WORD ON THE STREET: Today, there is no better example of a redlined community than the local manufactured-housing park. Inside most parks, there are systemic obstructions to accessing credit. This applies not just to individual homeowners, but also to the owners of the park itself.
This neglect should provoke the attention of more people. Manufactured housing makes up two-thirds of new affordable housing produced in the U.S. In North Carolina, these homes provide housing to almost one in six households. Absent the needed presence of builders capable of creating an adequate supply of new site-built housing, manufactured housing constitutes more than one-third of new housing starts in many of our rural counties.
The manufactured-housing industry finds it hard to ship more units, because fewer people can get the financing that they need to buy these homes. In an ideal system, the secondary market should create liquidity for lenders and, thus, encourage the availability of more money for the purchase of homes.
Yet the secondary market for manufactured housing, both for mortgage-backed securities (MBS) and for asset-backed securities (ABS), continues to stumble. It is no coincidence that the peak year for shipments – 1999 – was followed shortly by the year when there was more outstanding manufactured-housing ABS on the market.
Between 1996 and 2000, the sum of manufactured-housing ABS issuances increased from $6 billion per year to more than $13.6 billion per year. Outstanding issuances reached a peak of $51.3 billion in 2001. Since then, the sum of outstanding debt has shrunk every year. In 2010, only $16 billion in manufactured-housing ABS remained outstanding.
Lenders made those loans because there were people waiting to buy them. Who buys an ABS or an MBS? Traditionally, a few large private corporations bought debt side by side with the government-sponsored enterprises (GSEs). Conseco and its subsidiary GreenTree securitized billions in ABS, but Conseco filed for bankruptcy in 2002. Today, private investors still buy manufactured-housing securitizations, but the dominant players are essentially only the GSEs.
If demand for manufactured housing is to be resurrected, any solution begins with addressing the functionality of the secondary market. The first place is to begin is with the GSEs. The GSEs redline the manufactured-housing market. In 2005, less than one-half of 1% of Fannie and Freddie's portfolio was invested in manufactured-housing ABS.
Access to credit is difficult. In 2010, the Federal Housing Finance Agency (FHFA) initiated a proposed rule making that setback the prospects for the industry. The proposed rule clarified how the GSEs would realize their long-standing duty to serve under new expectations for service to manufactured housing as required by the Housing and Economic Recovery Act of 2008. The FHFA determined that the duty to serve would only apply to homes titled as real property.
Given that 60% of manufactured homes are never titled as real property, this interpretation thwarted the ability of HERA to resuscitate the manufactured-housing finance markets. I understand the concern of the FHFA. Almost one in five chattel loans ends up in default. Buying chattel debt presents a legitimate challenge to safety and soundness.
Nonetheless, that performance is really a product of how loans are made. Chattel loans use most of the unsound features (i.e., interest-only adjustable-rate mortgages, balloon payments) that brought down our mainstream mortgage financing system. The better approach is to use GSE participation as a lever to reform loans on homes titled as personal property.
If the GSEs only bought ‘high quality’ loans with fixed-rate fully amortizing features and with strong consumer protections, then they would have the effect of cleaning up lending. Fewer borrowers would default. Most likely, there would be less depreciation in the value of manufactured homes. Walking through a ‘waterfall’ of GSE neglect, the next step is to consider the poor policy approaches that apply to how the GSEs buy homes titled as real property.
The GSE ‘MH Select’ program is designed to provide demand for loans with an loan-to-value ratio (LTV) as high as 97%, provided that they come with private mortgage insurance (PMI). Unfortunately, in all but a few instances, PMI companies do not write insurance for manufactured housing. In 2009, for example, only five PMI contracts were written in the Virginia on a manufactured home, while only 15 PMI contracts were written in North Carolina that same year.
The Federal Reserve reports that only 172 PMI contracts were written for all purchases of owner-occupied manufactured housing in the entire country in 2010. More than 10,400 were written in 2004.
Absent a supply of PMI for manufactured housing, low-income households are unable to take advantage of the willingness of the GSEs to buy mortgages with LTVs as high as 97%. The GSEs require PMI for loans when the LTV is greater than 85%. Since there is virtually no availability of the PMI product, the result is that when people seek a loan, they must put up a high down payment.
The result is that the GSEs are only buying the safest of all manufactured-housing loans – those on real property with more than 20% down. Were the GSEs to remove the PMI requirement, a greater portion of manufactured housing residents would be able to get better financing. Ideally, this would change not just the availability of loans, but also the pricing for those loans.
Home purchase loan applications for manufactured-housing are denied three times more frequently than are loans for site-built properties. The loans that are originated were 7.5 times more likely to have a high-cost [subprime] interest rate.
Financing is the greatest impediment to the restoration of our manufactured housing industry. Federal legislation could make changes that help the industry and consumers. Both groups need a way for more homes to be financed at reasonable costs.
We are talking about a sector of the housing market that has been systematically excluded from national efforts to expand homeownership. This is a sector where getting a loan is difficult, where interest rates are too high, and where consumer protections are scant.
Adam Rust is research director for the Community Reinvestment Association of North Carolina and author of ‘This is My Home: The Challenges and Opportunities of Manufactured Housing.’ This article is adapted and edited from recent testimony delivered before the House Financial Services Committee's Subcommittee on Insurance, Housing and Community Opportunity. The full testimony is available online.