MHIndustry Business Prosperity Glass Near Empty or Soon Filled?
MHIndustry’s Business Prosperity Glass Nearly Empty or Soon Filled?
Manufactured Housing’s Title I (chattel) financing. Victim of past abuse, today’s macro economy, uncertain capital markets, & widespread misunderstanding? A Look at the latter
Gotta love landlease communities; just don’t abuse their inherent investment strengths
Join me in Albany, New York, on 29 & 30 March 2011 for Super Symposium II
Manufactured Housing’s Title I (chattel) financing. Victim of past abuse, today’s day macro economy, uncertain capital markets, and widespread misunderstanding.
Two weeks ago, in this Official MHIndustry & LLCommunity Blog, I penned: “Yes, it snuck up on me too; the realization HUD Code manufactured housing has permanently changed during the past decade, to the extent of being market – stiffed; maybe forever, sans new sources of third party chattel (personal property) finance!” That observation was straight historical retrospect, relating to the latest round of lending abuse foisted on homebuyers and investors, by the MHIndustry, at turn of the 21st century.
Last week, I cited the following confirming observation, quoted directly from a recent communiqué’ of the Manufactured Housing Association for Regulatory Reform (‘MHARR’): “…the one HUD program that helps put lower and moderate income consumers (i.e. manufactured home buyers) into new homes they can actually afford – the FHA Title I manufactured housing program – is subject to unreasonable and unnecessary restrictions that effectively limit it to only one financing provider and a minimal number of loans (1,834 during fiscal year 2010).”
I’ve since learned, the previous paragraph, relative to the FHA Title I (chattel or personal property loan) program, was viewed by some as misleading, causing confusion within some circles in the MHIndustry. To that end, I asked Thayer Long, of the Manufactured Housing Institute (‘MHI’), to set the record straight. Here he does so:
“The FHA Title I program is fully functional, and there is nothing in it that places unnecessarily high restrictions, preventing lenders from being Title I approved lenders! The reforms made to the Title I program were championed by all industry groups, and include a 90 – 10 risk share of loan loss; meaning, 90% of loan loss is covered by FHA, while the 10% loss remainder is assumed by the lender. I repeat, there is nothing wrong with the Title I program.”
“MHI has serious concerns, however, regarding capital requirements Ginnie Mae expects of securitizers of Title I loans, i.e. a lender must have a $10 million net worth, and keep an additional ‘reserve’ equivalent to 10% of the lender’s outstanding loans! Reasons? First, the aforementioned risk share. If a lender goes out of business, Ginnie Mae assumes the 10% loss incurred by the now defunct lender. Second; Title I loan actuarial data for their new program is lacking, since it’s so new, forcing Ginnie Mae to rely on old program loan performance for anticipated outcome. Third; Ginnie Mae’s approval is not structured for every lender. Only a fraction of FHA lenders ever become Ginnie Mae issuers. This is usually because one needs a large volume of loans to securitize, hence an aggregator to pull them together into loan pools.”
“Furthermore, MHI has had several meetings with FHA and Ginnie Mae staff, to encourage scaling back capital requirements for smaller lenders. Ginnie Mae can waive capital requirements if they feel comfortable with a lender. In fact, we believe if loan performance under the new program continues to improve, as we expect, they’ll likely reduce capital requirements for everyone.”
Bottom line? It’s not that MHARR’s statement was totally off track, but rather should have treated the matter as two related, but different aspects (i.e. FHA Title I & Ginnie Mae) of chattel (personal property) lending, relative to HUD Code manufactured housing. Anyway, Thayer Long ended his clarification by pointing out “…all this is a complex issue, impossible to fully explain in just a few paragraphs.” Now YOU know!
But even with the preceding explanation, not everyone in the MHIndustry believes ‘a better (lending) day is a – coming’. One MHVeteran, a highly respected financial advisor, lender and servicer, responded to last week’s blog thusly:
“I noted in your blog, you have finally come to realize Title I simply will not save the industry, no matter what _____________,or others, have proclaimed. And it’s not that Title I, or ‘Buy here – pay here’ and ‘captive finance’ methodologies can’t work in certain limited circumstances. It means, as I’ve oft said, ‘they alone’ cannot fuel a 100,000+ new home shipments per year industry! That seems to me, to be as apparent today as it was five to seven years ago. There simply is NO industry chattel loan silver bullet, none!” The writer goes on to suggest “The GSEs and HUD will not do any loans, even per our industry’s largest ‘players’, if they feature 16 – 19 percent default rates, and lots of work for originators” – the federal S.A.F.E. Act notwithstanding.
What’re the ‘certain limited circumstances’ referred to in the previous paragraph? Larger landlease (nee manufactured home) community portfolio owners/operators, frequently market and sell new and resale homes on – site, then (property owner) self – finance said transactions via ‘captive finance’ (i.e. using a third party financial service firms to collect mortgage payments from homeowners/site renters, etc.) or ‘buy here – pay here’ (i.e. property owner services his/her chattel loans to homeowners/site renters) methodologies.*1
Prevalence of this practice? Estimated chattel loan volume (contract sale paper) held by 500+/- LLCommunity owners/operators during 2009, was $3 1/2 billion. According to the 22nd annual ALLEN REPORT, by year end 2010, that total had swelled to nearly $5.2 billion! And it’s important to keep in mind, these 500+/- property portfolio owners/operators control only 10 – 15 percent of LLCommunities in the U.S., albeit the largest ones (i.e. properties containing more than 100 rental homesites apiece). *2 Furthermore, unlike a decade ago, when only ‘mobile homes’ (a.k.a. pre – HUD Code homes) and manufactured homes were sited in LLCommunities; today there’re at least four additional ‘types of housing’ to be found, e.g. ‘park model’ RVs, modular homes, ‘RVs for a season’, even site – built homes designed and constructed on – site to look like manufactured homes. So, word – playing the old country hit song, ‘A Community Owner Can Survive!’ – even ‘thrive’, as new HUD Code home shipments languish at 49,000 per year, as in 2009 and 2010. But there’s another side to this story. Read on….
Don’t abuse inherent strengths of LLCommunities as realty investments!
Just what are the Eight Good Reasons LLCommunities ‘enjoy a near perennial sellers’ market among tens of thousands of real estate investors throughout the U.S. and Canada’? Well, they’re listed on page nine of the aforementioned 22nd annual ALLEN REPORT. But here we’ll identify three of them here, along with cautionary advice regarding how ‘not to abuse’ these inherent strengths:
• Stable competitive site rent! This is the second biggest bugaboo directly affecting property operating performance throughout the asset class. Time and again, novice – as well as some experienced realty investors, have been overly aggressive with rental homesite rent increases in specific local housing markets. Now some are paying a bitter price, typified by severely lower physical and economic occupancy at best, property forbearance or foreclosure at worst. Is there a formula for computing competitive but fair site rent? Yes. But rather than repeating it here, suggest you scroll back through the blog archive at this Official MHIndustry & LLCommunity website for earlier detailed descriptions. In the meantime, know an online resource has been identified, one that provides quarterly ‘apartment rent’ information for 200 SMSAs (Standard Metropolitan Statistical Areas, or urban markets), and is now being compared, ratio – wise, to LLCommunity homesite rental rates in the same markets, using data researched and published by JLT & Associates – to ‘proof’ or modify the aforementioned formula. Results of survey will be first published in the Allen CONFIDENTIAL! business newsletter, then the Allen Letter professional journal. *3
• Low operating expense ratio or OER! One would think this is a ‘no brainer’, but it’s not. It boggles the mind, to realize how many owners/operators don’t know how to compute, let alone use, this key statistical benchmark of operating efficiency. Simply divide Total Amount of Annual Operating Expenses (not including debt service/mortgage $) – or the total expense amount from just one Industry Standard Chart of Operating Expense Accounts category (e.g. refuse/trash removal), by Total Annual Amount of Site Rent Collected: $192,000 divided by $480,000 = 40% or .40 overall Operating Expense Ratio or OER. While this percentage happens to be the OER planning model for this income – producing property type (a.k.a. the Allen Model, featured on above – referenced Industry Standard Chart of Operating Expense Accounts), know that conventional apartment national OER is frequently 10 – 15 percent higher (given high resident turnover, expensive maintenance ‘get ready’ of vacant units, etc.), while LLCommunity OERs are also known to drop by half, when larger (200+ sites) are managed efficiently. What’s the OER for your property or properties? If you don’t know, you can’t control, let alone improve it! *4
• Opportunity to add value. This is the primary, uncertain bugaboo – more accurately, ‘bugbear’, affecting LLCommunity ownership/management these days! How to add value? In this instance, ‘Buy homes, then rent or sell & finance them on – site…’ (quoted from ALLEN REPORT). So, how’s this a bugbear? Unlike late 1970s & early 1980s – the ‘first go round’ of this nature (post implementation of the HUD Code in 1976), when these practices were generally unregulated; the recent bursting of conventional housing’s finance bubble has caught the MHIndustry up in its’ consequences as well. This has meant a whole new array of housing finance regulatory legislation and measures. Think the federal S.A.F.E. Act (and variegated state implementation thereof), Red Flag, and the like. Today, only the largest of property portfolio owners/operators might have a handle on the matter. Relief? Maybe, but too early to tell whether concepts like True Lease (of homes) will shelter some owners/operators. Read about these developments here first, and in one or another of Rishel Consulting’s free and subscriber – supported monthly chattel finance newsletters. (217) 971-3968.
There’re five additional ‘good reasons to invest in LLCommunities’ we won’t parse in this blog today. But again, whether a potential or novice investor in the unique asset class, or even as an experienced owner/operator, YOU should be comfortably familiar with all eight inherent strengths! If not, order a copy of the ALLEN REPORT and strengthen your investor knowledge of this income – producing property type!
“Changing demographics, including household formation and housing consumer tastes, pose significant challenges and opportunities for the manufactured housing industry. As we emerge from the ‘great recession’, hear projections on when and how manufactured housing can lead housing’s return. Gain insight into how the industry, and LLCommunity owners, can best position themselves by understanding trends in the overall housing market. This session will also examine housing affordability, efficiency, and related strategies for manufactured housing.” Dr. David Funk, Cornell University
Need I say more? This is Dr. Funk’s clear and comprehensive description of the keynote address he’ll deliver at the New York Housing Association’s upcoming Super Symposium II in Albany, NY., on 29 & 30 March 2011. Will YOU be there? I certainly plan to be; wouldn’t miss those insights, as well as others from several excellent presenters.
And there’ll be several new HUD Code ‘Community Series Homes’ on display during the symposium. Here’s a question for you: Know how to calculate the sale and mortgage ‘price points’ a prospective homebuyer, or even the average consumer, in any local housing market in the U.S., can ‘affordably’ afford when buying a new or resale home within a LLCommunity or to be installed on a fee simple scattered building site? If NOT, be sure to attend this symposium to learn how to use the widely – acclaimed ‘Ah Ha! & Uh Oh! Worksheet for this purpose! For a program agenda, hotel accommodations, and registration information, phone Nancy Geer via (518) 867-3242.
1. For more information on this specialized subject, read the Manufactured Housing $$$ Primer, PMN Publishing, Franklin, IN., 2010. Phone the MHIndustry HOTLINE: (877) MFD-HSNG or 633-4764, or (317) 346-7156. $25.00 postpaid.
2. For a copy of the 22nd annual ALLEN REPORT, phone the MHIndustry HOTLINE (See # 1 preceding). For a limited time, the $450.00 annual report is available for only $250.00 – and if mentioned when ordering, includes a one year (12 month) subscription to the Allen Letter professional journal at no additional cost!
3. To subscribe to the Allen CONFIDENTIAL! business newsletter, phone the MHIndustry HOTLINE (See # 1 preceding). Cost? $950.00/year (12 monthly issues), but only $750.00/year for subscribers to the aforementioned Allen Letter professional journal.
4. For a FREE copy of the GFA Management, Inc., (2) Number Crunching Cards, containing all operating formulae characteristic of the LLCommunity asset class (e.g. physical & economic occupancy, home & resident turnover, OERs, ‘cap rates’, New Rule of 72 – for estimating capitalized income value of a ‘C’ grade LLCommunity, & IRV, phone above – referenced MHIndustry HOTLINE (See # 1 preceding)
George Allen, Realtor®, CPM®Emeritus, MHM
Consultant to the Factory – built Housing Industry &
The Landlease Community Real Estate Asset Class
Box # 47024, Indianapolis, IN. 46247. (317) 346-7156