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Brace Yourselves for Good Manufactured Housing News!

July 24th, 2011 1 comment

Several things are going on in today’s housing market that suggest that all is not gloom and doom in the manufactured home world.

First, the same onerous Federal and State regulations which keep many of us in the manufactured housing industry awake at night are also causing ulcers for those in the site-built market.

While we lament the fact that there are few lenders and effectively no secondary mortgage market in our industry, those in the site-built industry are struggling with lenders whose qualifications for new mortgages are so strict that fewer loans are being made.  On top of that, Realtors and the site-building guys are trying to deal with an oversupply of housing and unprecedented numbers of foreclosures.

So those in our industry who said a few months ago that manufactured homes can’t compete with rock bottom foreclosure prices on site-built homes are finding that regardless of how interested our prospective buyers may be in a foreclosure, they may not qualify for the mortgage.

Add to that the fact that manufactured home buyers frequently follow their previous generation and kinfolk.  To rephrase, those who grow up in manufactured homes or whose relatives live in manufactured home are inclined to buy a manufactured home themselves. So one might conclude that the final nail hasn’t been driven in the coffin of manufactured housing yet.

Those who thought our industry might survive government regulations and site-built sales thought surely we would succumb to site-built rentals.  Think again!

The inability of buyers to qualify for mortgages is driving rental rates to new highs.  A Wall Street Journal article today says new multifamily construction is now up almost 50% compared to a year ago.  So the same manufactured home sales prospects who couldn’t qualify for a site-built mortgage now can’t afford to rent.  At our location, our phones are ringing and our walk-in and Internet traffic is up!

Manufactured home land lease communities (LLCs) are finding themselves in a great position to sell or rent homes.  Many community operators are using internally-generated funds to buy new Community Series Homes (CSH) or previously owned homes to place in vacant sites for resale or rent.

Others are investigating offerings from specialized chattel lenders or consulting firms who claim to provide financing programs that comply with regulatory challenges.  Still others are relying on Lease-Option “sales”.

The bottom line is that our industry is not dead after all.  By seeking out the niches that are available, you too can have good manufactured housing news. # #

Spencer Roane

Spencer Roane

Spencer Roane,
Atlanta, GA
spencer@roane.com
or (678) 428-0212

Editor’s Note:

Spencer serves on the Georgia Manufactured Housing Association board of directors and MHI’s NCC and Disaster Housing Task Force. He holds both Mortgage Loan Originator and Mortgage Broker SAFE Act licenses.  Roane has 4 MHCs in GA and TX.

 

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Saving Independent Manufactured Home Retailers and Communities

July 18th, 2011 1 comment
Manufactured Housing Association for Regulatory Reform = MHARR

Manufactured Housing Association for Regulatory Reform = MHARR

The manufactured housing industry has traditionally been able to deliver a quality product to home buyers at an affordable price because of its unique system of factory-based production combined with its network of independent retailers and independent land-lease communities.  This unique marketing and distribution structure has allowed the industry to prosper over the long-term, while serving and meeting the needs of American consumers of affordable housing.  Today, though, the independent retailers and communities that are the core of this system and make it work, face serious challenges at the national level that are not being addressed and resolved effectively — and have not been addressed effectively for years.

Because the manufactured housing industry is comprehensively regulated by the federal government, all of its various segments and all of its members are impacted directly by decisions made in Washington, D.C.  And, while all segments of the industry share certain common concerns at the national level, the specific interests, specific priorities and specific needs of all those segments in the nation’s capital, as shown by experience, are not necessarily identical.  For 20 years, though, since the post-production sector’s last independent association, the National Manufactured Housing Federation,  was merged into the Manufactured Housing Institute (MHI) to create an “umbrella group,” those specific interests and priorities have been swallowed by a dysfunctional process that has resulted in lowest-common-denominator positions and approaches to national-level issues that have not worked and have helped grease the skids for the industry’s prolonged decline.  Even worse, as part of this process, the particular interests of smaller independent post-production businesses have been overwhelmed and pushed aside by the power and influence of a few large corporate conglomerates.

A key part of the solution, therefore, to halt the industry’s long-term decline and restore it to production levels in the hundreds of thousands of homes, where it should be, must be the re-establishment of a dedicated, national post-production sector organization to effectively represent the specific concerns and interests of independent retailers and communities in the nation‘s capital, while working cooperatively with a single, united national producers’ organization on matters of joint concern.  And the sooner this happens, the better it will be for the entire industry.

As MHARR has pointed out before, the HUD Code industry is the only major industry in Washington, D.C. that keeps all of its different segments and interests under one umbrella organization.  The real estate/site-built housing industry, the automobile industry, the recreational vehicle industry, the marine industry and a host of others in Washington, D.C., all have separate associations for their production and post-production sectors.  The representation of these industries is organized along functional lines, recognizing that different sectors of the same industry, while united by certain over-arching concerns, have specific individual concerns that are best advanced by separate organizations that cooperate with each other as appropriate.  In an age of ever-increasing specialization and growth in the role of the federal government, this is just common sense.  By contrast, an “umbrella organization,” where different industry sectors, in the formulation of policy, are routinely expected to sacrifice their own interests to protect others, is a prescription for weakness, bureaucracy, ineffectiveness and failure, and lies at the root of the industry’s current sustained decline  — particularly its problems with public and private financing.

For example, with an independent association for retailers and communities, the industry’s current crisis dealing with the SAFE Act and Dodd-Frank mandates most likely would not exist, because those mandates should  — and undoubtedly would — have been addressed before they were signed into law.  Instead, as has been acknowledged by various sources and confirmed by reports from Congress, the ball was dropped on this major post-production issue, and the industry is now scrambling against difficult odds to secure after-the-fact fixes, with the survival of its small businesses on the line.

It’s no different with Fannie Mae, Freddie Mac, Ginnie Mae or the Federal Housing Administration (FHA).  An independent association of the nation’s retailers and community owners would not have let manufactured housing loans drop to a miniscule portion of the business of these agencies.  It would have been on top of the failure of these agencies to properly and adequately serve the needs of American families who rely on affordable manufactured housing with strong, decisive positions and follow-up from day one.  It would not have provided cover for manufactured housing detractors within the Government Sponsored Enterprises (GSEs) — who ran them into the ground purchasing risky sub-prime loans that people could not afford, while choking-off private financing for manufactured homes that people could afford.  Nor would it have spent years on a “select” program that is so “select” it’s virtually useless, while allowing manufactured housing loans to shrink to less than 1% of the GSE’s portfolios.

None of this should be news to any of the nation’s hard-working independent retailers and community owners who are struggling just to survive while sending their hard-earned dollars to Washington, D.C. to fund national-level representation that, with little or no regard for smaller independent businesses, has presided over a shrinking industry, while a handful of larger corporate conglomerates have benefited.

A dedicated post-production association in Washington, D.C. would advance the specific interests of independent retailers and communities with strong, undiluted positions that would be more targeted, more focused and, therefore, more effective, while working hand-in-glove with a single, united, dedicated manufacturers’ association to promote, advance and protect the industry’s broader interests in Washington, D.C.  But this will not happen until the nation’s retailers and community owners take the bull by the horns, exercise leadership, and demand change to resolve the fundamental structural problem that continues to handicap their representation — and the representation of the industry as a whole — in the nation’s capital.

In MHARR’s view, retailers and community-based entities face a clear choice — continued dysfunction and decline, or a change to a new national level industry representation structure to lead the industry back to real prosperity.  # #

Manufactured Housing Association for Regulatory Reform (MHARR)
1331 Pennsylvania Ave N.W., Suite 508
Washington, D.C. 20004
Phone: 202/783-4087
Fax: 202/783-4075
Email: mharrdg@aol.com

The Manufactured Home Industry: Who Are They?

July 18th, 2011 No comments

There has been a whirlwind of activity within the industry as of late.  Specifically, polarized and heated arguments regarding the direction we need to take both legislatively and image-wise.  I have read countless articles saying, “The industry needs to do this…,” and “The industry must do such…,” all highlighting our very survival.

Who is ‘the industry?’

I, for one, do not want our survival to be in the hands of faceless organizations known only by acronyms.  Here’s the key: Our survival is in our hands.

I stumbled into the MH Industry a year ago when I was transitioned from project manager to unemployed. Though I have known people residing in MH communities, I did not know the business model.

I voraciously consumed all information I could get my hands on.  Basic management principles remain timeless however, property and land-lease legalities are an entirely different animal.

I learned from reading MHMSM.com and other publications that this industry is limping along.  Depressed home sales, lack of direction, poor image, on the verge of oblivion, etc.  I got excited.  If history tells us anything it is not to listen to the masses and the masses are lamenting which means there are opportunities to be had in abundance.

One historical reference comes to mind.  Two-hundred thirty-five years ago, the Declaration of Independence was signed when the complainers felt oppressed by unfair taxation.  Eleven years later they drafted the U.S. Constitution which began with three crucial words.  These words have as much power today as they did then but they are often neglected as cliche.  The words are: “We the people.”

The industry is not politicians, non-profit entities, organizations having turf wars, or a handful of names we look toward for leadership.  They are us.  You.  Me.  The directors of your association.  The retailers, manufacturers, community owners, employees, contractors, and yes, especially the residents.

We are the industry.  The thing to do is not complain but to take action.

One voice is like a mosquito – it can be swatted and ignored.   But not a swarm.  If each of us does not take a least a little action, we are each to blame for the demise of our industry.

That means call your representatives, write letters, meet with those who are influential and keep doing it!  Could we fail? Possibly, but without action failure is guaranteed.

We are the industry and we have a voice.  Make yours heard today.  Make at least one phone call or write one letter and do it now.  # #

James-Cook MHC property Manager

James-Cook MHC property Manager

James Cook
Manufactured Home Community Property Manager

(401) 402-0373
Fax (815) 572-5255

 

CONSPIRACY or INACTION: Which is to blame?

July 15th, 2011 No comments

by Martin V. (Marty) Lavin

Our Friend

Ah, finally, I was intent on reviewing the innumerable documents, which built up on the computer I had used for several years.  As I scanned the dozens, no hundreds of files in my documents, I came upon some, which stirred memories.  Probably none more than R. C. “Dick” Moore’s “Perspective #61” of July 18, 2008.  Mr. Moore, as most know, is a longtime MH retailer and community owner.  As the spirit moves him, he puts out an occasional newsletter, Perspective.

And what was this memorable missive all about?  Well it was a fairy tale about a mysterious “friend up east” who had MH powers similar to Superman, able to unite the GSE’s, (Fannie Mae and Freddie Mac), Clayton Homes and maybe even Citibank, and Warren Buffett himself, in an effort to stifle all competition for chattel retail lending to the industry.  Wow!  Strong stuff indeed.

The gist of the tale is that our “friend” was paid by the GSE’s to advise them “not to buy MH paper.”  This would also lead to Citibank “pulling the rug” on Origen Financial and Palm Harbor.  Then, as all competition is wiped away, Buffett borrows $2 billion in the market which he deposits in the account of the Clayton Homes’ lenders, Vanderbilt Mortgage and 21st Mortgage.  While the story didn’t as much as make the back page of the Wall Street Journal, I hear Hollywood is interested enough in the story so they’ve spoken to Brad Pitt to play “our friend up east.”

Who is He!

Since “our friend” goes unnamed in the several other Moore Perspectives with stories which mention him, there has been substantial speculation on who “our friend up east” is.  Presumably with all the players involved in the alleged scenario, this has got to be one powerful S.O.B.  Who could it be to wield such power?  It’s not Warren.  He’s “our friend from Omaha.”

Some came forward during this series of Perspectives and had the gall to suggest that I, the writer herein, was the powerful and mysterious “friend up east.”  They have also suggested that Brad Pitt is a good semblance of Marty, and would be perfect for the starring role in the movie, or TV miniseries.  Well, I’m obviously flattered but can I be the mysterious, unnamed “friend up east.”  As H. Ross Perot said, let’s go to the chalkboard to figure this out.

The first clue is that “our friend” has been paid by Fannie Mae and Freddie Mac to “advise them not to buy MH loans.”  That assertion is partially right.  I did advise Fannie Mae for a number of years on many matters MH, especially about retail chattel lending.  Other than informal, unpaid conversation, which we all have with others, I did not work for or with Freddie Mac.  Nice people and all, but I never did have that paid assignment there.  Too bad.

No Secret

Parenthetically, my assignment with Fannie Me was never secret, no attempt was made to hide it, by either side, and I always had the assignment on my resume on my web site.  So, if I am “our friend up east,” Mr. Moore, who writes that he uncovered that “our friend” was being paid to advise the two GSE’s “about MH paper,” that “secret” information was hiding in plain sight on my web site.  Best place to hide is in plain sight, they say.  And while I counseled caution in buying MH loans, based on MH loan portfolio experience, I never counseled anyone not to buy any loans, only those likely to cause alimentary canal back up.  But that doesn’t establish me as “our friend up east,” does it?

A second allegation is that “our friend” and the Clayton folks were dining together.”  Well, yes Kevin Clayton is a longtime friend of mine, I’ve dined with him contentedly many times, including once in D.C. when I went to the hopper late in the dinner and Kevin managed to convince me when I returned that I had lost in a game to determine who got the check for the night’s dinners.  Since it was a very large group with lots of big eaters and drinkers the tab was well over $1,000.00.  I’d have paid, but . . . . Kevin had the last laugh, he intended to pay all along and he did.  Good boy.

Global Heart Burn

I must admit I did have dinner one night in Omaha, Nebraska with the Clayton folks during the Berkshire Hathaway annual meeting.  Kevin had invited me out as a guest and I was invited to dinner by Keith Holdbrooks of Southern Energy Homes, a Clayton subsidiary, and a whole host of Clayton “Big Shots” were there.  What was discussed at the table that night?  The only memorable discussion I recall is that the table of 12 or 14 people all believed in the myth of man-made Global Warming, except OleMartyBoy, who tried to hold his ground.  With religious fervor the group accused me of my disbelief as though I was skeptical of the Immaculate Conception, an uncomfortable situation for all.   Since that 2008 dinner my vindication is nearer.  But still, every American has the right to an opinion, even an uninformed one, and there are plenty around these days.

So the “dining with Clayton folks” can’t be used against me, unless we were discussing how man-made Global Warming could be used to de-stabilize MH chattel lending.  Can it?  Some would have you believe it can and perhaps that explains the religious fervor at the table that night.

Conspiracy Theory

So why do I go on about this?  Certainly Mr. Moore is not the only MH figure to write about an industry conspiracy.  The estimable George F. Allen, one of MH’s brightest stars, has often brought up the possibility of a conspiracy.  And of course, the conspiracy always centers around Berkshire Hathaway and Clayton Homes.  Fleetwood, Palm Harbor and Oakwood go unmentioned.  The conclusion being that the reason Clayton Homes is the best of what’s left is conspiracy related.  The strong management there, excellent home lines, disciplined retail lending by two of their companies, and the fortuitousness of being owned by cash rich Berkshire Hathaway, apparently account for nothing.  Would or could Clayton Homes be brought down to Earth if their financial backing disappeared?  Perhaps.

And finally, yes I do live in the “east,” Burlington, Vermont, being far east and regrettably, far north.  But let’s go back to the chalkboard and look at facts, not conjecture.  Here are some of the various facts to be considered to explain the industry slide.

  1. The packages of chattel loans originated and sold into the ABS market from 1995 to 2003 are amongst the very worst loans of any type ever sold to investors.  If sub prime real estate is a problem, and it is, MH ABS paper is the Uber King-of-Sub Prime.  Investors are loath to touch these MH ABS offerings, to this day.
  2. While the industry has severe operating model deficiencies, little has been done by the industry to shore up these deficiencies.  Get the same liquidity to the industry it enjoyed in 1995-1999 and securitize these loans, and the result would still be bloody.  Far too little has changed to make much difference.  And investors not always being stupid, know this.
  3. The MH industry is not seen as important enough by government to subsidize its loan losses.  It has been prepared to do so with conventional housing, but not chattel MH lending.  Scream about it if you will, but that’s the way it is.

Subsidy Withdrawn

So, how much easier it is to cry conspiracy than to accept that from 1950 to 1998, when the music stopped, the success of the industry has constantly been subsidized by lenders?  When that subsidy was withdrawn in the late ‘90’s-early 2000’s, the industry tanked.  Yet, I still hear from many “it worked for 30 or 40 or 50 years.”  Worked for whom, I might ask?  It did not work for the lenders, so most have left.

This brings us to the present, with 2011 expecting between 40-50,000 new home shipments, a continuation of a slide of 90% since 1998.  This is serious, right?  Yet the industry response has been anything but serious.  Most industry response has centered around Washington, D.C. activity.  How’s that working for us?

The question for some would be how to return to the 1974-1995 trend line of about 240,000 new home shipments per year.  This avoids the 1969-1973 bulge, during which we averaged 477,000 home shipments per year, and the 1996-1999 period when we were over 300,000 homes.  You know the record since 1998.

Whence the Volume

Let’s look at this return to a much larger industry size for a moment.  One would think that given the facts we know, the 40-50,000 home shipments might be “where it’s at” into the future.  Baring any new flood of “loose” retail lending money, how do we get back to 250,000 homes annually, or even to the 2004-2007, 125,000 homes, give or take?  We can depend on FEMA for some homes, floods, disasters and hurricanes willing, but not too many.  The LLC’s would like to buy new homes, but their forays there with buy here – pay here have not created profit enthusiasm for this model.  Thus we can’t expect much new home volume there.  Retail chattel lending is very constricted, so retailers are unlikely to help with volume.

Title I, the former “great hope” has proven to be a volume dud, not surprisingly so.  Most non-Clayton retail lenders have to stay on the positive side of 700 FICO to survive.  Can’t look to them for much volume, eh?

The Berkshire Group goes deeper, but they ain’t Greenseco re-incarnate.  Only their disciplined lending and strong servicing culture and yes, experience, makes it all work.  They are not about to pump out $6.3 billion in MH loans as Conseco Finance did in one year around 2001-02.  I would guess if the two Berkshire lenders got to $2 billion combined annually that would be a wondrous job.  So even there, not too much excitement either.

This leaves real estate placements of HUD’s, a long cherished dream to go against the site built industry and whip their azz.  We know that isn’t about to happen, no matter how fervent our dreams.  New “easy” lenders coming to the rescue?  Perhaps.  Have you tried to finance anything in your personal life recently?  If you have you well know the absolute difficulty of any sort of success.  Add in our depreciating asset, the manufactured home, and generally scratch and dent credit capability for most of our buyers, and the hope of a new lender exploding on the scene seems demented.  But hey, we all live in hope.  Remember, Tarzan always said, as he went in and out of terrible scrapes, “Where there is life, there is hope.”  Amen.  Just don’t plan your entire business on the return of Conseco, CIT Group, The Associates, Green Point Credit and the others, though heaven knows their return could carry on long enough to shore up my retirement.

Regulatory Guillotines

Unaddressed yet are the new laws affecting lending and the new consumer agency.  I can only make one comment here.  When was the last time you encountered very complex lending laws, licensing requirements, and a super consumer agency which fueled a burst of sales activity for you?  In my time in the industry since 1972, I’ve seen none.  Perhaps the impact of many new laws, such as the very HUD code itself were overstated, but without the HUD we were shipping up to 580,000 homes per year.  Have you seen that many since in one year?

My best guess, and it is only an experienced guess, is that the industry will not be able to roll back the requirement that most industry transactions will come under the purview of one or more of these regulations, will control transactions, and will cause another reduction in HUD volume.  Even as the industry struggles with ways to avoid their prohibitions, the impact is most likely to be substantial.  I do surely hope I’m wrong.

And what will be the impact of LLC owners extending their own financing for the sale, or rent with option for homes in their communities?  Again, like everything, things not done during good times but becoming a fallback during bad times usually have warts on them.  Self-financing may well be a necessity, and I readily accept that.  If you have an LLC with substantial vacancy and the normal financing available will not fill it, one must save themselves, and self-financing, properly executed, can do that.  But, it does not speak to the substantial work and personnel necessary to make it work, the need for your own capital, the ever-decreasing used homes availability, the specter of violating some arcane lending law, and not least, a liquidity crunch which would drive one to try to cash out their loans and find there are no buyers or only buyers with a huge 80-90% haircut in value.  Some deal.  Pay attention here.

LLC Fallback

So one can’t help but think that as the LLC sector, perhaps the most vibrant and last to fall goes through a contraction in numbers, that only well-located communities with a value component to their offering will weather the storm.  It has been happening already, as the supply of used homes dries up, and new homes are found wanting for self-finance, the corn fields which became communities may be headed back to corn fields or for other use.  Wal-Mart, anyone?

If you struggled through reading my “Saving Chattel Lending” you had to ask yourself, “Can it be this hard, Marty?”  I surely ask myself the same question each time I prepare one of these papers.  If it’s going to be this hard, where does one start, and of the umpteen cures I recommend, which are the five most important?  Answer:  I don’t know.  Second answer:  Note that virtually none of my suggested measures have been tried.  The only change in the industry financing model, which is “the” defect, is that we’ve gone from “fogging a mirror” to 700 plus FICO, real credit capability, a completed application, full and adequate documentation and a belief the borrower is qualified in every way to get the loan and pay for the home successfully thereafter.  That is the quantum industry leap, which has occurred, and it certainly increases lender survivability, but has destroyed lender and industry new home volume.  Want to increase home sales volume?  Find a way to attract many more folks with better credit.  Stop building many new HUD code homes and selling them and what do you think the outcome will be for most industry segments?

So I come back to an industry conspiracy.  This all has to have happened because a mysterious, unnamed “friend up east” used his magical powers to convince some very large, knowledgeable lenders to quit MH chattel lending to throw all the volume to just a few special lenders.  Now if only that powerful friend can get SACU, Triad, and USBank to leave the industry, that will be the final step in the conspiracy.

Come Now

Speaking from atop the “Grassy Knoll,” I’d feel better if the industry might look at the known factors, which have brought the industry to its knees, and worked hard to Saving Chattel Lending.  Believing in “The Conspiracy” may let you off the hook of having to do anything, but will do nothing in resurrecting the industry.  It will take far more than conspiracy theory to do that.  # #

Martin V. (Marty) Lavin
attorney, consultant, expert witness
practice only in factory built housing
350 Main Street Suite 100
Burlington, Vermont 05401-3413
802-660-9911, 802-238-7777 cell
web site: www.martylavin.com
email mhlmvl@aol.com

Editor’s Note:  As with Mr. Lavin’s earlier articles, we have honored his request to post his article “as is.”  Read his other articles:

 

As I See it – advancing Manufactured Housing Chattel Lending – So Now What?

July 15th, 2011 No comments

As we come to the 4th of July or Independence day, I decided to carve out some time to add what I hope to be constructive ideas to the manufactured housing industry chattel lending issue.

Being involved in the industry for over 25 years I have rode the shipment roller-coaster (like many of you) more than once.  However, we cannot look to the past as our salvation for the future.  Nor can we look to Washington D.C. for our salvation.  Our “friends” in Washington D.C. can’t even balance a checkbook or a budget.  As my kids learned in college, there’s book smart (passing the tests) and then there is the real business world.  All the studying done in college has had very little to do with their business life experiences (or so they tell me).

So now what?  While presenting my idea for the industry, I’m simultaneously having a Rep. Paul Ryan-Marty Lavin moment.  Put your idea out there and let the attacks begin.  Even so, I still wish to share my thoughts as they may springboard (or whiteboard) the manufactured housing industry to the answer we all seek.

1st – Washington D.C. – This is the land of unintended consequences.  Where to start?  Safe Act, Dodd-Frank, CFPB or TARP pick any of the alphabet soups, did they do anything for us?  As an industry what did we do to them?  Sure we can relive what the Green’s did to the bondholders on Wall Street.  But they were bondholders who took on a risk for a return.  Whether it was a straight deal or not is why people charge for due diligence reporting.  Did we cause the mortgage backed security world to implode?  No, for that, I say look to D.C.  Fannie, Freddie, FHA, VA and Ginny Mae all were smarter than the rest of us. They wanted homeowners, so they put programs in place to get what they wanted.  Forget underwriting, down payments, proof of income, job verification and speculators, they wanted loans.  Did mortgage brokers take advantage of the system?  Yes!  Did they write the rules? No!  Those that are guilty of fraud should be punished to the full extent of the law.  Our industry was and still is collateral damage.  I guess that’s what happens when you are to close too the bomb blast.

2nd – Banking Institutions – Coming originally from a bank and credit union background I understand where depositories are coming from with regard to the decisions they make for our industry. Over the years we have presented opportunities to a myriad of institutional sources of capital and over 250 said, “No thanks”. The irony was, most of them actually liked the opportunity and the plan behind it. Some of the ones that said no, even said it was an outstanding opportunity and program. The ones that signed on, had some of the best results they had ever experienced with installment loans. But a funny thing happened along they way.  The keys to the vault were hijacked from the decision makers and placed into the hands of auditors and regulators.  Many lenders cannot make loans due to the ever-changing capitalization requirements.  If you really want to get your banker excited, ask them what has happened to the premiums for deposit insurance from FDIC & NCUA.  With the new lending regulation and bookkeeping (ratios) requirement ball always on the move, my lenders became deposit acquisition specialists. The TARP (Trouble Asset Relief Program) program did not live up to it’s name and became a vehicle for the big banks to get bigger.  If you are not familiar with the PNC – National City merger that alone should give anyone reason to pause.  I know that lenders want to make loans; it’s how they derive their income.  Not every bank can go to the Fed window and play the daily swap game between Fed funds and Treasuries (Citi).  So we are left with an under capitalized banking system (in the regulators view) that has put a lid on lending.  Based on current economic trends, the housing market inventory (both real & shadow), the troubled alphabet soups mortgage operations and D.C. politics, I unfortunately do not see lenders running to us with bags of money for a long time.

3rd – Ourselves – While we have been in a steady ten plus year shipment decline we cannot excuse ourselves.  Our market has remained basically the same since I started all those years ago, newly wed and nearly dead.  While parts of the industry have tried to morph into “traditional housing” e.g. bigger is better, we still had rampant documentation fraud, blown up invoices, backbreaking advances, excessive loan terms, lot rents increasing into un-affordability and our own “trick” lending programs (ersatz  ARM’s & 30 year paper).  We are now being treated like the child we presented ourselves as to the world.  While everyone points the finger at everyone else as the culprit we all forgot the golden rule.  The guy with the gold makes the rules and they decided to go home.

Over my years in this business, I have observed several areas where the industry system consistently fails. In order for homes to hold their value, there needs to be a healthy system for resale of homes owned by homeowners, just as there is in site built housing. Unfortunately, no such system exists in manufactured housing. MLS does not support our re-sale market in most states.  We’ve talked about our own MLS for my whole career and while there have been some great attempts (for example mhvillage) we are still a second class citizens compared to the real estate market.  By not having a re-sale market program we only hurt ourselves as our current residents cannot sell their home and, as a consequence, get mad, depressed and finally jingle mail the keys to the lender or community and leave.

Industry lending philosophies contribute to that problem by charging higher interest rates on pre-owned homes. Even after all my years in the business, it still stuns me to this day that we charge interest rates based on the age of the home. This does not happen in site built housing, thus giving site built an advantage, and manufactured housing a disadvantage, when it comes to the performance of the collateral from a lender perspective and investment performance of the home to everyone else. It also depresses any attempts to create a healthy system for reselling existing homes.

Another problem is the method in which repossessed inventory is handled. While the lenders should have a better plan than most do, many parts of the industry conspire to keep them trapped in a guaranteed to fail program. Almost every independent retailer, and many community operators treat outside finance companies like victims to be slaughtered rather than as important partners at the table. When a home is repossessed, many hands, motivated by self-centered greed are demanding money from the lender. Retailers want full profit fees to move homes onto their sales centers where they sit unsold until the lender gives up and allows the retailer to “steal” the home so that the retailer can then sell the home and “hit a home run” on the lender’s loss. The retailer is both short sighted and greedy in this transaction, and the lender lacks the fortitude they should have to shut the retailer off from future financing.

While the environment is somewhat better on the community side, it varies greatly from community to community. When Ken Rishel was a community owner, he correctly viewed outside lenders as important stakeholders. As a consequence, he saw the value of shared risks and never charged lenders lot rent, maintenance fees nor commissions for selling their repos if his people couldn’t get a sale price higher than the deficiency balance on the loan. When he began to focus on outside lending, he persuaded other community owners to the same view. When I started Precision Financial with Diane years ago, we asked community owners to agree to much of the same terms and many agreed.

Unfortunately, those community owners are not in the majority. Most expect lenders who own homes in the community to pay tenant’s back lot rent, the rent going forward until the home is sold, a commission for selling the home, and, learning from retailers, the lender’s home often goes unsold, with the hope of “stealing it” so, they to, can hit a home run on profits when the home is sold.

Until everyone involved possesses either the moral integrity, or sees the business wisdom to treat all the stakeholders fairly, the system is broken. It may limp along as it has been doing, but the problems that hold manufactured housing back will remain.

Appraisals have also become a problem in part because of the lower prices of repossessed homes. We have loans we cannot do because they will not appraise either through comps or through NADA, or even our own proprietary system of appraisal. We are now reaping the field we sowed.  All the wholesale homes have lowered everyone’s collateral value.  Not only have home values been depressed, but also what is happening to the community value if all the home values are 30% to 50% less and occupancy is going south?

Industry Image

To go RV’ing or not to go?  There have been many ideas floated within the industry as to what is needed to change the public, regulator and banker’s perception.  This issue is above my pay grade.  However, Einstein defined insanity as “doing the same thing over and over but expecting different results.”  All I know is that we have let others define us.  It is time we define ourselves.

So now what?

I think there are 4 plausible solutions for everyone to ponder.

1. Everyone can subscribe to partnering with Clayton Homes.  Who wants to fight Mr. Buffet?  I have been an admirer of his for years and even own Berkshire Hathaway stock.

2. Captive Finance – while D.C. is not making it easy, it is a stable and reliable plan for those who have the expertise, or are willing to hire the expertise they need. That it creates new challenges is undisputed because, done correctly, it requires a whole new set of business skills that few community owners or retailer possess. Done incorrectly, it is a disaster waiting to happen. It is not a short-term solution, but rather a long-term one that almost demands affiliations with outside experts to succeed.

3. Current lenders – Be sure to take care of the ones left.  They have been with us through the darkest of times.  Take care of them today and they will be here tomorrow to take care of us.

4. Lastly, a new idea. While not a new idea, as it served its purpose in the past for another industry and may well serve a purpose for us.  I’m talking about a manufacturer based captive lending program.  While it carries risk, it also carries a stick.  If you’ve never been involved in an auto dealership that had a sizeable portfolio with GMAC, Ford or Chrysler you do not understand the size of the stick the manufacturer captive lender holds.  If you loaded them up with poor-bad paper and cause high losses, it could cost you your dealership franchise.  No one wants to risk that decision.  In the beginning, before the automobile captives became market share driven, they would only finance their own products and were the most profitable arm of the entire company.  Our company has been researching this concept for a number of years, and we are in a position to help make this happen if a group of manufacturers would actually sit down in the same room and band together to make it happen. To this point, there have been no takers. Their dislike and mistrust of each other seems to color their survival instinct.

In the end, from my point of view, lending is about the 4 C’s:

Capacity – Can they afford the purchase without strain? Will that income continue?
Character – Would their word and their handshake be enough to make the loan?
Collateral – Are the ATF & LTV viable for the terms and conditions of the loan
Credit – Have they proven they have the self-control to manage their money and do they feel responsible for paying their bills on time?

The federal government controls none of these traits.

If you have made it this far, thank you.  Will any of these ideas help?  I hope so.  If anything, at least a conversation may start. Years ago when people asked me what I thought, I told a few and they thought I’d lost my mind. When I investigated the current D.C. promulgations, people again thought I’d lost my mind.  After awhile you begin not to speak up.  I was hoping the whole time that I was wrong.  Oh, I wanted to be so, so, wrong.  To Marty Lavin, I want to wish you well and treasure all the things I learned from you. They painted you, Gubb Mix, Ken Rishel and I with the same brush; only they have been far harder on you than the rest of us.

I asked my dad one time to try and fix my golf swing.  His advice after watching me was that there are 1,000 things going on in my swing and where would I like to start.  Our industry has many things it can improve on.  We need to start.  We still have and always will have the best affordable housing option story to tell people. # #

By Pat Curran, President
Precision Capital Funding

Dodd-Frank Act and Manufactured Housing

July 12th, 2011 No comments

Editor’s Note:  Received from the Manufactured Housing Institute (MHI), July 2011, thanks to a communication from Executive Director Thayer Long

The Wall Street Reform and Consumer Protection Act of 2010 (or “Dodd-Frank”) is approximately 2,200 pages long and affects all financial service products, including manufactured home loans.  Because of the legislation’s enormous size, complexity and its broad scope of impact, discussing it in piecemeal terms is difficult.  Even within the banking industry, community banks have a different focus compared with the large national banks.  For non-depository institutions, the same problem also exists.

Yet, there is a commonality of interest across a number of sectors.  Dodd-Frank contains a number of unintended consequences that impact a variety of industries and consumers.  For instance, with respect to the manufactured housing industry, Dodd-Frank was structured and written around a regulatory framework for real estate mortgages.  However, the bill essentially reclassifies all manufactured home loans as mortgage products.  Manufactured home loans not secured by real estate are not the same as mortgages.  To regulate all home loans the same way is an unsuitable model, which creates significant challenges to the industry and the consumers it serves.

Manufactured home loans have unique characteristics.  Manufactured home loans, in most cases, are much smaller than typical residential real estate secured mortgages and have shorter durations, which make transactional costs harder to recover.  Manufactured home loans have higher servicing costs than residential mortgages, requiring specialized knowledge and more personal contact and less reliance on technology.  Many manufactured home loans (with the exception of FHA Title I loans) are made with no government guarantees or potential losses to taxpayers.

How is the Industry Impacted?

First, the law creates a new standard for a “high-cost mortgage” loan which is based on interest rate spreads that fluctuate over time.  If the Annual Percentage Rate (APR) exceeds the average prime offer (the loan purchase rate established by Freddie Mac) by more than 6.5 percent, or in personal property transactions under $50,000 by 8.5 percent, then the loan is considered “high cost.”

For example, if the law became effective today a “high-cost mortgage” loan is any residential loan over $50,000 with an APR of 11 percent or more, or, a loan under $50,000 (if the dwelling is considered personal property) with an APR of 13 percent or more.  The law does not prevent “high-cost mortgage” loans from being made, but it does make it more difficult to make these loans, and it imposes a significant level of potential legal liabilities making them virtually impossible to securitize.

This is a problem because since our cost of capital is higher, manufactured home loan interest rates are typically higher.  Since Fannie Mae and Freddie Mac do not purchase loans or create a secondary market where manufactured housing lenders can access capital at a discounted rate, lenders need to rely on other sources to make loans.  These sources charge a higher interest.

Also, there are other fixed costs associated with making any kind of loan, such as fees for preparing the legal documents necessary to originate a loan.  These basic costs increase with each state and federal law and regulation that is enacted.  In addition, there are costs associated with each prospective borrower, including borrowers that are rejected and those who for whatever reason end up not taking the loan.  These costs also include a portion of the advertising and marketing that go into borrower acquisition, the costs of maintaining methods of communication, and the costs of determining loan eligibility.

This conflict is particularly compounded with existing manufactured homes sales, where loan balances tend to be smaller.  The loan may be smaller, but fixed costs are the same regardless of the loan size.  These fixed costs must be recouped in some way in order to make the loan.  Therefore, the only way to recoup these costs is by charging a higher rate.

If a lender decides to make a “high-cost mortgage” loan under Dodd-Frank, they must be prepared for a variety of new regulations, including

  • requirements for borrowers to undergo loan counseling by a HUD-Certified Counselor, the cost of which is expected to be $400-$600;
  • prohibitions that prevent financing points, fees and closing costs;
  • rules limiting late fees; and
  • rules requiring multiple disclosures to sell or assign “high cost” loans.

Second, Dodd-Frank does provide a path for relief through the definition of a “Qualified Mortgage (QM),” which is intended to provide a legal safe harbor from some of the Act’s more burdensome provisions.   However, the criteria that must be met to be considered a qualified mortgage include:

  • no balloon loans;
  • points and fees are restricted to 3 percent of the loan amount;
  • ability to repay must also consider taxes, insurance, and assessments; and
  • standardization of debt to income guidelines that have not yet been determined.

Again, because of the nuances in manufactured home lending, the definition of QM is unworkable for many loans made in our industry.  First, while balloon payments are not commonly made by manufactured home industry lenders, they are common with captive finance companies and local banks.  Second, the cap of points and fees at 3 percent coupled with our smaller loan balances will force lenders to charge a higher interest rate (thus tipping the scales and classifying them as “high-cost mortgages.”)

Communicating this in detail is complicated because the law’s impact will vary from lender to lender depending on their business model and the types of loans that they make.

What is true of all of the existing non-captive lenders involved in manufactured home lending is there is a limit, which varies from organization to organization, of how small a loan they believe they can make and still recover a reasonable amount of their costs.  Lenders will have to make a decision on what their lowest loan amount will be due to new limits on their ability to recover those costs.  To better understand this, a lender has only three ways to recover costs which are:

  • to buy the loan at a discount, which is only possible if there is a motivated seller involved in the transaction who is able and willing to accept a discounted payout;
  • to charge the borrower additional closing costs; and
  • to raise the interest rate and recover the costs as the borrower pays back the loan.

Even the strategy of using points to keep the interest rate below the triggers of a “high-cost mortgage” is impeded leaving no way to recover costs.

To further clarify, if the cost of origination and legal compliance equals X, that number does not change based on the loan size or duration.  The shorter the term and the lower the dollar amount, the harder it is to recover those fixed costs.  Here is an example:

A lender is considering making a $10,000 loan with a term of four years.  Using a risk-based pricing model, the correct interest rate is determined to be 11 percent.  If the fixed costs of origination are figured to be $2,000, the lender must charge the borrower either in points or closing costs that $2,000 to keep the rate at 11 percent.  If a law or regulation caps the lender’s closing costs or points, then the lender must look to raising the interest rate to recapture whatever costs could not be recaptured through points or closing costs.  If the entire cost were recovered via interest, the interest rate would need to be increased to 17 percent to recover the costs.

Captive finance companies currently have zero, or very low, minimum loan cutoffs.

Typically, they utilize higher interest rates to recoup costs, but often the justification for lending in the first place is that their related entities are profiting from the transaction in other ways, not the home loan itself.

What is the Result if Dodd-Frank is Not Amended?

Financing will still be available for those buyers with good credit and who can make a sizable down payment.  Industry lenders that have or require higher credit quality customers may not be as impacted by the “high-cost mortgage” loan provisions.   Those needing to serve customers with more challenged credit quality, and therefore needing to risk price their loans accordingly, will be impacted.

Also, those who fund low balance loans will find it more difficult to do business and existing homeowners will find it very difficult to sell their homes to buyers that need financing.

The dollar amounts for not making a loan will vary by lender because of all the variables detailed above, but each lender will find and set a minimum loan requirement based on their internal numbers.

It has been estimated that 50 percent of all the loans made on manufactured homes in manufactured home communities are under $25,000.  Another source has estimated that nearly 75 percent of all manufactured home personal property loans are under $75,000.00.  If the fixed transactional costs mandated by current and proposed law are higher than the lender’s ability to recover costs, the loan will not be made by lenders independent of other profit center relationships.

Bottom line is that without changes, there will be a significant number of consumers who will not be served.

Potential Solutions

MHI has an effort underway to seek bi-partisan legislative relief in six specific areas that needs and deserves the support of everyone in the manufactured housing industry.  The issues identified by the MHI Dodd-Frank Task Force are as follows:

  1. Elimination of the expanded scope of Homeowners Equity Protection Act (HOEPA);
  2. Clarification of the Qualified Mortgage Standards;
  3. Clarification and Consistent Standards of a Mortgage Originator;
  4. Exemption of Manufactured Homes from the new Appraisal Standards;
  5. Exclusion of Manufactured Home Loans from the Residential Mortgage Loan Definition; and
  6. Clarification and strengthening of exemptions for manufactured home retailers from CFPB Oversight.

A six-page white paper created by MHI can be obtained from MHI or any state association.  Industry members should obtain copies and distribute them to their Representatives and Senators along with personal letters and emails urging them to support this effort.  Those reading this article should distribute it as widely as possible throughout the industry along with their personal efforts to persuade other industry members, including employees and community residents, as well as suppliers,  to also contact their Representatives and Senators.

##

MHI is the preeminent national trade association for the manufactured and modular housing industries, representing all segments of the industries before Congress and the Federal government.   This article was prepared with input from the MHI Dodd-Frank Taskforce, in particular Ken Rishel, Sheila Dey, Dick Ernst and TF chair Tim Williams.

SAFE Act – The Final Rule – and what it means to the manufactured housing industry

July 6th, 2011 No comments

The SAFE Act’s final rule has been released by HUD just as predicted – before July 1st. So for those engaged in captive finance who have put off dealing with the problem, it is now time to get busy.  Because the time before enforcement is shorter than might be expected in some quarters.  Predictably, there is some confusion already and the lengthy document is not even cold. This article should clarify for those who need to know and understand what the final rule means to them.

We have had a team of experts and attorneys going over the document so we can provide authoritative answers that those engaged in captive finance can count on for guidance.  A decision was made to put this article in the form of questions and answers for clarity. But the questions are not necessarily actual questions from readers.

First – The Feds verses the States – Who is in Charge?

The final rule clearly reiterates what was stated in Savanna, Georgia at a meeting when questioned by me some time back.  This sets the minimum standards for compliance with the model legislation but lacks both the power and will to restrain the states from setting higher standards.  States can set additional standards, but they cannot usurp the minimum standards.

Are retail sales people now exempt from licensing in relation to the SAFE Act?

If they follow the rules they are, but, if they fail to follow the rules, they are not.

The final rule is somewhat more liberal than anticipated, which is a huge relief for the entire industry.  But there are still rules.  A salesperson may take, and assist in the filling out, of an application for transmittal to someone else at another legal entity who actually offers to negotiate loan terms, as far as the federal government is concerned.  States are free to disagree, and to place more restrictive rules in place.  Another key feature is the salesperson may not negotiate terms or be compensated by those who do.   However, the mere sharing of general information about a financing source, discussing hypothetical financing options, i.e., options not related to a specific financing source, giving the homebuyer a list of available financing sources without recommending any of the sources, discussing a buyer’s ability to afford a home, presenting or discussing generic facts or generic rate sheets, and/or closing personal property transactions would not be covered under “offers or negotiates”.  While sales commissions on the sale of the home itself are not considered compensation or gain for purposes of the SAFE Act, if the commission is paid out by the same entity that does offer and negotiate to make a loan, those sales commissions may be subject to scrutiny as compensation or gain, and those entities engaged in any form of owner financing are urged to contain their lending in a separate legal entity, including those engaged in rent to own, lease purchase, and lease option transactions.

Is Chattel Lending for Manufactured Homes, RVs, and Boats Exempt from the SAFE Act?

No.

Is Seller Financing Exempt from the SAFE Act?

Only if it is your own residence, or vacation home.

May a Person or Entity that made a loan prior to the SAFE Act modify that loan for the benefit of the borrower without being licensed under the SAFE Act?

HUD chose to defer judgment to the Consumer Financial Protection Bureau on that issue.  It should be noted that many states do require such and other licensure if the modification is permanent. Since this is an additional requirement, neither HUD nor the Consumer Financial Protection Bureau will act to ameliorate any such state requirements.

May we utilize our attorneys to originate our seller finance loans so we do not need to license?

An attorney may not act as a “straw man” for the actual lender unless the highest laws of that state specifically define those duties as part of the practice of law in that state.  Attorneys are allowed to prepare documents and provide legal advice, as well as assist in a transaction without licensure, but they may not act as originator or lender with SAFE Act licensure.  Many states will have additional requirements for lenders, attorney or not.

May we utilize a licensed loan originator to avoid our need to be licensed when seller financing?

From the federal government perspective of the SAFE Act, the answer is yes.  With that said however, there are serious complications that the final rule chose to ignore.  In all but a very few states, the practice of lending requires state licensure, so while an individual or entity engaged in providing some form of financing for the manufactured homes they sell may be able to avoid SAFE Act licensure, they must obtain state licensure as a lender.  Many states will require SAFE Act licensure as part of the process to obtain or maintain the other required licenses.  Because some states require the originator to also service the loan in total, the process becomes even more complicated.  Some states have already adapted the stance that SAFE Act licensure is necessary to modify even loans that predated the SAFE Act.  If you are interested in pursuing this strategy, make sure you have sought out competent advice on the requirements for the state or states in which you plan to operate.  There are other programs that do meet all the requirements necessary to avoid licensure of both SAFE Act and state lending licenses available in the manufactured housing industry if avoiding licensure of any kind is your goal that avoid the pitfalls of using an MLO only firm.

Is there now reciprocity between states to avoid all the duplication for multi state operations?

It is the federal government’s statement that it does not wish to encourage a “race to the bottom,” and thus is not encouraging such reciprocity, but cannot stand in the way of the states if they choose to participate in some form of reciprocity.

This synopsis of the Final Rule was created with the assistance of two nationally known law firms under retainer to Rishel Consulting Group.  It is not offered as a legal opinion to anyone reading this material, and their liabilities are limited to their retained client, Rishel Consulting Group.  Additional detailed information on the Final Rule is available in the July issue of Captive Finance News. # #

Ken Rishel, Rishel Consulting Group, ken@rishel.net

Manufactured Housing Institute President and CEO Comments on Research Report on State of the Industry

June 24th, 2011 No comments

Arlington, VA. – Thayer Long, president and CEO of the Manufactured Housing Institute, issued the following statement on in the IBIS World, Inc. research report falsely characterizing the state of the manufactured housing industry.

“Since 1989, manufactured housing has accounted for 21% of all new homes sold. Due to the most significant economic and housing crisis in generations, over the past five years the pace of new manufactured homes sold in the US has declined by 57%.

However, the pace of new single family site-built homes sold in the US has declined by 76% since its peak in March 2005. Buyers purchased 322,000 new site-built homes in 2010, the fewest annual total on record going back 47 years.

Over the past five years, excesses in the site-built housing market contributed to one of the greatest economic disasters in generations. Buyers assumed more debt and more house than they could afford, and this behavior was supported by the marketplace.

Manufactured housing, having undergone its own subprime bubble over a decade ago, learned these lessons well. As a result, manufactured housing remains the best housing value proposition in the marketplace, a feat accomplished in spite of tougher self-imposed industry lending standards. Over 19 million Americans live in a manufactured home, and the market share of manufactured housing is back on the rise over the past two years, with shipments increasing in 3 of the past 4 quarters.

Americans can realize the dream of owning their home at an affordable price, without sacrificing quality or the level of amenities they desire. The manufactured housing industry is very much alive, and very much here to stay.”  # #

From an MHI Press Release 6-24-11

Lending Is the Key to Selling Manufactured Housing

June 24th, 2011 1 comment

In a conversation with Industry In Focus Reporter Matthew Silver for  www.MHMSM.com, Mark Dillard, Executive Director of the Manufactured Housing Institute of South Carolina (MHISC), Dillard said lending is the biggest piece of the puzzle in terms of selling manufactured housing.

“We’ve been going to regional credit union association meetings and trying to reach a couple dozen people at a time. There are always a few people who show interest, and out of that we often will get one person who is ready to jump in. Credit unions don’t typically hold the paper when they make loans. Some of the mainstream lenders, like CU and US Bank are encouraging credit unions to make the loans, and then they buy the paper if the bottom line looks good to them,” he says.

“A lot of the retailers have a relationship with the banks in their towns so we put together a power point presentation that the retailer can present to lenders, and leave it with them. It’s everything from the lifespan of a modern day manufactured home to the quality features and construction techniques that go in to making them,” he added.

He says a lot of people outside the industry tend to think manufactured housing is still in the Dark Ages. They do not realize the technology that has made advances in medicine, construction, electronics, automobiles, energy efficiency, and so on, has come to the manufactured industry as well. He notes, “But the bottom line is, whether they can make money. We’re going to combine forces with some of the credit union reps and retailers and go talk to the banks.”

He says a couple of months ago representatives from Wachovia Bank came to the office. “It’s been a while since a big bank like that has come to us,” he noted. “They’ve been purchased by Wells Fargo and they gave us the impression that manufactured housing is going be a significant part of their portfolio.” When you get several lenders competing for loan business, that can help spur the industry.

Recently, the association has been running TV ads in larger markets, promoting the energy efficiency of manufactured housing while showing some very attractive homes. The calls came to MHSCI. The pitch is consumers can receive a $750 tax rebate from the government for buying Energy Star appliances. ”You hit close to home when you talk to people about saving money on their energy bills and getting a check from the government,” says Dillard.  It was a grant from the South Carolina Energy Office through the U.S. Department of Energy. “Whether or not they take an interest in the energy savings, people are at least seeing a very positive image of a manufactured home,” stated Dillard.

“Getting people inside a manufactured house is the real coup. They get inside and see the island in the kitchen, and the Jacuzzi in the bathroom, and the fireplace, and you can see the surprise on their faces,” he notes.

Another initiative Dillard is pursuing involves insurance companies that insure coastal areas. He says the whole U.S. Southeast coastal communities provide a challenge to insurers, whether it’s site-built or manufactured homes or commercial buildings. “In our previous initiative we took executives of national insurance companies on factory tours to show them houses being built, so they could see firsthand the  construction techniques and materials used in building manufactured homes.

“For our current initiative, we discovered in talks with the state insurance department that many people buying property insurance are over insured. We’re putting together a pamphlet to distribute to retailers for consumers to understand how they may save money when they buy property insurance,” he says. Insurance companies move in and out of the state on a regular basis, which keeps the premium high. “The state director of insurance has offered to contact insurers who do business in the southeast and suggest they do business here because we have a high density of manufactured housing,” he states.

South Carolina has just over 20 percent of its population living in manufactured housing.

He says one of the helpful things in this work is the resource of other associations.    “When you talk to other state directors, it’s almost like you’ve met your long lost twin. We all have similar issues and challenges, and even similar days at work,” he notes.

But he also adds that the last ten years have been especially challenging in the industry. He says twenty years ago if a problem came up, you had resources to deal with it. These days with a shoestring budget you have to be creative and resourceful.

In noting that one in every five South Carolinians lives in manufactured housing, he says, with a laugh, “It just shows what a good executive director I am.”  # #

Contact Mark Dillard at www.mhisc.com.

PROLOGUE TO SAVING CHATTEL LENDING

June 23rd, 2011 2 comments

WHAT?

When I started speaking with MHMSM Publisher Tony Kovach recently about writing some pieces for MHMSM.com NEWSline, the usual question came up.  “I know you’ve carefully explored in the past your ideas as to the dire condition of the MH industry, but how’s about some solutions, Pal?  Do you have any?”

Ouch!  That question can mean only one of two things; either Kovach has a short memory regarding the eight years of my monthly newsletters and the MHMerchandiser articles I wrote when that great resource was still alive, or, the boy doesn’t or hasn’t read my work.  Do I have solutions, you ask?  Does that mean solutions that “will” work to change things, or suggesting solutions which “might” change things?  I guess mine, of which I have plenty, are mostly in the “might” category.  For as we shall explore, there are no easy or surefire solutions to the industry’s problems.

WHEN?

Since the last home shipments top in 1998, the industry has slid through what I see as three separate phases, below:

  1. Phase One: From 1998 to 2003, the peak of the industry activity ending in 1998 and then starting a pretty aggressive decline.  During this period the industry was convinced this was nothing more than one of the usual episodes of industry disturbances, which had been regularly seen over the previous 50 years.  There was concern, but not much more.  Chattel lending dissolved all during this period, which saw the last of the Greenseco “balls to the walls” lending
  2. Phase Two: 2004-2008   Shipments started to stabilize in the 125-150,000 home shipments per year range, helped especially by frequent hurricane destruction and FEMA using MH as “temporary” housing, which turned out to be 10 years-to-forever housing.  Chattel lenders by this time are winnowed to a small number of able and cautious lenders.  Not many loans under 660 FICO closed, and the industry is starved for more aggressive lenders and lending.  The last great hope is FHA Title I, which is to be the “industry savior,” unless you read the 60+ page Government Accountability Office (GAO) report on the experience of chattel lending under Title I heretofore and the recommendations made to FHA in the report.  Had you done so, as I did, you might not have been so enthusiastic. Still, the industry waxed poetic about this great new lending source, which I hear produced a whole 1900 loans nationwide in 2010. All during that period MHI and MHARR, especially the former, were holding industry leader retreats with the goal of fixing the industry, going so far as to spend $250,000.00, as I recall, on an industry study by Roper Associates.  The “catastrophic” findings of that report led to an impetus to start an industry image campaign similar to the “Go RV’ing” campaign.  That move ended when disparate industry segments clashed as they thought they knew more about how to proceed than the pros we hired, apparently not busy enough in their MH business. But more importantly, when the industry’s “Godfathers” pronounced the campaign as “too expensive”, the movement died.  Amongst those are some still surviving, if not thriving, and several surviving in name only as they went to BK, which does not mean Burger King.
  3. Phase Three: 2009 to whenever.  The industry slides further down to 50,000 annual shipments, even flirting with 40,000, looking for a bottom.  Chattel lending remains ever-more constrained, enough so that many community owners resort to self-financing. Liquidity for loans within the industry is severe, even as Title I lives up to its failure to really fuel any sort of shipments surge, as I predicted well before it began. It seems FHA read the GAO report and heeded the warnings and recommendations therein.  The GSEs rejected “Duty to Serve”, the other industry “savior” as revealed in the Elkhart meeting in mid-2010, and the string is still counting down on the ability for LLC owners to keep vacancies at bay.  One large community owner, who had for years championed self-lending chattel loans to be highly effective, sold off a large package of LLCs producing those loans and the loans therein. Weren’t getting enough loans, apparently. More ominous, several new federal laws and a new consumer protection agency arrived to inject substantial constraints into chattel lending, this on an already overwhelmed industry and one which has not dealt effectively in the past with these types of regulations.  The industry response, as usual, has been to attempt to get released from the provisions of the law which are doing exactly what they were meant to do.  Presumably about the same time Subpart I of HIA 2000 is corrected, so will be those provisions of Dodd-Frank and S.A.F.E. which are biting so deeply.  I’ll be dealing with this in an upcoming Phase Four piece in the future.

HOW?

This prologue is followed by my Saving Chattel Lending article from 2007, written at the height of “what can we do to make it better,” during Phase Two.  I can say with Biblical certainty I did not save chattel lending, but then again virtually none of my recommendations were even attempted.

If you read the whole article, and I applaud you if you do, look at it from this perspective: there are two causes of defective chattel lending, and all recommendations made therein are calculated to try to correct these grievous defects:

  1. The Roper Factors The industry study I already referred to was meant to identify how we were treating our customers, what they thought of the industry, and how to correct our terrible performance.  This is the “Customer satisfaction” component.
  2. Home Depreciation The rapid loss of home value endangers the homeowner, his lender, the community owner, and ultimately the whole industry.  Were our MH financed for a short term, like an auto, then the depreciation might not bite.  But the home deprecation typically is so great and so quick; the entire process destroys any hope of making chattel lending a “main stream” bank product, as the loan repayment term used to finance homes is too long to defeat the rapid depreciation.  But, shorten the loan term, and the all-important affordability factor of MH is destroyed. Rock and a hard place, eh?  This is the good value component.

Don’t believe me on these two most important components?  I’m not surprised, neither did the 50 plus attendees at the Industry Salvation Chicago Meeting in May, 2005.  They did came up with many other answers, all of which were components of these two, which are at the very root of our problems.  Since the meeting never did identify “the” problems at their most basic, no answer was possible, and the cost of a trip to Vegas or Miami beach for OleMartyBoy was squandered getting to the Chicago Airport Hilton, which meeting came to nothing.  Make up your own list and see how basic you can make the industry problem(s). Then start your own list of possible industry cures.

AGAIN

I read my “Saving Chattel Lending” article again for the first time in years.  Virtually nothing has changed except the industry seems to have stopped all organized and concentrated attempts to save itself and the industry cannot and will not succeed unless the industry saves chattel lending, unless you think it is saved at 40,000 shipments. There are now scattered attempts to retrace the same industry steps previously made, mainly by people of short memory, or who didn’t participate before.  These efforts are very likely to come to naught. HIGH FIVES!  # #

June 21, 2011

MARTIN V. (MARTY) LAVIN
attorney, consultant, expert witness
practice only in factory built housing
350 Main Street Suite 100
Burlington, Vermont 05401-3413
802-660-9911 802-238-7777 cell
web site: www.martylavin.com
email mhlmvl@aol.com

email mhlmvl@aol.com

 

SAVING CHATTEL LENDING

By Marty M. Lavin

Manufactured Home MERCHANDISER, December 2007

As I get ready to journey to New York City to attend MHI’s Manufactured Housing Finance Forum, I’m going to propose some measures I think need to be instituted throughout the industry to correct the existing deficiencies of the chattel lending model. I do not believe we can have much of an industry recovery without better chattel (home only) lending especially in land-lease communities, and I have been saying so for years now.

I’m still surprised some folks fail to understand even today that manu­factured home chattel lenders haven’t “lost their nerve” and are not “conspiring” to control the market for lending. No, the reality is far easier to explain. If heretofore (pre-2003) the basics and statistics of manufactured home chattel lending were poorly understood, today that has all changed. While the “smart” industry lenders have continuously updated their loan performance figures, always seeking the keys to more expansive lending while remaining profitable, the general understanding of manufactured home chattel lending still survives today on immense caution. Profitable manufactured home chattel lending is still very much a niche product best practiced cautiously; and therein lies the constraint to increasing the shipments of HUD Code homes.

In order to believe chattel lending is the key to industry growth, one has to reflect with clarity on the inability, so far, of real estate-secured HUD Code transactions to lift the shipments to any extent. As the late 1990s progressed and chattel deliveries first stalled, then plummeted, many in­dustry participants and outside pundits believed conforming and non-conforming real estate mortgaged HUD Code sales, tied to the land, would pick up the slack. That was not to be.

Drop to low levels

While chattel secured homes, placed in land-lease communities and scattered sites were dropping to unimagined low levels, real estate-secured transactions did in fact in­crease slightly, but hardly enough to make up the loss of at least 150,000 chattel financed homes no longer being financed as the “Greenseco Finance” chattel loan model fell from favor, its non-profitability lethal for those using it, and dangerous even to bystanders, especially the borrowers who lost their homes in record num­bers. That episode was a preview of the current subprime mortgage problem.

As we survey the last 50 years of lending on our product, there has been a constant effort to “mainstream” the product. By that, I mean allowing an intelligent lender, with good money availability, at market rates, staffed by average lending personnel to enter the manufactured home lending market, proceed as they might lending on boats, cars or site-built housing and stand a good chance of financial success, creating a lengthy history of profits. This makes a lending product popular with banks, credit unions and finance companies, and spurs industry success. It is indisputable that only successful manufactured home lending can revive this industry. Keeping it a niche product for just a few companies to exploit might help them, but will do little for the totality of the market. The ability to mainstream the product has thus far elud­ed successful chattel lending.

Come and go

Historically, while innumerable lenders have come and gone in the in­dustry, profitability has eluded al­most all of them, with exceptionally few successes. That of and by itself says a great deal about lending on manufactured homes, most of which (historically 80-85 percent) has been chattel, especially into land-lease communities.

During the 1960s and early 1970s era, the “automobile lending model” was in vogue for manufactured home lending. Apparent down payments were generally higher than today (if not actual), homes were far more modest, repayment terms were far shorter and mobile home parks, where the vast majority of homes sold where sited, were in the hands of people whose primary source of income was from the sales of the homes going into the parks. It wasn’t until much later that rental income from the parks became the greater income producer rather than the sales of homes. When this occurred throughout the industry, it brought new players and many changes occurred which are being sorted out even now.

Today of course, the refugees from the late 1990s-2000s downfall in manufactured home lending populate lender staffs at enumerable banks and Wall Street firms. Their experience was so bad and our market size of profitable lending today is so small, why get involved? Why indeed.

And as I head to the Wall Street/MHI lending forum, I believe that thought is very much on the minds of many of the participants we expect to attend. “After the crippling losses suffered by manufactured home securitized loans from originations between 1994-2003, perhaps the greatest percentage ABS bond losses of all time, what are the reasons we should get involved in manu­factured home receivables?” I assume they will ask that?

And there are some positive answers we can give. Fraud in loans is far less. Loan documentation is very good, a previous weakness. Loans are made to far, far better credit risks than before and defaults will be decreased by an order of magnitude of 3-5 times less than before interest rates are significantly higher as compared to site-built housing than before and should render a good investor yield. And finally, you have a better customer, buying a better house, with more loans tied to land in some fashion, with ABS bond-performance-prediction recently being met and even surpassed. All pretty good stuff, frankly.

Good, but not enough

Yes, all the positives I’ve enumerated above are great, but to paraphrase the Wendy’s lady, “Where’s the volume?” You see, industry lenders have rationalized lending to become survivable based on loan quality, but they are having great difficulty changing other aspects of the industry model, which without changing, loan volume cannot increase much. There simply are no loan volume increases as new and even used home sales are skimpy. Is there a great HUD Code home buying demand? Yes, but it’s primarily coming from a non-financeable group of chattel buyers.

The HUD Code industry recently grafted many elements of rational lending, enumerated above, unto an overall industry model, which has arisen over many years of insufficient safeguards activity, lacking transparency, with few borrower/lender protections, and the industry seems incapable of sorting out what the final changes need to be or  how they can be implemented. I think the situation is pretty clear; the marketplace has already rationalized manufactured home lending into an 80-130,000 homes per year industry, even now as company consolidation  continues to drive down capacity and costs for people and places no longer needed in the industry. A permanent resizing is almost in place. Anyone who does not recognize that must be listening to industry rhetoric rather than viewing industry results.

Changes

All right, let’s get into the changes that, in my mind, need to occur in order to start a new industry shipments increase, sustainably derived, and tending to make it a more mainstream lending product. You cannot create a larger industry without a profitable and survivable lending model, which can successfully accommodate at least double the present volume, in an attempt to grow it back into the long-term new annual home shipments annual pace of 250,000 homes. This will require survivable lending to an average FICO tier at least 60-70 FICO points lower than recent ABS bonds and increased buying demand from reasonable credits.

I’ve spoken to a number of people lately, industry stalwarts, who finally agree that the industry model is broken. They recognize that the present grafting of a highly protective underwriting and loan closing regimen onto an otherwise disorderly industry model may well benefit some individual industry participants, but in the end, we are creating a far smaller industry. Some few prosper even as the industry sinks further.

At the Chicago industry retreat, which met several years back, I volunteered that I thought the industry defects could easily be broken down into two key elements:

The Roper Study Factors: Those are items which our consumers identify as industry weaknesses and tending to have our product sales, delivery, installation and after-sale yield far less satisfaction than our customers would like.

Home Value Deprecation: Those industry practices which tend to cause the home to lose enough value that with a modest down payment at purchase, the home is not later resalable within a reasonable time so as to allow the homebuyer to gain sufficient proceeds to pay off his or her home loan.

Note that without controlling home depreciation, significant industry growth is not really possible. And in the alternative, if you do control it, then the “Roper Factors,” while always important, take on less importance although complete industry salvation will require action on both weaknesses.

General Measures

Let’s start with general measures which tend to create better consumer satisfaction and progress into measures which tend to reduce home depreciation. An easy breakpoint between the two is difficult as a better home warranty, as an example, will not only create better consumer satisfaction, but also tend to reduce home depreciation. And many measures will be like that.

Without prioritizing measures, let’s just start a list.

• Image campaign

As I sat around John Diffendal’s (BB&T stock analyst) “investor dinner” in New York City the night before the MHI Financial Forum, my table was composed of several Wall Street investors, Larry Keener (CEO of Palm Harbor Homes) and myself. After listening to Keener and me respond to their queries, Christopher Abbott, senior vice president of Chilton Investment Company asked a simple question:

“You guys have a great story to tell, but I don’t think the public knows it. Have you thought about a ‘Go-RVing’ Type campaign?”

Whoa, that made ole Marty jump for joy! That has been one of my drumbeats for years. An image campaign to tell the public the role factory- built housing plays in the American housing segment is simply a necessity. Every day that goes by we cripple ourselves because we are not doing it. I suggest it is not only necessary, but frankly, inevitable. Why wait?

• Builder responsibility for integrity of the home installation/delivery

One of the big problems our consumers face is that they often feel left to their own devices after they buy. Our builders often don’t want to take responsibility for the shortcomings of their retailers and their subcontractors, because they don’t trust them. And the retailers don’t want to take responsibility for the installation subcontractors, again, for lack of trust. Yet both seem to have no difficulty transferring the results of that mistrust to the consumer and, by default, to the consumer’s lender. This is a major problem and the new MH select conforming mortgage program at Fannie Mae is the first to require significant protections for the consumer from that weakness in the present model. In a sense, this is like the recourse model so effectively used by many for years in the industry to protect a vulnerable lender from the troubles of manufactured home loans. This will ultimately spread to the chattel model as well.

• Longer and better home warranties

The consumer needs far better warranties and longer ones, say three or even five years, to insulate them from the financial shocks home repairs or breakdowns can bring. In the event some major home system dies at 18 months after purchase and the repair is $300 or more, a default causing event may have occurred and, without the warranty providing this protection, we’ve potentially created a repossession. Make no mistake; warranty adherence is expen­sive, but far cheaper than selling a whole industry down the river for lack of overall consumer value. We cast our customers aside because with very limited warranties, meager war­ranty compliance (see Roper Study) and short warranty term, the cost of homeownership, especially during the early years when its impact has the greatest financial impression, can strain the homeowner’s ability to pay his or her loan, if an untoward event happens.

• Cost of home site occupancy

After we put the homeowner into the dwelling, we frequently have sited them in land-lease communities, where the future cost of site occupancy has become an unknown, often with annual rent increases outstripping the ability of the homeowner to keep pace with costs through his or her earnings. This has contributed to substantial home value depreciation, resulting in a large decrease in chattel lending into communities placements.

• The high gross profit, low volume of sales model

The industry has evolved into low sales per location. This has seen an average of 36 new homes delivered annually by the average retailer. A sales location selling more than 100 homes is a giant retailer; however very few of those exist. The sales volume at each location is so low that a high gross profit must be achieved on the home in order to have any chance to survive. Even today, with far more rational lending, it is not unusual to see loans being made that represent 125 percent of the “invoice.” Note that this does not exclude the “slush” al­ready in the invoice, such as volume bonuses, advertising allowance, dues and other items. Nor does it encom­pass the customer’s down payment, being the 5 percent or greater we see today in most lending. With down payments commonly averaging more than 10 percent and invoice “slush” more than 10 percent commonly; it is easy to see that basic home gross profit can easily be 145 percent of true invoice or more. Home value depreciation starts there. This type of mark-up will have to be throttled back. The industry must try to move to the “high sales volume, low gross profit sales model.”

• We treat used homes differently from new for financing

Most lenders will admit that given similar underwriting and scrutiny, loans for new homes and resale homes will perform in similar fashion. Still, the loan-to-value advance, the interest rate and other loan factors are usually harsher for resales than for new. This continues the home value depreciation as such treatment for resales creates value depreciation at first sale. The industry is not good at treating resale homes with the same respect it does new. In the whole, they treat resales as “throw-aways” and so they’ve become. A con­certed effort to treat resales better is necessary.

• Our home loan closings lack formality

The real estate industry has evolved a voluntary and mandatory sales and closing routine calculated to protect the consumer, who is often unsophisticated in these matters. While it hardly guarantees an entirely trouble free transaction, it does a far better job than we do. Our industry has essentially refused to comply with real estate-type safeguards for chattel loans and only a few jurisdictions have forced such safeguards on us. We chafe at those few restraints. Transparency and consumer protec­tions seem little on our mind.

In manufactured housing, we see few non-real estate escrow closings or earnest money going into trust, little involvement by appraisers, lawyers or the various other measures created as transparency and safeguards for the consumer. Many of these measures are avoided in chattel lending on manufactured homes and loan performance has been far below that of real estate loans. Many don’t want these safeguards in place because it slows the “process” down. I can’t help but think there is a lesson somewhere in there.

Without attending to these two, the Roper Factors and home value depreciation, there is little beneficial change that is likely to result. The marketplace is currently rationalizing the manufactured housing industry, imposing an ever-lower shipments basis that is survivable. This is caused because profitable lending cannot occur at the level that is needed without significant industry changes and we have yet to find a way to increase the attention of better credits in and to our products, igniting the demand side.

Changes in attitudes

And what are those needed industry changes? In no particular order, we need help in these areas:

• Invoice Database

All invoices of all homes produced must go into an MHI controlled data­base available easily and inexpensively to lenders, appraisers and homeowners, with the proper protections as they are accessed via the Internet. This also allows cradle to grave tracking of the home with uses we don’t even know yet. While invoices are provided for every loan for new homes, the industry does not make them available for used.

• Shorter loan repayment terms

When I polled chattel lenders to prepare for this article, to a person, they all recommended reduction of loan terms to 10-15 years on single-section homes and 15-20 years on multi-sections, both with sales price cutoffs. More than $40,000 to get 15 years on singles, and more than $60,000 to get 20 years on multis. This would tend to reduce the nega­tive impact of home value depreciation with far quicker paydown of the note. Sales proceeds would then more commonly allow note repayment.

• Tighter loan-to-value advance

Lenders limit what they advance on all sorts of products. If using an invoice to loan on autos succeeds, it is because the allowable advance over true invoice rarely exceeds 10-12 percent, more commonly 5-7 percent. We have been allowing 140-150 percent and more of true invoice lending—and it is proven not to work well. A large loan advance to invoice amount guarantees home value depreciation. A high gross profit can only work on items which have high consumer demand coupled with scarcity of supply, like diamonds. Manufactured housing has neither high demand from creditworthy buyers nor limited supply. Continuing to get a high markup from a commodity in plentiful supply sold primarily to people on a budget is keeping the industry at low levels of volume. Tighter loan-to-value advances of not more than 10-20 percent over dead invoice, with limits on profit at sale will need to be instituted. This will tend to re­duce home value depreciation. Using real home value appraisals for new homes might be even better than con­tinuing loan-to-invoice to determine loan amount.

• Using standardized forms

The more we standardize procedures, regulations, safeguards and underwriting, the easier we make it to enter the industry and appeal to mainstream lenders. Keeping manufactured housing a small niche industry with arcane operating procedures, documentation and practices tends to shield existing participants from competition, but under current conditions, creates a very small industry. Standardized forms, like everyone using the same credit application, delivering it to lenders via the Internet and using standardized closing documents, as they do in conforming mortgages, is an important element to better action. Industry lenders must move towards this if we are to mainstream product lending.

• More use of appraisals

Using real value-based appraisals is said to reduce sales. Yet, if the consumer does not do an appraisal for us, they surely can’t avoid it by going to real estate. They will get one there if they go forward. The use of “books” only, with standard lender formulas and advance-to-invoice is no way to run a large, profitable industry, which delivers value to everyone. The book is only a cog in a complete appraisal, not to be used alone. Knowing the real market value of the collateral is a necessity for sound lending. Only market-based appraisals can do that.

• Longer house warranties

Homebuilders must find a way to deliver a fairly comprehensive three to five year warranty for homeowner protection. This might be done by the use of appropriate third party warranties, the cost of which is built into the invoice of the home. This will help stabilize the cost of home ownership for the early years when the borrower is most financially vulnerable. It also is a unique benefit differentiating our product from site-built.

• MLS system

We have the beginnings of an MLS for manufactured homes in several venues already. Most are just in the beginning stages. Far more is needed. Industry zeal must be directed at true issues, such as working towards an MLS, training of manufactured home resale brokers and every element of creating an organized resale marketplace. Can we partner more effectively with Realtors? Without a well-organized resale market, the homeowner is left to his or her own devices to resell the home. Failing frequently in that effort, they resort to “giving the home back” to the lender or selling, at a sacrifice, to another. Creating an organized resale marketplace is a centerpiece to rescuing the industry.

• Manufacturers statement of retail price (MSRP)

This is needed for several reasons. First of all, it provides greater clarity and shopping comparison opportunities for the consumer. Secondarily, it allows the builders to “guide” its retailers into a proper sales profit, consistent with volume and profits for the builder and the retailer. The current lack of pricing guidance is a disrespect to our consumers, putting in their minds that we are a disreputable bunch. Finally, the MSRP helps lenders deal with all customers being treated more alike. No one wants the black eye of “certain” consumers being treated differently. It also can be illegal.

• Posted home prices

I really don’t even know why this one is an issue. Most people do not like to buy items that are not priced, as they fear they are not being treated fairly. Yet, nothing is more common in the industry than waiting for the “up” to demonstrate an interest in the home before he is quoted the price. This simply is not ethical treatment and undermines our regard in the minds of our consumers. And this is an issue AARP and others have railed about. Isn’t it the right thing to do? What is the hold-up? Every home for sale at a retailer should have a clearly posted sales price. (The largest retailer chain told me recently every home they have for sale will have a posted price shortly!)

• Final Inspection of the home before delivery

No lender should fund a loan until it is convinced the home is properly delivered and the customer is satisfied. While this is moving towards industry lender practice, we are not there yet. Until the industry has established a long-term track record of compliance, this must be required and verified. The walk-through punch list site builders use before their closing with customer sign-offs is a good start for us. Not foolproof, but one more safeguard for all parties to the transaction. It is one more step to assure the integrity of the process and deliver more value to the consumer and his lender. It also keeps the sellers and builders on their toes making them do the right thing.

• Community Attribute System An important compendium of the details of land-lease communities in a database owned by MHI and operated by Datacomp Appraisals in Grand Rapids, Mich. Still in its infancy, the data is building, the cost to get data is low and over time can be used in tandem with an in-community MLS. No lender should be lending in landlease communities without accessing this data. It doesn’t take a genius to look at the 100+ attributes compiled therein, and if correct and current, a lender has a very good idea if that is a community wherein you want to lend. This is an important lender safeguard and allows better loan decisions. Lenders are using it and the data fields are being updated. It is also an important spur to community owners to work towards excellence

• Better finance treatment of resales

No Virginia, all resale manufactured homes are not crap-boxes to be financed for 5-15 years less term than when they sold new. We should require a real value appraisal so the quick “appraisal book” standard formula won’t undervalue (or overvalue) the home. We should not have the significantly higher interest rates on resales than we now see on new. We now know debasing the value of resales debases the new homes as well and you see the result of that all around you. For profitable lending and delivery of value to the customer, as go the used, so go the new.

• Proper and easy home identification

I did a quick study once on the damage caused by standard formula book appraisals coupled with improper home identification. I found the loss of value substantial. We all know the industry produces a bewildering variety of homes, often with enormous differences in selling price and some even being the same size and having similar model names. Yes, content does count in a home. Drywall construction, better windows, upgraded appliances, architectural details, better insulation and a number of other factors can make a big value difference.

Since most builders do not provide good (or any) home identification in their serial number, the true content aspects of the home may not be readily available, except in the invoice. At resale, invoices are rarely available, if ever. Lenders being the highly pragmatic bunch they are will take the lowest value that home could be, often without a great deal of further inquiry. In the event of calls to the factory for better home identification, some are helpful, but many are not.

The invoice database I discussed above is a great way to properly iden­tify the house. A second way is to use a standardized serial number as is used in the automobile and other industries. The special serial number range could identify the many relevant factors so that by using the proper code sequence one could know all about the home. This would make home identification certain and more importantly, stop the guessing and depreciation of value occurring by use of standard valuation formulas because we can’t properly identify the home easily or at all.

As between the two, if I could only have one, I would prefer the serial number, as once you know the number all the relevant information is available to you immediately and free of cost. But the invoice databank is important for good identification purposes and also may have cost data, which appraisers and lenders love.

This one is the canary in the coalmine. By that I mean it will be a sure tip-off that if the industry is not serious about taking action to assist lenders, appraisers and homeowners with proper home identification after the home is sold, and being resold, where can the industry start to solve our dilemma?

• Third party final home inspection

No loan should be funded without a reasonable third party inspection and assurances that the home installa­tion is proper, the customer got what they bargained for and the homebuy­er has had a walk through the house and is satisfied. Expensive you say? It will create problems because we find out the process is incomplete or wrong? The retailer doesn’t want you to do this? Just think about those reasons for not doing it, as though defaults are cheaper or unhappy homebuyers don’t cause problems. We continue to avoid this at our own peril.

• Quality of homes

I am the first to tell my clients that in general, the industry builds com­petent homes and actually some are better than competent. However, I’ve been in far too many homes which are three or more years old and my impression has often been how “used” the home appears. Many times the visual impression is one of a home many years older than it is. Yes, I am aware some of our cus­tomers can be hard on a home. We can build for that.

It is easy to create extra space in a manufactured home and often builders will induce buyer interest by the large amount of space at very low per square foot costs, but use non-durable materials to achieve it. Our industry is very cost driven. The downside is that the home appears so “worn” in short order, that it creates problems at resale. The tatty home appearance reduces its appeal in contrast to the new similar home offering, which the homebuyer can get with more attractive financing, for little more in price than the payoff amount of the loan on the resale. Can you say “home value depreciation” anyone?

Substituting more durable materials of better quality and reducing home size might be a wise tack for the industry. Sell the consumer on durable materials for their satisfaction. Consumers are not all stupid, are they? At least not the ones with good credit who make informed decisions, which are the ones we need.

• Residential architectural characteristics

A recent industry move is to create homes, even modest ones, with a residential appearance. Couple this with more durable materials and we increase consumer appeal and create far better resale action. Extremely modest, chattel financed homes seem an endangered species. Appearance and good presentation grow ever more important, reducing home value depreciation.

• Factory invoice with clear retailer costs

The Truth in Invoice Practices Statement (TIPS) is calculated to try to create a verifiable home invoice so that any lender and its appraiser can see what is being paid for the home. While recent changes have created more reliable invoices, the fact is that only within ranges can a lender today easily know what the retailer is pay­ing for the home. Strange you say? I agree. Invoices should clearly show what the home costs the retailer. Period.

• Long-term leases and lender /community agreement

Many of our best rental homesites are bent on maximizing rents. Often that is done without other considerations. In order to induce in-community lending, the elevated depreciation homes in land-lease communities undergo all too frequently, must be abated. One of the ways to do this is to negotiate lender/community agreements which determine a course of dealings between the two, especially after default and repossession. This can save lenders large sums upon default and gain the community owner’s valuable assistance to handle the repo, refurbishment and resale. The other necessary ingredient will be the use of long-term leases to induce a lender to extend a loan for a home going into the community, tying the rent increases to real increases in operating expenses plus real increases in earning capacity of the homeowners. Since we’ve allowed people to borrow on 20-25 year loan terms, closing a land-lease community without homeowners recompense or relocation assistance is a major and increasing problem. “Google Alerts” sends details of a new community closure almost daily. It does and will continue to cause the industry major problems.

• Use of indices for long-term leases

There is a current popular notion that a homeowner should be paying as rent the capitalized value of the homesite according to the OFHEO index of single-family residences, plus the increase in operating expenses. This has tended to be less than successful for both the landlords and the resident. The former has gotten increased vacancy and the latter suffered a high default rate caused by the resulting home depreciation. Lending in communities has greatly diminished as a result. This industry cannot prosper without a strong chattel-into-land-lease business and neither can the land-lease contingent.

The homeowner we need, as lenders to finance, will not value the rental homesite anywhere near as much as the OFHEO. And that index usually overwhelms the resident’s ability to pay based on annual earnings. As homesite rents increase annually, the resident “buys” the site over every year, unlike the real estate-secured borrower, who unless he refinances and gets money out, has fixed the cost of the purchase of the site until he or she sells. With rising rents, we never fix the cost of homesite occupancy.

Lenders will want to be protected with long-term leases to create more surety that the value of their collateral will not drop in tandem with overzealous rent increases. As lenders, we all understand the desire of landlords to maximize their return on their land-lease community. Still, if done at homeowner/lender expense, lenders must draw the line. The line drawn has tumbled in-community lending and without significant changes, is going to change little in the near to mid-term future.

• Proper installations

Recently, I heard a lender describe the actions his company has taken to encourage proper home installation. He rewards low set homes, those looking more like site-built foundations than the easy-to-do, not-so-good looking high pier home installations so common heretofore. He wants to see covered entryways, proper porches, front and rear entry stairs, good architectural design. And this is not conforming mortgages, but chattel! And why is this industry leading lender doing this?

Simple, good installations, completed on time, delivered as agreed upon with the homebuyer, set low with a distinctive home creates far greater home satisfaction for the homebuyer, AND when it comes time to resell the home, appeals much more to subsequent buyers than modest homes, poorly sited and installed, sitting on stilts up in the air. This reduces repossessions by greatly increasing the ability to resell and pay off the home loan through sales proceeds. To say nothing of the increased consumer satisfaction delivered and increased homeowner desire to keep the home “because he likes it.”

This lender is using the carrot approach. He gives a substantial interest rate reduction for such installations. It may take more than that in the future.

• Too many defaults

Part of the defense subprime lenders have given the media and regulators for the elevated defaults and repossessions likely to occur is that “they gave subprimers a chance for homeownership.” I’m not sure how much currency this will have as Congress and the regulators stick their nose into the causes of the subprime mess. But I would guess that in the case of manufactured housing, were we to continue to loan into communities, with known default rates in the 35 percent range (even with good credits), that if we use the above excuse and justification, we may well see an eyebrow or two raised. Me thinks that while the carrot approach can work well with a very hands-on lender who really works at his craft, in order to mainstream chattel lending in community placements may require a little more stick. And charging high chattel rates and having high defaults may work financially, but it is a poor business model. It smacks of “Buy Here, Pay Here” and is below what our dignity level should be. It also may catch the unwelcome attention of “busy bodies.”

• Retailer/builder relationship

It seems that the relationship between these two important industry segments has always been a handful. Retailers with good financial capability and experience in the industry are rare. It has historically been a “bootstrap” industry where retailers came with little, made little over a business career, tried to hang-in during the down times and ultimately faded into the sunset.

Along the way, consumers had various difficulties with them and consumer surveys find this industry participant, the retailer, with low grades. The industry itself views the retailer as a weak link. The difficulties lenders have with them are legendary, although I must admit that lenders too often have failed to protect themselves.

Lenders and builders are going to have to have far greater concerns over the experience and financial capability of the retailer. Where those are insufficient, and that is common, retail lenders are going to have to secure back-up performance from the builders the retailer represents. Without this builder back-up, the process continues to be a high default/large charge off endeavor which stands little chance of shipments increases, unless of course you believe that Greenseco Finance is alive and well in the wings, ready to burst back on the scene, chattel loans a-blazing.

• Protected territories and a good chance to make a profit

By being well capitalized, experienced, with protected territories and guided by their franchiser builder, we can turn retail locations into real businesses with an excellent chance of success. The ability to make a reasonable profit, consistently, draws retailer candidates with both experience and capital. We see this does work in some parts of the industry where builder-owned sales outlets are made financially capable through the parent’s financial strength, their managers are carefully selected and guided, and they have protected territories. Often, their managers are selected with greater care than their franchised retailers. Builders must move towards distribution representation, where franchised retailers are commonly experienced business people, with strong financial capability and protected territories.

As an industry, this very perplexing matter will need serious attention. But whether the industry fixes it or the market does, it will be settled. The market is likely to settle it at lower shipments than a unified industry approach that precedes a pace.

Final reflections

I’m not sure there may not be other needed measures. I have never been able to sit down and read this list of industry model enhancements needed to correct the failed model. And if you disbelieve me that the model is failed, I repeat the words of the “World’s Greatest Investor,” Warren Buffett. In my March 2004 newsletter, which was the early precursor to the comments in this letter, I quoted from Buffett’s Feb. 27, 2004 statement to his shareholders. In part regarding his view of the manufactured housing industry, Buffett said the following:

“During those years, (the 1990s) moreover, both the quality and variety of manufactured houses consistently improved.

Progress in design and construction was not matched, however, by progress in distribution and financing. Instead, as the years went by, the industry’s business model increasingly centered on the ability of both the retailer and manufacturer to unload terrible loans on naïve lenders. (emphasis mine)

“A different business model is required, one that eliminates the ability of the retailer and salesman to pocket substantial money up front by making  sales financed by loans destined to default… Under a proper model—one requiring significant down payments and shorter-term loans—the industry will likely remain much smaller than it was in the ’90s.” (emphasis mine)

And I agree with Buffett that if only down payments and shorter loan terms are involved, we are likely to remain much smaller. The measures I proposed are to start a return to the 250,000 annual home shipments industry long-time trend line, with far more comprehensive action.

And why do I repeat Buffett’s words again? Because when I say what he says I know many people do not believe me. I’m a “nobody” and when I speak of a “failed industry model” in manufactured housing, people think they can disregard it. And for others, the concept of a “failed model” is beyond their comprehension.

I can hear their words. “This industry has always worked in the past”, “The lenders have just lost their nerve” (In reality, what the lenders lost was their shirt) and “This is simply a collusion by certain entities to take advantage of the market.” The only people I know who are doing well would prosper even more with a robust market. Alleging market collusion is so childish and avoids reality so deeply, that I can only shake my head when I hear it. It’s usually spoken from atop the “grassy knoll.”

Warren Buffett is a SOMEBODY. As you read his words above, can you afford to ignore them? Hasn’t he been proven right with such force that we should not doubt his words and undertake an immediate series of steps to correct the failed model?

That would seem an intelligent result, finally, and as the industry study committees met again in Hilton Head, S.C., we’ll review for industry progress. Can we rescue ourselves from the housing niche into which we’ve fallen and can’t get up?

Martin (Marty) V. Lavin, is a 35-year veteran of the manufactured housing industry from Burlington, Vt. He is an attorney, consultant and expert witness to factory-built housing interests. He is past chairman of the MHI Financial Services (2001-04) and recipient of the Totaro Award for Outstanding Achievements in the Manufactured Housing Financial Services Industry….
Editor’s Note:  We have again honored the author’s request to post his article and the original “as is.”