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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