Partners (Winter 2002)
Partners (Winter 2002)
Over the last 10 years, the manufactured housing industry has experienced significant growth in the sale of new homes. In 1990, manufactured home producers shipped 188,172 units to retailers. By 1998, the annual total had almost doubled at 372,843. However, production plummeted to 250,550 in 2000.
Many factors attributed to this decline, including overproduction, poor underwriting, and significant losses in the industry. There is an indication, however, that corrective measures are being made to improve the industry’s prospects for recovery and future growth.
Many say the industry was a victim of its own success. High margins of profitability lured a number of new manufacturers, retailers, and lenders into the business. Manufacturers continued to increase the production to supply the new retailers, which eventually created an excess supply of these homes on the market. According to Eric Belsky, executive director of the Joint Center of Housing Studies at Harvard University, “Manufacturers focused on shipments rather than placements. When shipments overshot placements, inventories rose.” Retailers made money off origination fees, so they looked to sell and finance as many homes as possible. The increased volume of sales from the retailers meant more production by the manufacturers.
Poor Underwriting Standards
With keen competition for market share of this booming business, the credit underwriting policies for many of the lenders were loosened substantially, bringing in a higher-risk customer base. According to R. Dean Stalcup, senior vice president of business development for GreenPoint Credit, lenders lengthened loan terms and introduced seller buydowns with points being financed on contracts. The 5-percent-down-payment was introduced, more loan offices were opened to provide local service to more retailers, and credit standards were changed to allow each lender to maintain or increase its market share. More loans were required to pay increased lender costs. Therefore, more applicants had to be attracted, and lower credit standards seemed to be the way to get them.
The emphasis in the industry was on loan volume, not loan quality. However, this growth could not be sustained. The market became saturated, and sales did not keep pace with production, leaving retailers with large inventories of homes that could not be placed. Simultaneously to the decrease in sales, there was a significant increase in the number of loans that were defaulting and the homes repossessed.
According to a New York Times article dated November 25, 2001, Green Tree Financial, now owned by Conseco, financed more than 40 percent of all manufactured homes sold in the United States during the industry’s peak. In 2000, Conseco recorded 28,466 repossessions, and it appears this will be matched in 2001, with an estimated 25,000 repossessions already reported as of October. Many more of the low-income borrowers could lose their homes before this crisis is over. The hundreds of retailers and manufacturers that were lured into the market by the high industry profits initially have found themselves with heavy losses and are exiting the market.
Most of the industry’s larger lenders use a common process called securitization as a source of funding. The lender would resell its loans to outside investors by grouping thousands of small loans into a pool worth hundreds of millions of dollars. The pool would then be divided into a series of bonds and sold with a promise to pay interest on the bonds from the interest it collected on the loans. Because the loans to customers carried interest rates at 12 percent or higher and the bonds were sold at 6 or 7 percent, the lender made a profit on the difference.
Several manufactured home lenders applied a rarely used accounting procedure called “gain on sale.” Gain-on-sale accounting enabled the lender to book the total projected profits on a long-term loan every time a block of loans were securitized instead of the standard accounting procedure of only accruing profits as the loans are repaid.
Earnings increased significantly for the large lenders during the mid-1990s, but those profits were not based on actual cash the company had made. In reality, earnings were a fabrication based on the company’s projection of the payments it would eventually receive, less operation costs and losses on repossessions. Earnings were further overstated because the number of repossessions was significantly underestimated, and therefore losses were much greater than budgeted.
Industry’s Corrective Measures
The inventory of homes currently available through the manufacturers and retailers is estimated to be sufficient to meet projected demand for the next couple years. Many of the large manufacturers have reportedly closed numerous retail locations and some manufacturing plants to reduce inventories to match market demand.
Only the strongest are likely to survive the drastic changes the industry is undergoing. Some manufacturers have installed new inventory systems and are reorganizing their retail sales force. Fleetwood reported in its 2001 annual report that it idled 10 of its manufacturing plants and reduced inventories at company owned retail centers by 34 percent. Champion, in its Third Quarter 2001 Report, reported operating 49 plants, down from 55 since September of 2000. They also revealed that their 229 company-owned stores had an average inventory of 13 new homes per location, down from 18 homes at the 270 locations operating last September.
In an effort to reduce the number of repossessions, charge-offs, and delinquencies, a greater emphasis has been placed on the credit underwriting process. Most lenders now require satisfactory credit and use credit-scoring systems to qualify potential buyers.
In the March-April edition of Modern Homes, Chris Stinebert, president of the Manufactured Housing Institute, stated that the Institute will focus on the implementation of a “Lenders Best Practices” program that has the full support and participation of all the major manufactured housing lenders. This involves expanding the role of community banks and mortgage bankers in manufactured housing finance and improving the primary and secondary mortgage-backed securities markets.
Stinebert further states that “[it is] critically important that financial lenders operate on a level playing field, without the need to compete with each other through ill-conceived incentives or taking on bad credit risks simply to win the deal. The Lenders Best Practices Program will ensure that financial lenders compete in a common sense manner without the need to resort to unsound business strategies that have plagued our industry for far too many years.”
Improving Product Design
The manufactured housing industry has come a long way in improving the quality of manufactured homes, but additional efforts are needed to produce more durable products and pursue new innovations in design. These efforts will help address the negative public perception of the homes, which continues to be one of the biggest constraints on the industry. Using higher quality materials will extend the life of the manufactured home so the homes will more resemble site-built homes. In addition to improving marketability, better quality homes will lend support to the argument that these homes should be considered real property.
The industry has also recognized that design changes are needed to expand the market to include urban communities. Manufactured homes could be an important component of a strategy to address the affordable housing shortage across the country; however, they are often excluded as an option because the current design does not fit the existing character of urban neighborhoods.
The industry is interested in providing homes for urban areas and has conducted a demonstration project in cities across the country to show that manufactured homes can provide both an affordable and aesthetically appropriate option for housing in urban areas. The best example of an urban manufactured home development is Noji Gardens in Seattle, Washington, where 75 two-story manufactured homes were constructed. The industry must continue pursuing these efforts in order to expand into new geographic and demographic markets.
Expanding Customer Base
The industry has traditionally pulled from two markets: the retirement community and low- income households. Demand for manufactured homes was driven by the low cost and ease of maintenance. However, with the advances made in product design and quality, people are changing their perception of manufactured homes, and new types of consumers are considering manufactured homes. These include single women, retiring members of the “baby boom generation,” as well as well-to-do buyers seeking second homes or vacation houses in resort communities. The "baby boomers" who are over age 50 appear to be the fastest growing group. This changing consumer market should provide the industry with new customers for years to come.