Partners (Winter 2002)
Partners (Winter 2002)
The financing system is one of the biggest challenges facing the manufactured housing industry, and it presents a potential barrier to the affordability of the homes. There are several options available for financing new manufactured homes including government-sponsored programs. It is critical that both lenders and consumers understand the different options available in order to make an informed decision that best serves their respective interests.
Financing options available for manufactured homes are affected by the classification of the home as either personal or real property. In general, personal property is moveable (e.g., a car or camper), and real property is immovable (e.g., a structure permanently affixed to land).
The two options for financing manufactured homes are: 1) personal property loans, for homes that are not permanently secured to land and therefore considered personal property; and 2) real estate mortgages, for homes permanently affixed to property and therefore considered real property.
Personal property loans are the standard in the manufactured housing industry for several reasons. First, the majority of existing homes are placed on leased land, so they cannot qualify as real property. Secondly, the buyers of manufactured homes often have marginal credit histories and are not able to meet the underwriting criteria for conventional mortgages. Lastly, collateral risk is high due to expected depreciation of the homes, so lenders are reluctant to provide mortgage financing.
As the industry has grown, the financing companies and banks have made some changes to the standard terms of personal property loans to make them appear more affordable. Interest rates remain higher, but loan terms have been extended in order to lower monthly payments, and down payment requirements have been reduced to less than 5 percent.
The manufactured housing market is changing and more buyers are choosing to permanently place their homes on privately owned land. According to the U.S. Census, 68 percent of all new homes were placed on private property. In addition, the quality of the homes has improved, and buyers are increasingly choosing multi-section homes, which are comparable to site-built homes. These changes should allow more manufactured homes to be titled as real property and financed using a conventional mortgage product. Collateral risk with new homes is also significantly lower as a result of improvements in the quality of construction and the potential for appreciation on permanently affixed homes.
Government and Secondary Market Influences
FHA, VA and Farmers Home have programs that are intended to reduce risk and encourage lenders to provide affordable personal property loans and real estate mortgage loans for manufactured housing. Unfortunately, the impact of these programs on the manufactured housing industry has been insubstantial.
FHA’s Title 1 program was started in the 1970s to insure personal property loans for manufactured homes. While the program had some early success, there are now only a handful of certified lenders nationwide who provide these loans. The primary problem with the Title 1 program was the administrative burden for lenders and the long delay in loan approvals.
FHA’s Title 2 program will insure real property loans for manufactured homes, and VA and Farmers Home will guarantee these loans for specific buyers. None of the government-sponsored programs have ever achieved the success of the comparable programs for site-built homes.
The largest secondary market for manufactured home loans is the asset backed securities (ABS) market with securities backed by pools of high interest personal property or nonconforming real estate loans. Ginnie Mae, Fannie Mae and Freddie Mac will purchase manufactured home loans, but their activity to date has been limited. Ginnie Mae will purchase FHA Title 1-insured and VA-guaranteed personal property loans, but there are very few of these loans.
Most of the lenders that do provide these loans have chosen to keep the loans in portfolio instead of using the secondary market. Fannie Mae and Freddie Mac will purchase real estate mortgages for manufactured homes. However, there are still only a limited number of homes financed as real property. In addition, the underwriting criteria for conforming mortgages required by Fannie Mae and Freddie Mac have excluded many manufactured housing buyers who don’t meet the credit and down payment requirements.
Freddie Mac recently launched a program for buyers choosing to place their homes on leased property, which will allow lenders to originate loans with terms and rates comparable to conventional mortgages. Freddie Mac will purchase loans secured by manufactured homes in a leasehold estate, if the term of the lease extends beyond the term of the mortgage by 5 years and the manufactured home and land can be converted to real property. The program is relatively new and its use is limited to only the 22 states that currently allow manufactured homes to be converted to real estate. However, the program provides an indication that the mortgage industry is starting to recognize the significance of manufactured housing.
Problems in Finance System
The number of manufactured homes titled as real property has been increasing, but most new homes are still financed by personal property loans. In 2000, 75 percent of the new homes placed nationwide were titled as personal property.
Most buyers purchase their homes through a retailer, and most retailers have relationships with financing companies. The relationship allows them to offer financing for the home in the form of personal property loans. Thus, the buyer can get the home and the financing in one easy process and in a matter of hours. The retailer does not differentiate between homes placed on privately owned or leased land although if it is privately owned, the land may be used as collateral for the loan. For most buyers, the simplicity and speed of this system is very appealing, particularly when they are not presented with any other options.
In order to qualify more buyers and accommodate the increased production of homes in the 1990s, financing companies began relaxing credit and underwriting guidelines. Loans were approved without sufficient consideration of the overall debt-to-income ratios or the rent payment for a home placed in a lease community. In addition, retailers found ways around the down payment requirements, so buyers were able purchase the homes with very little upfront expense. The loans were structured to appear more affordable, by extending the term of the loan in order to lower the monthly payments. The buyers saw a monthly payment they could afford but were not informed of the long-term costs associated with paying a high interest rate over a much longer period.
The commissions and other incentives to produce, sell, and finance homes lured all players into rapidly expanding the industry. There was little incentive for the retailers to encourage buyers to consider other options, despite the fact that many new homes were placed on private property and could have qualified as real estate. The industry was well served by this system throughout the 1990s, posting stellar profits and attracting the attention of Wall Street investors.
The past several years, however, have brought a significant change to the industry. The largest financing companies have seen a rapid increase in the number of repossessions due to their emphasis on quantity over quality. These companies have had to take significant losses and have lost investor confidence. While there is still a large manufactured housing finance market, the companies have had to change their practices to ensure better quality loans.
One of the biggest problems with the current finance system for manufactured housing is the lack of regulation and consumer protection with personal property loans. All real estate transactions are subject to the Real Estate Settlement Act (RESPA), which requires property appraisals and prohibits commissions and the payment of excessive fees. In addition, Regulation Z (Truth in Lending) and the Home Ownership and Equity Protection Act (HOEPA) require the disclosure of the loan rates and terms and regulate potential predatory practices.
Personal property loans are not subject to these regulations, which is why they are so much easier to originate and more profitable than conventional mortgages. Homebuyers, attracted by the chance to own a home with an affordable monthly payment, are not provided with the information needed to make an informed decision about the true cost of buying the home. The lack of an appraisal also allows disparate pricing, with the retailer setting the price based on the monthly payment each individual buyer can afford.
The lack of resale financing is another concern with the current financing system. Most lenders are reluctant to provide a loan to purchase a home from a source other than a dealer, even if the home is permanently affixed to private property. Thus, the resale market is limited to buyers who can afford a cash transaction, and the seller may be forced into accepting a lower price than is needed to even cover the outstanding loan balance. This lack of financing has significant implications for the ability of the homes to appreciate and therefore on the homeowners’ ability to build equity.
Manufactured housing is a lower cost and sometimes more appealing alternative to conventional site-built homes. Construction costs are generally less than half the costs for a site-built home, primarily because of the economies of scale associated with centralized production and purchase of materials. Secondly, because almost all construction is done in the factory, the on-site work is limited to securing the home to the land. Thereby homes can be occupied in a matter of days, which helps reduce security and other soft costs.
Manufactured homes are also very appealing to potential buyers because they can customize the home to include the colors and amenities they desire, which is not always an affordable option with site-built homes. The cost savings and the improved quality of the homes provide a strong argument in favor of the affordability of manufactured housing.
The manufactured housing financing system, however, must be improved if the goal is providing affordable housing for low-income homebuyers. The total costs associated with the current system are much greater for the buyer than the actual price of the home. The higher interest rate greatly increases the total cost, particularly since interest payments on a personal property loan are not tax deductible as they are with a conventional mortgage. This system also limits the opportunity for homebuyers to realize other benefits of homeownership, such as building wealth through property appreciation.
Improving the System
Making the improvements to the financing system is going to require a comprehensive effort by all of the players. Most importantly, a major educational campaign is needed. Homebuyers need to be educated on all financing options available to them and the total cost of buying a home. Affordable housing advocates are key to the educational campaign and should include education on manufactured housing when providing homeownership counseling as appropriate.
The conventional mortgage industry needs to be made aware of the changes in the manufactured housing industry and the need to accept these homes as real property. The conventional mortgage industry should be encouraged to develop products that better meet the needs of manufactured home buyers and utilize appropriate underwriting standards. If the conventional mortgage industry starts to play a more active role, retailers and financing companies will be forced to change their practices in order to compete with the mortgage industry.
The financing system will be greatly improved if the homes that qualify as real property can be financed as such with a conventional mortgage. However, this will not be an option for all homebuyers, and it is critical that these buyers are protected as well. Financing companies must continue to enforce strict underwriting criteria in order to ensure that buyers can afford the home. The number of buyers may be reduced, but the quality of the loans will be better and the number of repossessions should decrease, helping both the industry and the homeowners.
Park owners and developers must also be included when considering how the system can be improved. The industry, and particularly lenders, need to encourage park owners and developers to offer more creative leasing options, including long-term leases, in order to take advantage of opportunities like the new Freddie Mac program.
Finally, the financing system will be greatly improved if government-sponsored programs become more widely available. The problems with the FHA programs discussed earlier need to be addressed, or new programs should be created in their place to reduce the lender’s risk and to encourage more lenders to provide affordable financing for this industry. In addition, Fannie Mae and Freddie Mac could play a greater role in providing a secondary market for manufactured home loans, particularly if more homes are financed as conventional mortgages.