65 Year Historical Perspective to FHFA’s DTS Rulemaking Challenge to Fannie Mae & Freddie Mac
Blog # 430 Copyright @ 22 January 2017; community-investor.com
Perspective. ‘Land-lease communities, previously manufactured home communities, & ‘mobile home parks’, comprise the real estate component of manufactured housing.’
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This blog posting was prepared specifically and especially for the Federal Housing Finance Agency Listening Sessions. It is a 65 year look back at manufactured housing finance cycles, plus a challenge to look forward, and collectively decide how to restore reasonable access to chattel capital for financing of new and resale manufactured housing in land lease communities nationwide.
Historical Perspective to FHFA’s Duty to Serve (DTS’) Rulemaking Challenge to Fannie Mae & Freddie Mac
“If you dwell in the past you lose an eye. If you forget the past you lose both eyes.”
An ancient eastern proverb *1
“Use this look back into our 65 year MH$ past, to ensure 20/20 vision going forward!”
George Allen, CPM & MHM
Folk new to manufactured housing and land lease community business models may hold the naive view this industry and realty asset class’ loss of easy access to chattel capital, from independent third party lenders – between the turn of the 21st Century and now – is simply a one time hiatus. Not so. We’ve gone through similar cycles in years past.
(More than a dozen of the following paragraphs, republished two years ago as lead feature in the January 2015 issue of the Allen Letter professional journal, were in turn quoted from the June 2000 issue (pages 45-48) of the defunct Manufactured Home Merchandiser magazine, in an article titled: ‘Looking Back at 50 Years of Manufactured Housing Financing’ by Otto Wantuck, former owner of San Diego-based Amcorp Financial Services.)
Mr. Wontuck’s reason for penning his half century retrospective description of manufactured housing finance cycles? In his words, “…help us do a better job and avoid same ‘pitfalls’ in the future.”
Otto. “The year is 1950. It’s summer in Tulsa, OK., and gasoline is selling for 37 cents a gallon. The young couple (is) from Knobnoster, Mississippi, where they bought a trailer from Sipes Trailer Sales, the local Spartan retailer. They are at the factory to pick up their new home, a beautiful, shiny, silver 8X20 Spartan Mansion aluminum trailer.”
Their Spartan Mansion’s “Sale price, including title and tax = $4,200. Down payment paid to dealer = $840. Balance owing = $3,360. Physical damage insurance for three years = $140. Credit life insurance = $60. Amount financed = $3,560. Finance charge (five percent add-on) = $534. Total note balance = $4,094.”
“The couple will be making 36 payments of $113.74 to pay off the loan. The true interest rate on the loan is 9.2 percent in simple interest. The cost to the lender is about 3.5 percent, resulting in a gross profit, before an administrative cost of almost 60 percent of the finance charges. A very profitable financing operation, indeed.”
Such was the reality of that time period, 65 years ago.
Moving ahead ten years, Otto again: “As of the mid-1960s, banks and savings & loans were unregulated. In their race for deposits, they turned to manufactured housing loans for higher yields. However, they lacked the expertise in originating these consumer installment loans. Entrepreneurs, many coming from manufactured housing finance companies, formed ‘service companies’…becoming the loan arm of thousands of federal and state – insured banks and savings & loans.”
Then came the Crash of the 1970s. “By 1973, annual sales volume (i.e. new ‘mobile home shipments’) reached 580,000 – an all time high never to be seen again. However, there was a flaw in the industry growth. The marriage of service companies, financial institutions, and credit (repossession loss insurance) companies did not incorporate the basic checks and balances needed in the world of lending.”
“Competition for loan volume reached a ‘fever pitch’. Prudent lending practices disappeared in the feeding frenzy for profits by service companies. Banks, and especially S&Ls, were screaming for more loan business, since they needed the higher yields to support their marketing of high yield deposits for their customers in CDs and savings accounts.”
“The credit (repossession loss) insurance companies, at great risk, were generally unaware of their extreme exposure to uncontrolled loss. When they finally realized their mistake, it was too late.”
“The crash came in 1974, as losses skyrocketed. Credit (repossession loss) insurance companies pulled out of the business and annual sales of home plummeted to 338,000 units (shipped).”
“Repossessions were pouring in due to bad credit standards and many lenders withdrew from the business never to return.”
Two positive events occurred during the late 1970s; Otto continuing…
• The FHA & VA offered government-insured mobile home loans, and the Government National Mortgage Association offered a mortgage-backed securities program, that eventually provided “…billions of dollars to fuel the industry’s growth in the 1990s.”
• “A national construction standard known as ANSI 119.1 was imposed on the mobile home industry in 1976. (Now the HUD-Code)…greatly increasing the credibility of the industry with lenders, investors, and the general public.”
Interestingly, the debut of the HUD-Code (federally preemptive national building code) is most often cited as ‘the reason’ for the following 20 years fall-off in new home shipment volume, when ‘blame’ should be shared, at least equally, by chattel capital lenders of the time.
Economic Factors of the 1980s & 1990s
Otto again. “The borrow rates for manufactured home loans were three percent higher and could be attributed to higher costs of servicing and default losses.”
“Loan terms in 1980 were up to 20 years and rose to 30 years by 1995. This resulted in no equity lending on most loans for several years, and down payments dropped from 10 to five percent, a grave error.”
“…in 1998 & 1999, delinquency increased from 3.5 to five percent for most lenders, indicating problems. Default losses, including expenses, rose from 30 percent in the ’80s, to 45 to 50 percent in the late ’90s.”
“Pressure (however) increased among lenders to gain or hold on to market share. Loan credit quality deteriorated as the competition heated up. Eventually, in the late ’90s, many of these lenders withdrew from manufactured housing lending, but the damage was already done.”
Summary observation from Otto Wantuck, writing in mid-2000: “I have seen all of these problems before, but I have never seen all of them occur at the same time!” And to this he added this hopeful note: “The days of great ups and downs
in the lending industry are coming to an end.” Alas, probably more of an ‘end’
than even he realized at the time.
(For an anecdotal look at how these tumultuous financial times affected homebuyer/site
lessees, read ‘Upside Down in a Mobile Home Park!’ A fictional tale describing the real world consequences of 1) borrower qualification compromise, 2) questionable down payments, 3) bogus credit and 4) employment histories, plus 5) free-wheeling adjustable rate mortgages, even 6) ‘free site rent for a year’ in (then) manufactured home communities with rental homesite to fill. For a FREE reprint, phone COBA7’s Official MHIndustry HOTLINE: (877) MFD-HSNG or 633-4764.)
How did manufactured housing industry leaders, at the time, view these matters? Now retired, Gub Mix, a former association executive for several western states, and founder of the annual MHI Manufactured Housing Congress, opined circa 2000, in his widely read column, ‘From My Soapbox’,
“…manufactured housing industry devotes an extraordinary amount of its’ resources to sell homes to people who really aren’t qualified home buyers. Why? Because they allow us to sell the ‘old mobile home way’. It’s easier than attempting to sell to qualified buyers who require a lot more effort. Manufactured housing may be the only industry in America who ignores the customer’s desires in their marketing practices. Unfortunately for us, potential buyers are much more savvy these days, and appear to be abandoning us in droves.”
OUCH! But it had to be said!
And, the consequences to annual new HUD-Code home shipments nationwide?
• Year 2000 = 250,550 new homes shipped (Down from 372,843 in 1998)
• 2007 = 95,769 (First year since 1961 with fewer than 100,000 homes shipped!)
• 2009 = 48,789 (The nadir of manufactured housing shipments!)
Furthermore, this is what now retired industry chattel finance maven, Marty V. Lavin, esquire, opined about what he termed, the ‘deeply flawed operating model’ of manufactured housing. In his words…
“During the early 2000s, it became evident the new home sales downturn was unlikely to end! Our long term industry operating model was deeply flawed. The huge number of home shipments enjoyed during the 1960s & 70s, had only been possible given unsustainable chattel loan losses absorbed by industry lenders throughout the period. Once the severity of said losses was fully recognized, in he late 1990s, chattel lending tightened and shipments started a rapid decline, dropping to 50,000 homes shipped per year. Today, only a slight shipment recovery seems possible under the continuing flawed operating model. Not until the industry finds a way to market our homes to a much better credit tier of buyer, is growth likely to occur again. And one must believe industry growth is also unlikely to occur absent many needed industry model changes.” (Lightly edited. GFA)
With all that said though, our focus now must turn to what it’s going to take to restore reasonable access to chattel capital when selling and financing new and resale manufactured homes on-site in land lease communities (a.k.a. manufactured home communities) throughout the U.S. And that’s why the Federal Housing Finance Agency is hosting three Listening Sessions throughout the U.S. this Winter, providing opportunities for manufactured housing executives, land lease community owners/operators, and others, to input Fannie Mae & Freddie Mac, as these GSEs engage in rulemaking and program development that’ll restore reasonable access to chattel capital to this unique affordable housing marketplace.
That’s why it’s helpful to have learned, and now understand, what’s brought the HUD-Code manufactured housing industry ‘to its’ knees’ between 1998 (When 372,843 new homes were shipped), and 2009 (When only 49,789 new homes were shipped); and how we experienced 70,544 new homes shipped by year end 2015 – and just might eclipse 80,000+/- new homes during 2016 – if several thousand FEMA homes are added to the total provided by the Institute of Building Technology and Safety (‘IBTS’).
Yet another succinct historical retrospective on this matter was penned, and recently updated, by Dick Ernst, president of FINMARK in Dallas, TX., writing for the Guidebook for Selling & Seller-financing New Manufactured Homes in Land Lease Communities, he observed… *2
“Let’s go back to those ‘go-go days’ of the 1990s, when HUD-Code manufactured
housing was enjoying strong growth year after year, and was the darling of Wall
Street. Large amounts of capital were chasing public (housing manufacturer)
companies’ stock, driving up housing prices, and giving these firms ‘play money’
with which to expand their retail distribution networks. The new buzz within the
industry as ‘vertical integration’.
Retail (chattel) financing was plentiful and financially attractive, because lenders
were paying MHRetailers a premium for their loans and were very aggressive
with their underwriting practices. While some lenders were portfolio lenders (i.e.
keeping chattel loans on their books), the bulk of financing, at the time, came
from active participation in the Asset Backed Securities Market. Lenders were
originating $100w of millions in loans, packaging them, and selling them, while
retaining servicing. Green Tree Financial was the largest ‘player’ at the time, with
more than 30 percent of market share. Other lenders tried to ‘out do’ them, by buying more marginal business, and or paying more for the loans purchased.
The peak of manufactured housing’s gluttony occurred in 1998, when 372,843 HUD-Code homes were shipped to MHRetailers and land lease communities. Marty Lavin (now retired), veteran manufactured housing finance consultant determined as much as one third of the industry’s chattel loans were made to homebuyers having a FICO score of less than 600 points! The soon result was a default frequency of more than 30 percent of loans originated at the time. The industry ended up with a glut of repossessed homes that took three years to absorb and resell.
So, what has happened since then? The asset-backed security business continued to operate, but the cost of doing securitizations became very expensive. Green Tree reorganized under bankruptcy protection, and stopped originating new loans. Clayton Homes, one of the largest scrutinizers in the MHIndustry, ended up selling to Berkshire Hathaway. Ultimately, when the sub prime fiasco hit, the capital markets were shaken to the core and closed down the asset backed security market completely. By 2010, there was no market for manufactured housing.
The MHIndustry and chattel financing look nothing today like they did at the turn of the century. The number of lenders financing ‘home only loans’, or at least the majority of such loans, can be counted on one hand, oft identified as ‘The Big Three’: 21st Mortgage Corporation, CU Factory-built Lending, and Triad Financial Services; plus, Clayton’s in-house arm, Vanderbilt Mortgage and Finance, Inc.” *3
“First came the S.A.F.E. Act (‘Safe And Fair Enforcement’…of mortgage licensure), implemented and enforced on the state level.” *4
“Then the Dodd-Frank Act occurred in 2010, soon birthing the Consumer Finance Protection Bureau (‘CFPB’) , yet another regulatory agency to enforce mortgage lending laws.” *5
Finally, this hands-on perspective from land lease community portfolio owner/operator Spencer Roane, MHM , of Pentagon Properties:
“The business of owning/managing land lease communities has become capital
intensive during the past 10-15 years. Today we are faced with spending $30-40,000 per new manufactured home we purchase for marketing on-site in our properties. Fortunately, there are many sources today, from which to borrow funds at record-low interest rates.
• Private investors (who) will lend money to community owners, oft from self-directed IRA accounts.
• Local banks, like American Commerce Bank, located on the outskirts of Atlanta, will also lend for home acquisition, seeing this as a means to segue into providing refinance, even new property acquisition funding, in the future.
• HUD-Code home manufacturers, like Clayton, Cavco, Champion, and Legacy, have in-house (Vanderbilt @ Clayton Homes) finance programs that encourage/facilitate community owners’ purchases of new HUD-Code homes. Also include 21st Mortgage Corporation’s CASH Program in this $ mix.
• Excess operating funds within land lease communities, via healthy net operating income (‘NOI’) and or refinancing the debt on said property or properties.” *6
Now, with that said, attention needs to focus on what must be incorporated into Fannie Mae & Freddie Mac chattel capital finance programs, relative to manufactured housing, so as to make their loans/mortgages ‘safe for securitization’ & ‘attractive to borrowers’ .going forward.
To some, this FHFA, Fannie Mae & Freddie Mac effort to rise to the challenge of Duty to Serve, might just be this nation’s last, best opportunity to preserve & increase the inventory of, and access to, this decades-proven and continuing ready source of truly affordable housing combination known as manufactured housing in land lease communities!
1. Quoted from the treatise, AFFORDABLE (MANUFACTURED) HOUSING, ‘From Factory to Family; a Bold Look into the Future of housing & Community’, 2015
2. PMN Publishing, 2016. Chapter # 5.
3. For more detail on this subject, along with contact information, read Signature Series Resource Document: ’18th annual National Registry of ALL Lenders’, 2016. Available ‘free’ from COBA7 via Official MHIndustry HOTLINE: (877) MFD-HSNG or 633-4764.
4. Quoted from Chapter # 5 of Guidebook for Selling & Seller-financing’, 2016
George Allen, CPM & MHM, writing for the Community Owners (7 Part) Business Alliance, or COBA7 c/o Box # 47024, Indianapolis, IN. 46247. email@example.com