Archive

Posts Tagged ‘freddie mac’

A Deeper Look at why the GSEs say no to Securitizing Chattel Loans

May 24th, 2016 1 comment

TOPIC

The Duty to Serve (DTS) question for the Government Sponsored Enterprises (GSEs) of Fannie Mae and Freddie Mac regarding originating Chattel (home only, personal property) loans on HUD Code Manufactured Housing has been a topic of discussion for years.

FreddieMacFannieMae-logos-creditBeforeItsNews-PostedMHProNews-

Logos are for editorial illustration purposes only, and are the properties of their respective organizations. Composite image credit, BeforeItsNews.

BACKGROUND

To understand why I say what I do about DTS, the GSEs, MHI and manufactured housing (MH) below, some history will be useful. My experience with MH Affordable Housing and Duty-to-Serve spans nearly 35 years.

Upon entering the mortgage banking business, I worked in the mortgage division for Fleet Bank in St. Louis, Missouri. I made my first HUD Code MH land/home loan back in 1982.

At that time, HUD Regional Offices had to approve each subdivision and the homes that were being constructed within that community. HUD reviewed, approved and retained documentation and complete control of the Architectural & Engineering process.

The Regional HUD Office was located in St. Louis and Chaired by Joy Miller. Fleet was chosen by HUD because of its strong government lending (FHA & VA) platform, national presence with the ability to replicate the program. Fleet provided financing for the consumer’s purchasing HUD Code, single-sectional and multi-sectional, Redman Homes on short wall foundations in a subdivision in House Springs, Missouri. This was a new MH “beta test” community development project. It was one of the first HUD Code MH subdivisions outside of California. It was cutting edge and an exciting step for me right out of college.

At the time, I had no idea that my future in banking would be focused around Affordable Housing. From that point forward, I continued down the path of Affordable Housing which is truly a key for the to Duty-to-Serve.

In my follow-up assignment, I worked extensively at Ft. Leonard Wood, Missouri making over 600 VA loans in two years to accommodate relocating veterans and civil service personnel in the initial phases of the US Military Base Realignment and Closure (BRAC) program. Specifically, on the Ft. Belvoir, Virginia relocation of 2400 families to Ft. Leonard Wood over six years. Brick & mortar site built homes were selling for $35,000-$65,000.

Next stop was in 1995 when I was invited to join an exclusive group of high profile mortgage bankers who focused on Affordable Housing nationally. I had no idea when I was chosen that I was chosen for my HUD Code MH housing experience. The group of 30 members from around the country formed the Underwriting Barriers Outreach Group (UnBOG), lead by Rick Coffman and Matt Miller of Freddie Mac in Washington, DC.

The task force was formed to bring mortgage bankers together to discuss how to create loan programs to provide financing for the underserved, economically or geographically challenged consumers. These borrowers were credit worthy, but did not have down payment of 10% or 20% plus closing costs. Or they could not meet the debt-to-income ratios of 28/36. They needed expanded guideline programs. As a member of that task force, I helped craft the 97% LTV Alt-A, Section 8 Voucher-to-Own, Lease-Purchase and the 105% LTV loan programs.

During that time period, our government leaders on Capitol Hill put mandates on the GSE’s to produce and deliver Affordable Housing programs to the marketplace. The new mandates were tremendously difficult to meet. They were tied to creating and driving home ownership in the United States. The new mandates required that 1 out of every 2 mortgages purchased by Fannie Mae or Freddie Mac had to meet strict affordable underwriting criteria to be considered affordable.

The reason for the formation of the UnBOG group and the push to new loan programs as outlined above to expand homeownership, thus simultaneously answering the DTS mandate at the same time. It was from the UnBOG platform I learned how to write loan programs and how they were developed to serve a diverse and unique new classification of purchasers referred to in those days as “low-mod” borrowers.

In essence, our leaders on Capitol Hill were enforcing the Duty-to-Serve component which had been the focus of the creation of Fannie Mae and Freddie Mac from their inception. Nothing new, just a way to measure and enforce the GSE’s mission of Duty-to-Serve and expand homeownership.

FAST FORWARD

My invitation to UnBOG was to provide insight into the Manufactured Housing space. Specifically, how to create and deliver the MH product from construction loan through permanent end out loan on a product built in an off-site factory versus the traditional on-site method.

By this time, I had already successfully been making construction-to-perm loans on MH for 13 years. The GSE’s felt that a look into the MH industry, what I was doing and how I was doing it, could help them achieve these lofty Duty-to-Serve Affordable Housing goals now being enforced from Capitol Hill.

This point is that Duty-to-Serve is nothing new. It truly is the reason Fannie and Freddie were created.

For the first couple of years, we focused on Fee Simple loans known in the industry as Land/Home loans. Many of the programs coming through the development pipeline at the GSE’s were inclusive of MH Land/Home financing. Land/Home was sort of a no brainer, but subject to several gaps that needed to be closed with regard to title insurance, retiring titles, mortgage insurance, production and travel insurance, method of attachment and the creation of a true real property package upon completion and conversation to the permanent-end-out mortgage. Those topics we can save for another article.

In 1998, while working for First Tennessee Banks mortgage banking division, which would later become First Horizon Mortgage, I received a call from Freddie Mac asking me if I was interested in working on a new loan program crafted by a captain of the MH land lease community at MHI, a gentleman named Rick Rand. Rick had worked with program development guru Ginger Walters and Freddie Mac attorney Judith Agard to craft a program to serve as the Chattel Loan look-a-like.

The program was designed around a 35-year land lease, which created the real property entity necessary and required by the GSE’s to make a 30 year fixed rate loans on MH HUD Coded homes sited in MHC’s.

It was a brilliant piece of work by all parties, but there wasn’t anyone in the mortgage or banking space interested in the $300MM beta test “pilot program” that 99.99% of bankers had no clue about. It just so happened that I had extensive leasehold estate background from years gone by.

So when I received the call from Rick Coffman from Freddie Mac, my UnBOG colleague, I understood the program immediately.

Needless to saym it was exactly what the GSE’s needed to kill two birds with one stone. First and foremost, it met the Affordable Housing criteria right out of the box for Community Reinvestment Act (CRA) credit. Which meant it could be counted towards the GSE’s requirement to expand homeownership. Second, it answered the DTS question that had been long on the lips of all MHI leaders, pushing for rates and terms more readily associated with brick & mortar housing.

For me, it was just another niche market program that I was going to have to run up the flagpole with my boss, his boss, his boss and so on until I got to the banks president who just happened to understand the program.

Why, you ask did the president of a large bank like First Tennessee get it?

Well, because it just so happened our largest client on the books at the bank was this fellow name Jim Clayton, and his company was called Clayton Homes. You know  – the gent who sold his manufacturing, retailing and MHC communities to the “Oracle of Omaha”, aka Warren Buffet.

There was a program which we launch at First Horizon where we worked out the kinks in origination, processing, underwriting, closing, funding and servicing and – oh, yes – securitization too. Because Fannie and Freddie had their securitization platforms built out years before this “real property” leasehold estate program arrived on the scene.

By the way…pricing was about a ½% above the then 30 year fixed rate pricing.

The program was strong and grew legs. We even added a One-Time-Close (OTC) Construction Loan to the menu as First Horizon was developing Construction-To-Permanent (CTP) and OTC loans at that time.

We then moved it to First Bank where it died on the vine, as it became tainted by those who thought we could utilize this program the same way the other Chattel programs were being used in the marketplace in that GreenSeco era of “No Income, No Asset, No Job, No Money,” no problem loans. The GSEs wanted none of the headaches that came from the mindset that spawned GreenTree, Conseco and the other related chattel lending meltdowns of the late 1990s, and the early 2000s.

MHImanufacturedHousingInstituteLogo-postedIndustryVoicesMHProNews-

The MHI logo is used here for illustrative purposes only, and is the property of that trade association.

WHAT’S THE POINT?

For years MHI has been attacking the DTS issue in hopes of pushing through some sort of chattel lending conduit for as long as I can remember. The Duty to Serve has been on the books since the inception of both GSEs.

The DTS guideline for both GSEs – Fannie Mae and Freddie Mac – in their view is clearly stated to be for real estate secured properties. Chattel loans by definition are not real estate, and most folks in the MH world don’t understand the cost to build the securitization process.

The roots of the issue from the GSE vantage point are several key components.

First, understand that neither of the GSEs have the platform to securitize and deliver chattel product into the market place. There is already a pipeline to buy/deliver loans on conventional housing, but there is nothing like that for the personal property lending space that manufactured housing operates in.

If the GSEs were to spend the millions and millions of dollars to build that secondary market, there was in the past insufficient product flow to support the expense.

Another prime example is that the major purchasers of GSE securities paper are not interested in buying chattel (home only, personal property) loan production.

Those investors, such as Goldman, BlackRock and Raymond James among a host of other institutional buyers of mortgage paper do not have a DTS requirement. They are a behind-the -scenes cause for the “Just say No” by the GSEs on MH chattle lending, not the GSE’s themselves.

The GSEs only buy what they can securitize and layoff out their back door to their institutional buyers. If the institutional players don’t want the paper, who else is there to purchase those MH chattel loans in volume?

It is MHI’s lack of understanding of the function the GSEs have in providing paper to their core secondary lenders, such as Wells Fargo, Bank of America (BOA) and U.S. Bank.

What causes a great part of this problem is the MH industry’s failure to create a program that delivers a standardized product. For example, when the GSE’s buy a loan from Wells or BOA, the home created is attached to the land through a standardized “method of attachment.” That’s commonly called a “foundation.”

The house is built for a slab or a stem wall foundation that attaches a given residence to the dirt creating a single package of “real estate.” Home, foundation (which again is standardized) are connected to the land, thus creating a single package of real property. That standardization allows the title insurance companies and private mortgage insurance companies to stand behind those loan products too.

Chattel loans on manufactured homes are seen by the GSEs as a hodgepodge of various foundation systems. Mock block in their view is nothing more than a faux exterior wall that doesn’t attach the home to the ground. They see MH as concrete blocks on plastic pads, tied down with cork screw anchors, metal straps and then commonly enclosed by using vinyl skirting.

In the eyes of the folks that buy all the securities from the GSEs, those aren’t true foundations, they don’t believe they’ll stand the test of time, i.e. the 30-year term of a mortgage. Thus, the home – and loan – in their view won’t perform.

This is in spite of the fact that there are thousands upon thousands of successful examples of manufactured homes that have stood the test of time on these foundations.

In a phrase, this is a perceptual issue that calls for insights and education.

But have you ever sat across the table from six “black box” investment bankers and actuaries from Goldman Sachs or Pieper Jaffery and tried to explain to PhD. so-and-so from Harvard, and Phd. so and so from MIT or Yale and argue such topics? Doubtful. But I have. And I must tell you it is exhausting and has often seemed to be wasted time.

One such academic who actually had a hand in creating the securitization business called me aside halfway through one such meeting and said “Titus, let me give you a bit of information from our perspective.” “Yes, sir” I said, all ears. “If it walks like a duck, quacks like a duck guess what? It’s a duck” …meeting adjourned.

In addition to the manufactured home foundation issue – right or wrong – the security buyers still view these homes as ones that can be moved to another location in the middle of the night.

The MH industry fails time and again to realize the GSEs are a conduit to the secondary market buyers.

The GSEs create “real property” securities that are sold into the marketplace. The GSEs don’t even have to service loans. They have four major servicers behind the curtain that can service loans, if necessary, on behalf of the folks who purchase the securities.

The Triad Financial Services and Clayton/Vanderbilt Mortgage and Finance chattel models are different yet similar, as they finance chattel loans that are either held in portfolio or sold at a discount to a note rate buyer looking for yield spread.

The Clayton/VMF model is successful because Mr. Buffet has deep pockets and likes the yield spread. Not to mention Jim Clayton had the brains and financial support to create it. And at their company owned retail centers, VMF only finances paper from Clayton dealers. Plus, Mr. Buffet owns Clayton manufacturing and many of its suppliers as well as its dealer base. He is thus able to finance low credit with higher down payments or he can finance 5% down for consumers with truly good credit scores.

Triad focuses on AAA grade paper from reputable dealers that have a strong track record with Triad’s independent MH retail base. They portfolio and service their loans in house. Don Glisson, Jr. and his team have done a terrific job of navigating the chattel waters for over 30 – sometimes tumultuous – years. Triad’s book of business is the testimony to Don’s success.

If the MH Chattel industry would produce a standardized product model, with a more traditional method of attachment, and pushed the model without deviation through a beta channel and proved that compliance, not circumvention is the new MH mantra, then they would have a secondary market delivery strategy.

Armed with such data, you can then approach the investment banking crowd with proof of your models success. But instead, every time there is a lack of lenders or funding in the MH market, MHI cycles back to the GSE’s and DTS.

But there are powers that be in the good ole boy MH world who won’t learn and/or capitulate to those realities. As was noted in the Masthead blog linked here, the GSEs – as well as FHFA and most importantly our U.S. Congress – will not budge on this issue.

By the way, some of those House and Senate members will upon retirement want to go to work for the GSEs, or with the institutional actors such as Goldman Sachs or BlackRock. So they aren’t going to do much if anything in defense of chattel lending if it causes heartburn for those they may go to work for later in life.

4S=SafeSoundSanitarySustainable-postedIndustryVoicesMHProNews-com-

The answer…is easy…follow in the footsteps of Jim Clayton, Don Glisson, Jr., and Warren Buffet and create a standardized program that delivers a product that can stand the test of time and contain the 4 S’s: Safe, Sound, Sanitary and Sustainable.

But the MH industry, year after year after year, fails to produce anything that the true secondary market is likely to hang their hats on. ##

TitusDareSVPEagleOneFinancial-PostedIndustryVoicesMHProNews-com-Titus Dare
Senior Vice-President
EagleOne Financial, Inc.

 

 

Editor’s Note: Other well reasoned letters to the edtior Op-Ed style viewpoints are encouraged on this or other MH topics.

Could Long-Term Home-Only Mortgage Loans in Land Lease Communities Rise Again?

December 7th, 2015 No comments

I read with great interest Paul Bradley’s recent article in MHProNews. I agree with Paul that there is an opportunity forthcoming to bring back a program that was created by Freddie Mac – one of the two (2) Government Sponsored Enterprises (GSE’s) – in the early 2000’s. That program had Freddie providing conventional, residential home-only mortgage loans at market rates in selected Land Lease Communities where the residents had a long-term lease.

I was one of a very small group of professionals involved in the manufactured housing industry who worked directly with Feddie Mac to create that program. I know firsthand how well the program worked for residents in three (3) land lease communities that we owned when the program was active.

This was not a simple program to get out of the starting gate. It took well over two (2) years to draft the program, garner internal agency approvals, work through the idiosyncrasies, deal with legal and appraisal issues and partner with a lender to finally bring the program to the market. All of the work involved was not easy to accomplish, yet in the end the program became a reality. And, in my opinion, the program was a success.

People will question why the Freddie program was a success, even though it was not available for more than a few short years. There are many reasons why the program ultimately was cut short by Freddie Mac, but now is not the time to rehash those issues.

What is important is to look at the successes of the program. The template and performance are set for the GSE’s to use, so that time is saved. The success is proven by the number of performing, conventional long-term mortgage loans originated in land lease communities at then current market rates.

As stated above, our firm utilized this lending program in three communities. The home buyers were thrilled to have this loan option available. In fact, after we began to offer the program, rates dropped significantly. Almost every borrower refinanced their loan at a lower interest rate without any issues or penalties!

With complex programs come many questions and concerns. Let me focus on two important issues.

First, under the Freddie Mac program, the mortgages on the homes did not impact the underlining financing of the land lease community. This was a critical issue resolved early-on while we were drafting the program. Documentation was required and provided from the underlining land lease mortgage lender to Freddie Mac, assuring that the community lender would respect the long-term leases of the residents.

Secondly, there is no relationship between the Freddie Mac Program and the proposal by the Uniform Law Commission to title the manufactured homes as “real property.”  Although there were various phrases and terminology utilized in the Freddie Mac program, there is zero connection to the ULC proposal, which is important, as the ULC plan gives current MH personal property lenders heartburn for a variety of reasons.

According to MHI and others, the Federal Housing Finance Authority (FHFA) will soon issue a draft Duty to Serve rule. It could be a great opportunity for manufactured home lending if one of the recommendations suggests a lending program similar to the Freddie Mac pilot. Having another viable lending option would be a positive step in the market place.

I stand ready to work with the parties involved on this or any other lending option once the FHFA rules are known. Feel free to contact me, indicating your interest or support. ##

rick-rand-great-value-homes-manufactured-home-pro-news-industry-voices-guestblogRichard J. “Rick” Rand
President
Great Value Homes, Inc.

9458 N. Fairway Drive
Milwaukee, WI 53217-1321

414-352-3855

414-352-3631 (fax)

414-870-9000 (cell)

RickRand@gvhinc.net

Retail Sales Trend Up Despite New, Looming Threat

May 25th, 2012 1 comment

According to Statistical Surveys, a provider of objective industry data, Texas' new manufactured home retail sales were up 29 percent for the three months ending March 31 over the same period last year. This follows on the heels of a flat Q4 2011 when compared with Q4 2010. Texas also ranks first in national shipments to retailers through March 2012 with a 20 percent share, and number one in units produced with a 27 percent share according to the latest MHI Monthly Economic Report for March 2012. 

While great news for the industry, an ominous threat lies ahead as the young Consumer Financial Protection Bureau (CFPB) begins rule writing for implementing Dodd-Frank and the S.A.F.E. Act.

On behalf of the membership, the TMHA Board approved taking an active part in the federal arena, where this will all play out, at our May 18 Third Quarter Board Meeting. 

I have been in the industry 43 years – the spectrum of consequences we face from this new regulation is something never witnessed.   

 

Some examples:

  • New rules could potentially force lenders to discontinue making lower balance loans such as what we typically see for single section home-only loans, and result in an exit of lenders.
    • One of the largest industry lenders estimates 40 percent of their loan volume is under this threshold.
  • These new federal rules would also certainly impact retailers, manufacturers and communities.
    • While MHI introduced an industry-supported bill in Congress (HR 3849) to reduce regulatory burdens that impede access to affordable manufactured housing financing, the likelihood of this passing anytime soon if at all in our deadlocked Congress is slim.
      • We have been told this directly by those that should know and have extensive knowledge of the current national legislative climate.

 

Experience has shown it's much easier to influence the writing of a new rule than it is to change a rule once it's written. TMHA is not going to sit on the sidelines to see what happens.

 

We want an industry voice to be heard.
 

Your association has several key resources that, if combined with that of MHI, fellow state associations and industry members, will see that manufactured housing has direct input in the federal rule writing process:

  1. First, our large, informed and dedicated member base understands the dynamics of our business model and that it relies heavily on portfolio lenders.
    • While mortgage lenders in the traditional housing market produce loans, sell the servicing to another party and look to the government through Fannie Mae or Freddie Mac to take the risk of loss, our lenders do none of that.
    • MH lenders originate loans, service their loans and take the hit on any loss.
      • This requires different loan pricing, fees and loan origination systems than previously envisioned by those writing the new federal laws and most likely the officials charged with writing the rules.
  2. Secondly, our seasoned board and Executive Director DJ Pendleton will give us a voice in this process.
    • DJ brings a strong academic and professional background as an attorney coupled with industry experience, allowing him to understand the new laws, rule writing process and nuances of guiding the consultants we will require to help ensure the industry is heard.

Finally, through conservative fiscal policy, financial support from members over the years and God Bless our Texas economy, TMHA has the financial resources to commit in coordination with others to support this effort in D.C. While no one can guarantee our success, we will at the very least have a voice at the table.

 

Sincerely,

 

Ronnie Richards
Chairman
Texas Manufactured Housing Association

Dick Moore’s Industry and Finance Perspective

November 16th, 2011 2 comments

 

Dick Moore's Industry and Finance Perspective
 
Well, it seems that I struck a nerve with our friend up East. He mostly disappeared for a couple of years, quit writing his newsletter, and went dormant. I figured maybe his conscience was bothering him, after the spin he put on our industry.
 
Now I see a new post from our buddy in “Industry Voices,” the guest platform on Tony Kovach’s e-zine MHMSM NewsLine (MHMSM.com = MHProNews.com), wherein he goes on and on about me in a general mis-representation of my writings. I certainly never opinioned that he had powers akin to Superman. He did, however, invent some mystical losses derived by using losses from Brigadier, Conseco, and other lenders who did not know or understand how to buy MH paper. He then reported those loss figures to Fannie Mae & Freddie Mac, keeping them out of the (Manufactured Housing) markets.
 
This lack of competition had a negative impact on the other lenders that were still major players in our industry.
 
He admitted to me in Louisville one year that he was an “attorney” and was being “paid” by Fannie to advise them. He later denied all that, but everyone knows the credibility of lawyers and politicians. After all, who else gets “paid to have an opinion”?
 
My ex-neighbor was a college professor who taught business
administration at Memphis State University. After listening to his
many goofy ideas and theories, I realized the source of the old adage “If you can’t do it, teach it.” If you were a failure in the finance business, then go out and advise others how to do it!
 
The Mortgage Industry produced paper much worse than the MH
industry ever dreamed of, and that was the paper that our friend
advised Fannie to buy (instead of MH paper). Fannie’s losses are the worst losses the United States has ever endured, and it continues still. (How good was that advice?)
 
It is easy to measure or analyze a situation the way you
want it to look – just choose the measuring criteria needed
to give you the end result you want and ignore any thing
that doesn’t.
 
The MH Industry (its survivors) remains the only low-cost housing that is un-subsidized. Just because less qualified people enter the business and lose money from their poor business decisions does not equate to a ‘subsidy.’ Maybe our friend does not know or understand what a subsidy is. He sounds like Obama explaining the debt ceiling and how someone else created it.
 
I’m sure there will be another argumentative letter, but I have work to do and do not have the time to continue with fruitless exercises in writing.
 
********
 
This industry and its recourse lenders fared well and made good money from the 50’s to the 90’s, with no taxpayer subsidies.
 
This industry faces a number of problems, with the main one being lack of financing. The lenders and the learned professors of the industry like to blame the dealer for all the woes. True, we have had some bad apples in our business, just like every other industry. But the level of damage from that kind of dealer falls way short of the debacle we as an industry are paying for now.
 
One major issue our industry faces concerns resale values of our houses, which directly affects the lender’s recovery on defaulted loans. We as dealers have very little influence in that arena.
 
Many MH Communities will not accept houses over 10 years old; lenders will not finance homes over 10 years old. Somehow, when the house hits its 10th birthday, it suddenly is worth ZERO!?!?! And this is the dealer’s fault?!?!
 
When free enterprise existed in this country and banks lent money to their dealers with recourse, our industry performed well! Lenders were selective about who they would take on (based on the dealer’s financial condition and track record in the community), the dealers would take care of their funding pipeline by not sending them dead-beats (since the
dealer would have to repurchase if the loan fell out), and the dealers were paid endorsement fees for this guaranty. The dealers worked to re-sell the bank’s repos with good unpaid balances, and the paper overall performed quite well. It was that performance that led to the influx of the non-recourse lenders that we saw in the 90’s.
 
Long-gone lenders such as Bombardier, Conseco, Greenpoint Credit, BAHS, et al, saw the performance of recourse lenders’ portfolios, due to good resale values on houses sold under recourse agreements, and made the mental jump to they can do that too! Soon tactics such as withholding of proceeds and diverting rate spread and the odd-days’ interest into non-interest bearing reserve accounts became the norm from the lenders, at the expense of their MH dealer network.
 
In their headlong rush for gold, they also opened the funding gates to credit buyers who (like in today’s meltdown) had NO reason in their track records to get approved for loans at low rates and low down payments.
 
So, they kept the endorsement fees, put that rate spread into a reserve account for repossessions, and bought non-recourse.
 
Their inability to manage the repos, refurb and re-sell them (as the recourse lender/dealer relationships had done) created massive losses for them. Again, I fail to understand how this is the dealer’s fault.
 
********
 
President Obama is railing against corporate jets, while flying around on the most expensive jet in the world. The tax deductions on all the corporate jets in the US would not pay for Air Force One. Is this leading by example or “Do as I say, not as I do?”
 
Good leaders lead by example. They don’t accept favors from lobbyists and major contributors to their re-election campaigns, and they don’t spend the taxpayers’ money recklessly.
 
The crash of the housing/mortgage industry was caused by Fannie Mae and Freddie Mac, which is govt. money invested into private enterprise, wherein all the profits go to the cronies of powerful govt. people, but the risks and losses go to the taxpayers. # #
 
post submitted by
R. C. “Dick” Moore

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.

Congressional Hearing on Federal Role in Housing Finance – Report And Analysis

September 16th, 2010 1 comment

MHARR logoBack from its Summer recess, Congress has embarked on a process that will ultimately determine – as soon as 2011 – the future role of the federal government in private-sector housing finance and the future role, structure and character of the Government Sponsored Enterprises (GSEs).

On September 15, 2010 the House of Representatives Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises held a hearing on “The Future of Housing Finance – A Progress Report on the Government Sponsored Enterprises.” Although the “duty to serve underserved markets” (DTS) mandate imposed on the GSEs by the Housing and Economic Development Act of 2008 (HERA) was not addressed as part of this more broadly-focused hearing, both the implementation of the DTS mandate and the future availability of private consumer financing for manufactured homes will ultimately be at stake in this process. Moreover, the challenges that the industry faces in this process were underscored in testimony by both the Administration and the current federal regulator of the GSEs, the Federal Housing Finance Agency (FHFA), as well as in statements by Subcommittee members.

While the Administration has not yet offered a detailed plan for the future of the GSEs, and is not expected to do so until early 2011, Michael S. Barr, Treasury Department Assistant Secretary for Financial Institutions, reported on the steps taken by the Administration in response to the financial crisis as they relate to the GSE’s as well as the Administration “Objectives and Goals for Housing Finance Reform” – i.e., widely available mortgage credit, housing affordability, consumer protection and financial stability to achieve those goals. He then outlined several policies including the necessity for “clear mandates.” Specifically, institutions that have government support, charters or mandates should have clear goals and objectives. Affordable housing mandates and specific policy directives should be pursued directly and avoid commingling in general mandates, which are “susceptible to distortion.”

Follow-up questioning by the Subcommittee focused on who was responsible for letting the GSEs get out of control and what contributed to their collapse. Some Republican members alleged that the housing goals forced the GSEs to get involved in sub-prime lending and to acquire sub-prime mortgage backed securities. Democrats and Secretary Barr responded that the GSEs acquired sub-prime mortgage backed securities to increase profits and that the housing goals did little to impact the GSEs collapse.

Significantly, though, subsequent testimony by FHFA Acting Director Edward J. DeMarco, expressed reservations about the Administration’s strategy, stating:
“Recently there has been a growing call for some form of explicit federal insurance to be a part of the housing finance system of the future. The potential costs and risks associated with such a framework have not yet been fully explored.”

Without either explicitly endorsing or opposing such a role for the government, he stated three specific concerns in his testimony:

First, he rejected the premise that no private firm would risk funding a 30-year mortgage, “at least at any price that most would consider reasonable.” Rather, he asked “whether there is reason to believe that the government will do better?” noting that “if the government backstop is under-priced, taxpayers eventually may foot the bill again.”

Second, he stated that a government guarantee could allow politicians to favor some areas or demographic groups, noting the government “would likely want a say with regard to the allocation or pricing of mortgage credit for particular groups or geographic areas.”

Third, he stated that a guarantee would shift capital toward housing, which already benefits from other government support.

Discussion among Subcommittee members then addressed moving forward – with some Republican members favoring complete privatization and the elimination of all housing finance goals. Their view is that goals will distort the market and lending will be to higher risk or with less of a down payment.

Regardless of whether there is any such specific guarantee, however, and regardless of the ultimate nature of the GSEs or successor entities going forward, the original mission of GSEs – as embodied in and strengthened by the DTS mandate – to provide home ownership opportunities for lower and moderate-income Americans, was not responsible for the GSEs’ failure and must be maintained in order to ensure that home ownership remains available to as many Americans as possible.

Another hearing on the GSEs is slated to take place later this month. MHARR will continue to carefully monitor these hearings and take further steps relating to DTS and proper GSE support for manufactured housing consumer financing as appropriate.

MHARR will keep you apprised as new developments on this important matter unfolds.

An MHMSM.com INdustry In Focus Exclusive Interview Report With industry consultant and once interim-president of MHI, DICK ERNST Part Three

August 10th, 2010 No comments

Dick Ernst discusses the SAFE Act and its impact on the Manufactured Housing Industry, and the extent of a potential boost from FHA financing

Reporter Eric Miller with Publisher L.A. ‘Tony’ Kovach for MHMSM.com

We conclude the interview begun last week with Dick Ernst.

MHMSM: You just mentioned the SAFE Act. How is that being viewed from inside the mortgage industry?

ERNST: There is lots of confusion. More so, probably, for the manufactured housing business. In the mortgage business, it’s pretty straight forward. I think for the most part, mortgage brokers are being squeezed out because you can’t do the yield spread premiums, charge higher rates to customers with more money going to the broker and things like that. So I think the mortgage brokers are being really squeezed on the mortgage side of the business. But it’s pretty straight forward for the mortgage business. If you operate under a national charter – if you’re a national bank, credit union or thrift – you have to register your people; your people don’t have to be licensed. But the people who go out there and originate loans for you have to be licensed within the state they are doing business with, so you’re dealing with someone who is going to be regulated.

In the manufactured housing business though, it’s much more confusing because of the nature of our business – with some of it being mortgage-type transactions and a large part of it being chattel financing. There are some issues related to the SAFE Act that really make it confusing, in my view, for the average retailer. But in that situation, I believe, the way our business has historically been handled using a retail installment contract or a three-party contract, I think that’s going to be very problematic for the industry going forward because that, technically, makes the dealer a lender and then he assigns that loan to another lender, usually at par value. So, I think that’s going to be problematic and I think our industry is still trying to figure out the right way to handle it.

Community operators, those that we just talked about, that are actually investing in their own paper – I don’t think there’s any question that they are lenders. They are deriving benefit because they are collecting interest on the loan they are providing to the customer. All the other issues related to the administrative aspects of what a retailer does, those to me become more secondary to the bigger issues of, are you getting benefit by earning interest on the loans you are making? Are you, in fact, utilizing a retail installment contract, which represents a loan contract that you are taking to the borrower and then assigning it to someone else? I think all those things are more important issues.

MHMSM: Is becoming licensed difficult? Would that possibly serve the customer better if some of the people in the industry did become licensed?

ERNST: Becoming licensed for people who are involved in the mortgage business is like becoming licensed to begin with, passing your mortgage broker’s license. You have to have certain training and understanding of the mortgage lending laws and what you can do and what you can’t do, and what truth in lending is, or [Real Estate Settlement Procedures Act] RESPA is; the various applicable federal laws and state laws and things of that nature. So you already have a background in it and familiarity with it and you have studied for it to pass your mortgage broker’s license. It’s more difficult for our industry, because typical retailers are not that heavily immersed in mortgage lending and, from what I am told, many of them do have difficulty in passing that license, or passing that test to obtain a license because they are dealing with something they haven’t done before. So I think for our industry, it’s going to continue to be problematic. But if you step back about eight or ten paces from this thing and take a big-view picture of that and say, “Is the customer going to be better-served by having someone who is licensed handling or involved in their loan transaction?” I think the answer is, yes. The real question is: what does mortgage lending have to do with doing a chattel transaction?

TK: Let me jump in here and follow up on the SAFE Act issue because a lot of what we heard at the DC meetings was the shear costs of meeting the SAFE Act requirements. I remember the Texas Association executive director saying that a quick numbers crunch with some of their people came up with a cost of 12 million dollars for licensing, and some small lenders figure it’s going to cost them two million dollars to meet all the requirements. You want to touch on that for a second, how that impacts the industry?

ERNST: From a lender’s perspective, doing business in this industry: Take a company that does business in multiple states. They have to actually have people licensed – anyone who touches that loan transaction, helps to either set payments or underwrite or establish terms on that loan – is going to have to be licensed within that state. Because every state now has their own SAFE Act they were required to put together. So if you have someone operating in multiple states – and let’s say you have loan officers who may get loan business from five, six, seven, eight, nine different states – they’ve got to pass the licensing for all of those. And so the compliance – and I heard one of the major lenders in our industry talk about their expenses like you say – that compliance, that licensing – that’s looking at every aspect of your business to make sure you are doing things properly, because compliance is their second largest expense after personnel. It becomes very costly, because the penalties for violating SAFE Act requirements or regulations can be severe. I think the big fear that most of the industry has is that because of the economic situation, you may have states that see this SAFE Act as a potential revenue generator for them both through the licensing fees as well as the audit fees, and potentially the fines and penalties that might be imposed and collected.

MHMSM: But most state laws are based on the national model, right?

ERNST: They are, but keep in mind, the national model – there’s no final rule that’s been published yet. It’s questionable whether a final rule will be published because the responsibility for the SAFE Act is being transferred from HUD over to the Consumer Protection Bureau, and whether HUD is going to ever issue a final rule or not is in question. Meanwhile, you’ve got states out there that have created their own, based on the information provided initially from the proposed rule from HUD; and keep in mind, those were minimum standards. So the state law had to at least contain the minimum standards provided for in the national SAFE Act that HUD had published. So you see other states that have imposed other things such as brick and mortar requirements. In other words, you have to have a physical office with someone specifically licensed in that facility where records can be stored, where customers can come in if they wanted to, to address issues, whatever it may be. That becomes a very expensive proposition. And then you begin to look at states and say, “Well, how much business am I getting out of there anyway and can I justify having an office there; and if I can’t, then I am going to pull out of the state?” So you’ve got all of those issues. And when you talked earlier about the cost for some, it’s, “What do I have to do to be in compliance in those 46 or 48 states or whatever it may be that I am operating in?”

MHMSM: Right. I could see where that would add to the cost substantially. You once served as interim President for the MHI – when was that?

ERNST: Back in 1998, the last of the big years when we had 373,000 shipments that year. The issues the industry faced then were significantly different. MHI had been trying for a number of years to pass the Manufactured Housing Reform Act, if you will, that addressed issues like installation and licensing and inspections and things of that nature, that really brought some significant issues and updated the HUD code, so to speak. The industry battled and we had conflicting views with MHARR and we couldn’t get anything done. In fact, we had Congress people tell us, “You guys better get your act together before you come back in here because we can’t have divisive opinions from both of you. We don’t know which way to go on this thing, so you better get your act together if you expect to get any help on this at all.”

That was what I would say was one of the positive things that occurred during that period I did serve as interim president. Walt Young was the chairman at that time and Walt directed me to sit down with Danny Ghorbani and meet with him and see if some of our disagreement wasn’t more personality than substantive and if we couldn’t both come together and compromise. We did end up coming together. We formed a coalition with MHARR and had a working group of people that worked in lock step, and we spoke with one voice as an industry for the first time in many years. That helped to get the Manufactured Housing Act of 2000 passed.

The question that’s often asked is: How did we face that issue? And I mentioned earlier that we had a third of our business that had below a 600 FICO score. And everyone likes to have an excuse; and excuse or not, there was an awful lot of Wall Street money, there were a lot of things going on at that time in the industry, a lot of consolidations, a lot of acquisitions going on. Champion Homes was very busy acquiring other companies, acquiring a lot of retail distribution networks – chains, if you will, of retail operations – and creating a really intensive, competitive struggle within the industry. You had other companies then trying to stay ahead of the game with Champion and trying to match them purchase for purchase; a lot of Wall Street money chasing the industry saying these securitizations are great, get us more, get us more, and people saw the acquisition of a chain of retail operations as a way to cement their ability to generate a lot of retail paper and more securitizations. As a result, underwriting went away pretty much. I remember lenders were paying as much as five points for a transaction to a retailer – and that’s to buy a 600 FICO score customer – and they were paying the retailer five points. That’s just not sustainable. It all came crashing down. Repossessions started occurring with great frequency and it became very difficult.

MHMSM: It seems to me manufactured housing can now be positioned as quality housing you can afford, unlike the so called site-built McMansions that too many couldn’t afford; but there’s talk the Obama administration may begin to look away from promoting and subsidizing homeownership in favor of pushing the rental housing market. Shouldn’t manufactured housing be positioned as an alternative to both? How can we move our message ahead the most rapidly and effectively?

ERNST: I think it should be positioned and I’ve often questioned in my own mind – you know, we like to claim that we’re the only form of non-subsidized housing. I don’t know if that’s a good thing or a bad thing. It’s always been touted as being a good thing, but at the same time, if you’re not a part of the government’s plans for providing or assisting people with housing, then that kind of puts you on the outside. I agree with you that the industry should position itself as a home that you can afford. You don’t always have to rent. But I think, and this is just a personal opinion, I still think that we’ve got to improve our image, and perhaps even the architectural appeal of our homes, so that they are more broadly accepted by what I will call the traditional home buyer. I think there are people who look for manufactured homes or who buy manufactured homes because they think that’s the only thing they can afford. At the same time, those same people may have had a manufactured home before or maybe currently live in one.

So I think that we’ve got to broaden our appeal. I think that we’ve got to offer good quality affordable lifestyles, whether it’s in a land-lease community or provide an architecturally comparable home for someone who wants to put it on a piece of real estate. And I think until we do that and can get the opportunity for urban and suburban placement of homes, because architecturally they are compatible with all other homes, I think that’s when we’ll begin to see a broader acceptance and a broader capability of maybe doing suburban developments with homes that just happen to be built in a factory, but they look like everything else.

MHMSM: You mentioned urban. I haven’t heard of many instances where there’s any of that. Is that a potential market for manufactured housing?

ERNST: There have been situations. In California, in Oakland and other places; there was one, I think, in Louisville and in Maryland and other places where non-profit groups actually did urban infill projects where there are a bunch of empty lots; and they had to change the architectural characteristics of the home for them to be compatible with surrounding products.

Also in Cincinnati; I remember Dan Rolfes did the project in Cincinnati. He worked with the mayor and several manufacturers and they did some gorgeous homes. Some of them were modular and some of them were manufactured. None of them looked like a mobile home. They all looked like houses and they were very compatible; they were really a little bit nicer than their surrounding properties, because it was in a much older area of the city. The experience from those has been that those homes have appreciated; they were very favorably priced, and it provided a place where young professionals could purchase a home, be close to the city, be close to the ballparks – that type of thing – without having to commute 30-40 miles.

MHMSM: Is there anything else you would like to share?

ERNST: I do want to clear up and offer what I think are some potential positives. The industry can get mired down in negatives pretty easily. We’ve been mired in negatives for a long time. I really think there’s an opportunity to have good open dialogue and meeting with people, at least at FHA, which I think could be a critical component of the whole finance picture for our industry. If we have a source, an insured source, who consistently… now just think about this for a moment. If we have a source, even with some tightened underwriting through the existing FHA guidelines, that will permit lenders to do the 620 to 660 or 680 FICO score customer, you could have local banks, you might even have regional banks or others, make those loans where they are not participating in the market at all. I think that ultimately then, that will help the over-all industry because I think it will make available an insured loan product. And I think that’s an important part of it, too, because if you have community banks or someone like that making a loan that’s insured by FHA, if they do have to repossess the home, then their loss will be contained to an affordable loss as opposed to one that might be fifty percent of the unpaid balance.

I’ve worked with community banks, and once a board of directors sees a loss where you might lose 50 percent of an unpaid principal balance on a particular home, the next action is, “We’re not doing any more of those.” So I think this could open the door for some portfolio lenders who say, “Ok, I could do a couple million dollars worth of those, or five million dollars worth of those; we’re going to be insured, and we can still buy decent quality paper in there if we service it properly.” That’s one thing. And we mentioned to FHA that I think it would be very helpful if the industry and MHI in some way could help FHA create some sort of an educational program for new or prospective lenders in the Title I program, and even Title II, to educate them about our industry and about our home products and give them the tools they need to be successful in it. We don’t need any more failures in this business.

TK: I agree with that. You kind of touched on something indirectly right there if you’ve got an extra minute. Part of what FHA was setting up was this “ten million dollars plus ten percent.” What do you see happening to that?

ERNST: Well, I personally thought it was an overreach, that it was excessive. Because some of the best lenders in the industry, those that have been successful – and I’ll use Triad as an example – while they may meet the ten million dollar net worth requirements, the additional ten percent of all the outstanding securities that they issue is very onerous. Because if you operate in 45 states or however many they operate in, and if you did an additional 300 million dollars a year in FHA business, that’s an additional 30 million dollars in net worth that you’ve got to have. So now all of a sudden, your net worth requirement goes up to 40 million. That’s just too onerous. What we tried to do is demonstrate to them that that’s not necessary. We went back to them and said no, the average loss on these homes for the lender, while it may not be ten percent – it’s more like 15 percent.

There are some capped expenses that FHA has: they’ll only pay $1,000 per section to move a house (it may cost $1800 per section to move it); they’ll only pay seven percent commission on the sale of a repossession. You know, seven percent on a $50,000 deal is not a lot of money, and you’re sure not going to get a lot of people interested. The standard is more like ten percent, so there’s additional exposure for the lender.

If their actual loss experience is fifteen percent, the ten percent additional is still an overreach. It’s up to us to prove that’s what the lender’s actual loss exposure is. Vicki [Bott] commented that their data reflected that it was closer to 30-40 percent; I think that’s what she said. Well, if it’s 30-40 percent, then there may be a reason to have those excess net worth requirements. I don’t believe that they are. And the unfortunate thing [about those statistics] is that really, the only the only people involved in FHA Title I financing have been Vanderbilt and 21st Mortgage to any degree over the last five to seven years, and they haven’t done a lot of it. Everything else they have is so old and really not even applicable to today’s marketplace and the way people do business. And there’s more of a distressed marketplace situation. I don’t believe it’s appropriate to use those numbers or that they are applicable, but we’ve got to be able to demonstrate that we’ve got some more recent history and some more recent data that says it’s closer to 15 percent. Then we can demonstrate that maybe they can relax the rules to some degree. I’m also working on some other things that I’m not at liberty to talk about that might be another approach on that.

TK: One last question after the one last question. How much of a bump do you think a successful FHA program would represent to the industry in terms of shipments? We’ve seen a lot of numbers on that. What would your take be?

ERNST: Well, I know there’s a lot of disagreement with this and people are going to say, “He’s nuts.” I think there could be a 10-15 percent bump in shipments. That’s 5,000-7,500 shipments, because of the ability to reach the heart of the industry’s customer, the 620-660 or 680 FICO score customer. That being said, there are a lot of other things that have to be right in the marketplace, too. Right now in a lot of areas, we’re still seeing excess inventory of site built homes, a lot of foreclosed homes, a lot of deep discounts on those properties – and that still represents competition. And we’re still looking at a lot of uncertainly in economic times. That’s keeping people from being [at] the sales center and looking to buy. Another important point is that there are going to be a lot of homeowners out there who have the scar on their credit reports of having had a foreclosure. If everything else – income, job stability, all the rest of the situation – is good for a customer, how is FHA going to look at that? We don’t know.

TK: That’s a great point. Dick, thank you so much. Eric do you have anything else?

MHMSM: No, that was a lot of great information.

TK: I want to really thank you personally for your time and all this expert insight. It was very valuable and I think the industry will appreciate it.

ERNST: Well you’re welcome and I hope it’s helpful and I hope you don’t get too [much] criticism of it.

TK: A little bit of criticism is a good thing. I think this is going to be well-received and just outstanding material. Thanks so much.

This concludes our three-part series of an Exclusive Interview Report with industry consultant and once interim-president of MHI, DICK ERNST.

An MHMSM.com INdustry in Focus Exclusive Interview Report with industry consultant and once interim-president of MHI, DICK ERNST, Part Two

August 8th, 2010 1 comment

Dick Ernst Discusses Duty to Serve amidst the future of Fannie and Freddie and the potential return of private financing
Reporter Eric Miller with Publisher L.A. ‘Tony’ Kovach for MHMSM.com

We continue with the interview begun last week with Dick Ernst.

MHMSM: Even for Industry pros, there can be confusion with all the terminology, agencies, etc. Do you have a simple way or suggestion to help readers keep it all straight?

ERNST: I agree with the fact that it’s confusing. We’ve seen that recently in a couple of other blogs that were published. FHA is the Federal Housing Administration and it’s been around for years. The FHFA is the conservator for Fannie Mae and Freddie Mac and it was just recently put together to act as a conservator on behalf of the government. It deals only on the mortgage side of the business with Fannie and Freddie.

MHMSM: Will the FHFA go away when the future of Fannie Mae and Freddie Mac are determined?

ERNST: That is to be determined and I would expect that it probably would. I think it’s anybody’s guess right now. I don’t believe Washington really knows what’s going to happen to Fannie and Freddie; they still have huge issues and huge problems to work through. We’ve all seen the anticipated losses that the taxpayers are going to have to eat as a result of their involvement. I think there will be some privatization of that business, but the mortgaged-backed security market has to be alive and well and thriving. I think that there will be a continuing government role in some form of providing a marketplace, and it might focus on the low- to middle- and moderate-income families and affordable housing. That might be a better spot for them to play in. But it’s still too early to tell what’s going to happen to Fannie and Freddie and what role the government is going to play going forward, and whether FHFA continues to exist.

MHMSM: Any thoughts on the GSE’s Duty to Serve and how it can be enforced? Do you think the conservatorship excuse they have given holds water legally? If not, why not?

ERNST: There is a legal question and a practical question to be asked. Legally they are under an obligation, a legislative obligation, to create programs and it’s only enforceable to the extent that Congress is willing to hold their feet to the fire and say, “Look, you guys have an obligation to provide loan products to this industry because you’re only providing less than one percent of the financing that occurs when this segment of the housing market has historically averaged about 20 percent of the new single-family housing market. So it’s woefully underserved, and we passed legislation specifically for you to address it.”

That being said, the practical side of it is, who is going to put the pressure on it. Politically it could be suicidal because of the massive losses that Fannie and Freddie are taking. They would be saying “Oh, now we want you to go into this area of business even though there are some historical facts that this may have a higher default rate than what you are comfortable with.” I don’t think there’s many Congress people, including those on the housing finance committee, that really want to tackle this head on and hold Fannie and Freddie’s feet to the fire to say, “You’ve got to offer chattel financing, you’ve got to do this and you’ve got to do that.” There may be legislation there, but we’ve seen from a legal standpoint, obligations that the federal government has legislatively that they are just unwilling to address because of the potential political problems that exist for it.

MHMSM: Do you think that will be more palatable to address after they exit conservatorship, if that’s what happens?

ERNST: I think our industry is taking the right approach. We’ve always been big supporters of Fannie and Freddie, I guess in hope that they would step up to the plate and fill that Duty to Serve, and offer more programs and opportunities for a secondary market. We’ve made it clear to both agencies and the FHFA that the industry is willing to talk about skin in the game, talk about minimum credit qualities, talk about minimum equity requirements and have a good sustainable program. I don’t know that they’ve got the stomach at this point right now to take on something new. I think they’re overwhelmed with the size of the problems they have right now. That takes up the bulk of their time.

Once they’ve exited, I think we have to keep an open mind and say, “What is their obligation, what is their duty now to the housing industry, and what’s the role and how can we work within that?” I think the industry is taking the right approach to say, “Look, we’re not going to come out and say anything negatively against the agencies in terms of whether they should exist or not exist.” We continue to be hopeful that at some point it will provide us a source. We’re certainly not going to say anything about “take ’em private and the government should get out of this business” because I think that it’s a marketplace the government has to play some role in; we just don’t know how big or how much.

MHMSM: What are some of the biggest barriers to providing chattel loan financing privately? How can the Industry move beyond some of the past history of experiences like Conseco?

ERNST: Right now there is no asset-backed securities market. Chattel financing, up until the credit crunch occurred, was predominantly either being funded by portfolio lenders, or the asset-backed securities market was still providing some. I’ve got to back up a little bit here. Clayton Homes’ Vanderbilt Mortgage and 21st Mortgage were both big players in the asset-backed securities market until the early 2000s; and then when the cost of securitization became so expensive, they felt their own existence being threatened because of the cost.

I can remember in the early 2000s where if someone had a billion dollars worth of securities to go to market, they wanted securitization for a billion dollars worth of manufactured housing loans, they had to come up with an additional 200 million dollars in over collateralization to get that deal done. There aren’t very many companies in this industry that could withstand that for any period of time because if you have to do that for two to three years, then all of a sudden, you’re talking about $600 million dollars in additional over collateralization, and a lot of companies didn’t have that kind of excess capital or excess assets.

The landscape changed dramatically for our industry after the blow-up, if you will, of the sub-prime credit purchases that we were doing in the mid to late 1990s, and I think it’s changed pretty dramatically, and I really don’t see it getting back to where it was. I think the asset-backed securities market will come back, but I think the disciplines many lenders have in their portfolio will open up an opportunity to do some securitizations, because the credit quality is so high and the default experience has been very good on that higher-credit-quality customer.

MHMSM: Will there be a process and what will the process be for public finance returning as an option?

ERNST: The process is a comfort level in the capital markets. I’m sure you’ve read where there’s beginning to be some opening up in the mortgage-backed securities market as well as some asset-backed securities classes like automobiles and other things like that, where there are some asset-backed securities deals being done. Slowly I think, because of demand or the need to invest capital, I think that ultimately there will be that opportunity to do some asset-backed securities with some pretty high-quality manufactured housing loans. Some of the more recent loans that were securitized by Countryplace Mortgage and Origin, some of those had average FICO scores of more than 700. It was pretty high-quality and for the most part, those have performed very well. I think it’s a matter of investor confidence and sitting on a lot of extra capital right now that they need to get invested; but they want to invest it in something that’s going to have predictable returns and a predictable experience.

MHMSM: The manufactured housing industry experienced an easy-money, no-credit-score bubble in the late 1990s. That was repeated more recently in the site-built housing industry. Have we learned our lessons? What are those lessons?

ERNST: Who do you mean by “we”? If you’re talking about the manufactured housing industry, I’d say absolutely we’ve learned our lesson. I think there’s been a lot of slicing and dicing, so to speak, of that business that was purchased prior to 2000 or 2001; and a lot of people looking at the credit quality look at the way business was being done back then.I mean, we got pretty loosey-goosey back in the late ’90; and when I say loosey-goosey, it’s been reported Marty Lavin (who is kind of a statistical nut and likes to look back at things) has indicated that more than a third of the businesses purchased in the late 90s had less than 600 FICO score business.

We know, based on experience now, that that business cannot perform. It’s not a matter of IF it’s going to repossess; it’s a matter of WHEN it’s going to repossess. When you’re dealing with low- to moderate-income customers, they have less leeway to be able to withstand an adverse event in their life, whether it’s an income interruption or whatever it may be; they have fewer assets, fewer reserves and less disposable income to withstand that event. I think we’ve learned.

The survivors do a lot of verifications now: they verify down payments, they verify income, they verify employment, they look very carefully at what the customer’s disposable income is going to be, what their other expenses are, what their family size is – all of those things now, I think, are being looked at a lot more closely. I think that the lower-quality credit customers are just not able to get those loans financed for the most part. If they do, through a company like 21st Mortgage, they’re going to have to have some significant equity in that loan or put up some collateral, perhaps land that they own or something like that, so they have more at risk. I think our industry has learned a lesson.

I can’t speak for the site-built industry. It’s been pretty devastating what’s happened to them. You’d like to think that everyone learns a significant lesson from this, but we all know there are a lot of cyclical events that occur in major markets like this, and we can only hope that everybody has learned a lesson.

MHMSM: What are your thoughts on efforts like Ken Rishel’s to move chattel ahead via establishing captive finance programs, especially for land lease community operators?

ERNST: I think the captive finance entities that Ken works with and a number of community operators that provide financing for their own customers is absolutely through necessity. You have to remember that land-lease communities have two potential benefits. Number one is, they tend not to focus so much on the profitability on the sale of the house. They want it to be profitable to some extent, but there’s less emphasis on the profitability and they want to have a loan that they can put in their portfolio. They’re willing to take a little bit more credit risk because they have much more control of that individual transaction with the site manager who can monitor what that customer is doing on a monthly basis and look for the signs that they may be having some issues; maybe look out there and see that the guy bought a new motorcycle or whatever it may be. Sometimes those can be things that create difficulty with a loan going forward. I think the captives are by necessity.

At the same time I think the captives in the future – and I don’t know how long in the future – but I think at some point in the future, there will be the ability to securitize those loans with someone with some pretty high leverage, or I should say low leverage. In other words, if you put a billion dollars in loans together, you might be able to re-coupe a half a billion dollars in capital. In other words, you might have to do a two-for-one type of deal because of the potential risk involved. Now, the larger communities – and to the extent they are well capitalized and have access to capital – I think you see folks like Hometown America and others who have done that and done it successfully, believe it’s necessary for their business model to support the communities, to create revenue-generating customers, revenue from those lots that they lease, and they think it’s important. At the same time, they’d love to be able to securitize those loans so that they don’t have all that capital tied up.

I think it’s going to continue; and the numbers that have been published – I have seen both from George Allen and others, and Tony’s numbers – indicate anywhere from three and a half billion to as much as six or seven billion dollars worth of paper that’s being held by these community owners. I do think the SAFE Act is going to cause everybody take a look at that and make sure they are doing business the right way; but at the same time, the captives are a necessary part of their business model.

Be sure to catch the third part of the MHMSM.com exclusive report with Dick Ernst when we discuss the SAFE Act and its impact on the Manufactured Housing industry and the extent of a potential boost from FHA financing.

Click for Part Three of this interview

An MHMSM.com INdustry In Focus Exclusive Interview Report With industry consultant and once interim-president of MHI, Dick Ernst, Part One

August 4th, 2010 No comments

Reporter Eric Miller with Publisher L.A. ‘Tony’ Kovach for MHMSM.com

MHMSM: To help us set the stage for this interview, please tell us about your role at Finmark and how you and your firm serve the Manufactured Housing Industry.

ERNST: Finmark is a shortened version of Financial Marketing Associates. It’s a company I formed in 1983. When I first got into the manufactured housing industry and I started my own company, we represented banks and savings-and-loans and originated manufactured housing loans for them. Eventually, it’s evolved into my doing consulting work predominantly now, and putting together outside-the-box type transactions.

Some of the unique things I have done are a joint venture mortgage operation between three manufacturers and Wells-Fargo, and ran that operation for about three years. I also put together Countryplace Mortgage for Palm Harbor Homes 14 or 15 years ago now. I helped Textron create a commercial construction mortgage loan program and was working on a consumer program for them when the financial meltdown occurred and they decided not to move forward with it, and ultimately decided to get out of the manufactured housing inventory finance business as well.

The work I do is all related to the manufactured housing business. I like to put special deals together and provide consulting to manufacturers, retailing groups or finance entities that makes their projects possible.

MHMSM: What is the “big picture” to take away from the June 2nd Elkhart meeting?

ERNST: Many times the big picture gets missed based on individual comments and interpretations of how the meeting went. There are a couple of big picture take-aways from that meeting. One is, I found Dave Stevens, the FHA Commissioner, and members of his staff to be very open and candid about their willingness to work with the industry and help craft a program that can be sustained. I don’t think there’s any question that the FHA believes clearly that manufactured housing has a very important role to play in providing affordable housing to people in this country.

The issue that they have to deal with – and I think this goes beyond manufactured housing – is they have a very difficult task of reigning in the FHA mission of being the lender of last resort for low-end, low-quality credit customers to being a viable source of financing for qualified customers. They may run a broader spectrum than what Fannie Mae and Freddie Mac have done, but I really believe they want to play a serious role with Ginnie Mae to provide a good source of FHA insurance and have Ginnie Mae provide that secondary market for our industry.

I think we have some very smart people with extensive mortgage backgrounds willing to sit down, engage with us, understand our business better and work with us to craft a program that’s going to be sustainable.

The other take-away is that FHFA now is the only entity that we’re able to talk to with respect to Fannie and Freddie. It’s clear to me that they are using their conservatorship as another convenient excuse not to tackle something they have been directed to do through the Duty to Serve legislation. They are using their conservatorship and all of the other problems that they have in order to pretty much stay away from our industry. That’s a sad situation.

MHMSM: What is the big picture take-away from the follow-up at the MHI Summer Meeting with Vicki Bott [Deputy Assistant Secretary HUD] and other Industry and public officials?

ERNST: The Washington meeting came about as a result of FHA reaching out and saying we would like to put together a working group of lenders and interested parties who can help us understand your business – the way you originate it, the way you service it, the repossession and disposal characteristics – and understand your business better so we can address those things properly and still have a sustainable program.

Vicki mentioned that at some point in the not-too-distant future. they’re going to be sending out a TI letter to all mortgage lenders that are operating in the FHA space that anything below a 580 FICO score is going to require a ten percent down payment. That’s a huge jump for FHA because the current regulations require it to be anything below a 500 FICO score. From 500 to 580 – that should be a clear message that FHA is taking these defaults and delinquencies very seriously and they really believe they have to pay a lot more attention to the underwriting side of the business instead of being the lender of last resort.

Again, the take-away from that meeting is she came prepared. She brought several members of her staff. I wasn’t really expecting that. I thought there would maybe be one or two people, but she brought in four or five people including her head appraiser, because there can be appraisal issues and concerns about the program. They had specific questions in areas that they wanted to explore and get feedback from the industry.

I was very pleased with the quality of the meeting, the quality of the questions, the openness of our membership, the lenders who were involved and I’ve seen in some previous blogs comments that the people around the table were “the survivors” – and there is a lot of truth in that. The survivors weren’t the guys doing the bad acting in the late 90s that created some of the housing problems we had in the early 2000s.

I appreciated their candor. For the first time ever, when Bob Ryan, their risk officer… I mean that in itself has got to be amazing to people who track FHA. FHA has a risk officer. That’s pretty astounding to know that with billions and billions of dollars in mortgages that they’re insuring, and they’ve never had a risk officer before to assess what type of risk they are taking on and whether or not programs for site-built are sustainable as well. So when they came to us and said not only are you battling some perception issues, you’re also battling some real issues.

When provided some material on FHA Title II that the serious delinquent accounts, the number of defaults, 30, 60 or 90 day delinquents, all pretty much doubled the site-built business – the rates were double what the site-built business was, that’s a real problem. And it’s a problem our industry has to respond to and say we do need to tweak this program and make it actuarially sound and there are things both of us can do to make it work.

MHMSM: Vicki Bott comes to HUD with a Mortgage Background, Right?

ERNST: That’s correct. She came from Wells Fargo. She’s a very bright lady with a very inquisitive mind. The interaction I saw with her is “she gets it.” When someone responds to her, we’ve seen others that pretended they got it, but they didn’t really have much of a clue what we were talking about. I think that she really gets it from the depth of experience she has from her mortgage background.

MHMSM: If I’m just an average voter out there, I might listen to this and say if you have the qualified borrowers, why can’t the private market handle them? Doesn’t all this stuff exist because we want to allow people who maybe aren’t as qualified to have a home?

ERNST: I don’t think that’s it. It’s potentially a conflict and the way the FHA conventionally has been viewed as providing the opportunity for someone to get a home who wouldn’t otherwise qualify for a conventional program.

But I think you do that in a couple of different ways. The conventional programs from Fannie and Freddie, and even those from private institutions typically require 5, 10 or 20 percent down; and because of the private mortgage restrictions, those having higher credit scores are usually the only ones able to qualify. Does that mean that everyone else is unable to qualify? I don’t think that it does.

I made the comment during that Washington meeting that I believe the heart of our industry, that is the people who buy manufactured housing, typically will have between a 620 and 660 FICO score business. Those private companies that are in the marketplace today, with the exception of 21st Mortgage and perhaps Vanderbilt because of their funding capabilities with Berkshire Hathaway, the bulk of the companies are buying 680 plus FICO score business; and while they may do some with five percent down, they’re going to have to have a higher FICO score for the most part. The 620 to 680 FICO score customer is still a legitimate customer capable of buying a manufactured home and they deserve an opportunity for financing.

The other way FHA permits financing opportunities for those customers, is with a five percent down payment. Because a lot of those loans can be securitized with Ginnie Mae, the interest rates charged to the borrowers are actually going to be more advantageous than some of the conventional money or portfolio money that’s out there today. As a result of that, it provides a nice window for FHA to provide a way for people to buy homes that maybe aren’t being served today in most of the conventional markets for manufactured housing.

And I think provides a tremendous opportunity for our industry, for people in the land-lease communities as well. I think it gives them a potential source of financing because I really see the Title I program for chattel financing focusing more in the 600 or 620 to 680; and then to the extent that higher credit quality customers would drift toward an FHA loan, they would do so because of the interest rates or the down payment situation.


Be sure to catch the second part of the MHMSM.com exclusive report with Dick Ernst when we discuss the future of Fannie Mae and Freddie Mac, the recent housing bubble, the SAFE Act and its impact on the Manufactured Housing industry and more.

Click for Part Two of this interview

July, 2010 “MHARR Viewpoint” Reprint

July 6th, 2010 No comments

MHARR logoIn the MHMSM.com download area please find the reprint copy of the “MHARR VIEWPOINT” article titled “RESTORING THE STATURE AND STATUS OF THE MHCC” published in the July, 2010 issue of the Journal magazine.

A great deal of misinformation has been circulating around the industry regarding the status of the Manufactured Housing Consensus Committee (MHCC) and recent steps taken by HUD regulators and attorneys that threaten to turn the MHCC into an impotent and irrelevant forum akin to the now-defunct National Manufactured Housing Advisory Council (Advisory Council).

The must-read MHARR Viewpoint article details these ongoing efforts to downgrade the role, authority, functionality and independence of the MHCC, placing them in the context of the background and history of the MHCC as one of the centerpiece reforms of the 2000 law. By tying together the history and development of the MHCC as an independent replacement for the HUD-dominated, rubber-stamp Advisory Council, the column shows just how far recent changes have degraded the MHCC and the extremely negative impacts that these changes will have going forward, unless they are halted and reversed.

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