Ronnie Cudd, director of sales at Fleetwood Homes in Douglas, Ga. The industry typically accounts for about 10% of total U.S. new home sales, although that figure fell to below 6% during the housing boom. And while it is now fighting to get back to the 10% level, significant obstacles remain in its path.
The manufactured housing industry did not benefit from the go-go years of the housing boom because its typical customers – lower-income people seeking affordable housing – were able to get loans to buy much larger conventional ‘site-built’ homes. However, it is suffering from the hangover left by that boom – namely, foreclosures and repossessed bank-owned properties that are competing for the same customer base.

‘Now you can buy a site-built home for $90,000 that formerly was $180,000,’ says Joseph Stegmayer, chairman and CEO of Phoenix-based Cavco Industries Inc.

As foreclosures decline and the inventory of real estate owned properties is gradually sold off, that competition should dissipate. Indeed, that's one of the main reasons for the increase in manufactured home sales this year.

But the industry still faces other competitive challenges. While interest rates on conventional 30-year mortgages have dropped to below 4%, those rates are not available on manufactured homes, where rates commonly start at around 5% and move all the way up to 11%. This results from the fact that the vast majority of loans for manufactured homes – approximately 80% – are personal property, or ‘chattel’ loans, meaning they are secured by the building only, not the land it sits on, which is usually leased by the homeowner.
Fannie Mae and Freddie Mac do not buy chattel loans. The Federal Housing Administration buys chattel loans that are also secured by the land, but they account for only a small percentage of total manufactured home sales. Because there is currently no active private secondary market for manufactured home loans, that leaves only a dwindling handful of banks, credit unions and other lenders that buy whole loans.

But even with those high interest rates, loan servicers have a hard time making money.

‘The average manufactured housing loan is significantly less profitable than a conventional single-family loan,’ says Timothy Williams, CEO of 21st Century Mortgage in Knoxville, Tenn., the largest lender in the manufactured housing industry.

Williams notes that it costs just as much to originate a $200,000 conventional mortgage loan as it does to originate a $25,000 manufactured housing loan. But even with the higher lending rates, lenders can't cover those higher costs.

‘We have the same cost structure as the conventional mortgage business but an entirely different price structure,’ Williams adds.
Even though chattel loans are technically not mortgage loans, manufactured housing lenders are subject to most of the same regulations as conventional mortgage lenders. Here is a case in point: Under the Dodd-Frank Act's qualified mortgage rules, lenders would be able to charge a maximum of only 3% in points and fees on a loan. On a $50,000 loan, for example, the lender would be able to charge only $1,500, even though it would cost $3,000 to originate the loan.

Williams and other industry representatives met recently with the Consumer Finance Protection Bureau (CFPB), asking it to change the proposed cap to the greater of 3% or $3,000 for manufactured housing loans. ‘They listened politely,’ Williams says.

But even if the industry gets the CFPB to agree on that point – an iffy possibility, at best – it still runs up against compliance issues related to the Home Ownership and Equity Protection Act (HOEPA). Under HOEPA, lenders must report as ‘high cost’ any loans they originate in which the annual percentage rate exceeds the yield on comparable Treasury securities by more than eight percentage points, or if the total points and fees exceed the greater of 8% of the loan amount or a set dollar amount, which was $592 in 2011.
‘That won't cover our cost to originate,’ complains Williams.

Most lenders would prefer to avoid originating any high-cost loans because those loans are generally considered to be predatory. Changing the high-cost definition under HOEPA would require congressional action.

As if these obstacles weren't high enough, manufactured lenders must also comply with the Secure and Fair Enforcement of Mortgage Licensing (SAFE Act), which basically prevents home sellers from becoming involved in the lending process unless they are licensed mortgage originators. In the conventional residential mortgage business, real estate agents are exempt from the SAFE Act, but manufactured housing companies are not.

As a result, retailers must get all of their sales employees licensed as mortgage originators – an onerous and expensive process – or they can't assist their own customers in getting a loan. It would be similar to going into an auto dealership to buy a car but not being offered financing.

‘We can't help the consumer fill out a loan application and send it in to a lender. We can give the customer a list of lenders, but we can't help them,’ says Don Glisson Jr., CEO of Triad Financial Services, based in Jacksonville, Fla. ‘That makes it difficult for the customer to get a loan. I'm not sure how this helps the consumer.’

There are at least two proposed bills in Congress – one in the House and one in the Senate – that seek amendments to Dodd-Frank and the SAFE Act that would ‘minimize disincentives’ in the manufactured housing lending business. But in view of the current state of congressional stagnation, their near-future passage seems unlikely.

George Yacik is a Stratford, Conn.-based financial writer. He can be reached at gyacik@yahoo.com.


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