July 6, 2017

It has been more than 10 years since I last looked at the market for manufactured housing, my excuse being that nothing much had happened that justified another look. But now something has happened: Fannie Mae and Freddie Mac are planning to support the market for chattel loans on manufactured housing. The agencies are being pushed to do this by their regulator, the Federal Housing Finance Agency (FHFA), in compliance with their “Duty to Serve” requirement under the Safety and Soundness Act.

This makes sense because, according to the US Census, the average price of a manufactured house today is about $70,000 compared to $350,000 for a site–built home. So long as Fannie and Freddie remain in conservatorship operating as wards of the Federal Government, their principal mission remains that of meeting the housing finance needs of low and moderate income households. The big question for the agencies is how to provide financing for manufactured housing without incurring excessive risk.

What Is a Manufactured House?

A manufactured home is built entirely in a factory, transported to a site, and installed there. Usually they are built without knowing where they will be sited, and are subject to a Federal building code administered by HUD. Most often, manufactured homes are financed with chattel loans rather than mortgage loans.

 A manufactured home is distinguished from "modular", "panelized", and "pre-cut" homes, in which parts are factory built but are assembled on a pre-specified site.
These other types of factory-built housing comply with the local, state or regional building codes that apply to that site, and are financed with mortgages, in the same way as houses constructed entirely on-site.

What Is a Chattel Loan?

The word has a long and diverse history, but when applied to a manufactured house it means that the collateral provided to the lender is the house exclusive of the land on which it sits. While manufactured houses are no longer referred to as “mobile homes,” and they are seldom moved from the site to which they are fixed, default rates and losses from defaults on chattel loans have been closer to those on automobile loans than to those on home mortgage loans.

Why Chattel Loans on Manufactured Houses Have Had High Loss Rates

 Perhaps the major reason is that the value of the collateral securing the loans tends to decline over time, in contrast to site-built houses, which tend to rise in value. For one thing, the collateral securing chattel loans does not include land value, which accounts for a large part of the price appreciation on site-built houses. If you don't own the land, you don't realize this benefit.

A second cause of declining collateral value is rising rents or reduced availability of house sites. If the house sits on rented land, an expiration of the lease puts the owner at the mercy of the landowner. If the landowner decides that it is more profitable to use the land in some other way, the manufactured house owner must move it or leave it. Since the cost of moving is very high, the lender's collateral may end up in the trash heap.

In addition, manufactured houses have had more defects than site-built homes, and many have not been anchored securely to their foundations, making them vulnerable to natural disasters. Hurricane Andrew in 1992 destroyed almost all of the manufactured houses in its path, compared to about one-third of houses built on-site.

The Better News

Despite these problems, manufactured housing has enormous potential for relieving the shortage of affordable housing. A square foot of house costs significantly less to produce in a factory than on a site. The challenge has always been to find ways to take advantage of factory-generated economies of production without the diseconomies associated with placing a home on a site that is owned by someone else.

Several community groups have arisen to deal with these diseconomies. I recently spent several hours on the web site of one of them (NMHOA) which has a comprehensive policy agenda focused primarily on state laws that affect owners of manufactured houses, as well as the owners of rent parks containing manufactured houses. These laws vary widely in the extent to which they allow or encourage owners of manufactured homes to accumulate equity.

Which made me wonder how Fannie and Freddie would approach the problem? Their charge from FHFA is to provide “support for chattel financing,” but in the same document, FHFA points out that “the percentage of new manufactured homes titled as chattel increased from 67% in 2009 to 80% in 2015”. Why did it not task Fannie and Freddie with reversing this unfavorable trend? From a policy perspective, the first priority ought to be to encourage mortgage financing, because it encourages equity growth that chattel financing often subverts.