Government funding programs
In order to loosen the grip on financing, the industry is seeking greater access to the three government-sponsored funding sources that have traditionally worked to make home buying more affordable-Freddie Mac, Fannie Mae and Ginnie Mae.

According to James Clifton, Ph.D., chief economist at the Manufactured Housing Institute (MHI), manufactured homes are often left out of these government funding programs because the government hasn't included manufactured housing in its definition of "affordable housing."

"You can get a government-backed loan to build an apartment building or a row of townhouses as low- or moderate-income dwellings. But because of the narrow definition, you can't do the same to build a manufactured home community," said Clifton.

Freddie Mac (Federal Home Loan Mortgage Corporation) is a private, government-chartered corporation that operates in the "secondary market." Freddie Mac operates by buying mortgages from lenders and packaging them into securities that other companies buy as investments. The securities are guaranteed by Freddie Mac, which then uses the funds from the security sales to buy more loans. And because Freddie Mac has purchased its loans, the original lenders have new funds with which to grant more mortgages. And so the cycle goes-money from these entities ensures the availability of home loans for Americans seeking to purchase a home.

After many years of discussion and work, Freddie Mac introduced a new program for leasehold manufactured home loans in April. The program, called "Manufactured Housing and Leasehold Estate Mortgage," ensures that Freddie Mac will buy these "leasehold mortgages" on the secondary market, provided they meet specific criteria. Among the criteria for participation are long-term community leases (five years beyond the term of the mortgage), permanent foundations and taxation as real property, unless the state or local jurisdiction requires that the home be taxed as personal property.

"This is a significant step forward. But it is only the start of what must happen across the board to bring adequate financing to the industry, especially in the area of home-only loans," said Clifton.

Like Freddie Mac, Fannie Mae (Federal National Mortgage Association) is a company that operates in the secondary market. Its congressional charter directs it to increase the availability and affordability of home ownership to low-, moderate- and middle-income Americans. And like Freddie Mac, Fannie Mae accepts portfolios of manufactured housing loans, if homes are permanently attached as real estate, but does not operate in the home-only loan market at all.

While MHI is currently in high-level talks with Fannie Mae, it currently works only with conventional loans in the real estate sector. Because of this, only upscale manufactured homes that are sold with the property qualify. There is no chattel option for buyers with more modest incomes at this time.

"We'd like to see them offer secondary market support for chattel loans as well," says Clifton.

Ginnie Mae (Government National Mortgage Association) is the third government-sponsored enterprise operating in the secondary market. Unlike the others, it is government-owned and is a part of the Department of Housing and Urban Development. Ginnie Mae operates to back securities by approved private institutions. The securities are insured by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VHA) or Rural Housing Service (RHS). Ginnie Mae operates the program that ensures the funds are backed by the full faith and credit of the United States government.

At the same time that private lenders are making chattel loans more difficult and expensive for low-income manufactured home buyers, there is a moratorium on new loans under the FHA Title I program, which provides personal-property loans.

"In today's market, affordable rates are not available for the single-section home buyer," says Tim Williams, president of 21st Mortgage, in Knoxville, Tenn. "Lifting the moratorium would revitalize this all-important sector of the manufactured housing market."

"In the past, when the industry hit rough spots in the financing arena, the FHA Title I program helped pick up the slack. This moratorium effectively removes that safety net," said Clifton.

How did we get there?
Not long ago, the manufactured housing industry was seeing a boom. The years 1996-99 witnessed a spike in home sales, thanks in part to an interest by Wall Street, which eagerly financed purchases using asset-backed securities.

Sales rose, but the industry, "got out of kilter," according to Martin V. Lavin, of Mortgage Services and also vice chairman of MHI's Financial Services Division. Walt Young agrees, "As an industry, we sold to people who shouldn't have bought homes. The bubble burst in the summer of '99."

Repossessions jumped. "For every 100 homes you finance, you'll repossess 20," Lavin says. He estimates that there will be 100,000 repossessions in 2001.

And from the financial end, those finance companies that didn't leave the game raised rates and underwriting standards and shortened loan terms.

"What you're seeing now is a more appropriate rate to cover the risk in current market conditions," said Zych.

Where do we need to be?
So what will help the industry gain access to greater financing?

First and foremost, better terms from banks. Walt Young believes once the repossession rate drops, the manufactured housing industry will be back in balance and chattel loans will become more attractive to private lenders.

"What we will see going forward will be a little [better] balance on underwriting standards," said Young. "Existing or new finance companies will drop rates-more like the more traditional three percent over mortgage rates."

Zych says the lending industry already is doing a number of things unrelated to interest rates to make manufactured housing more affordable. "We're adding mortgage-like parts to the puzzle"-longer terms, lower down-payment requirements, and the option for customers to buy down the rate. "The result is a lower monthly payment," he says.

At the same time, manufactured housing industry leaders are looking for government-sponsored Fannie Mae to enter the chattel loan arena, much the same as Freddie Mac has recently done.

"If I had a wish list, I would like to see the dialogue elevated to the highest level of Fannie Mae," says Dick Ernst, president of Residential Loan Corporation, in Dallas Texas.

"There's a new mutuality of interest," says Clifton. "Fannie Mae and Freddie Mac have come under significant criticism in recent years as being too risk-averse given their charter to encourage homeownership for people of modest means."

The move by Freddie Mac and talks that are being undertaken with Fannie Mae are given impetus by the implementation of the Manufactured Housing Improvement Act (P.L. 106-569), which President Bill Clinton signed into law last December.

"The language in the act specifies that manufactured homes are affordable housing," Clifton says. "That language should encourage Fannie Mae and Freddie Mac to include us in the national goals for affordable housing, from which we have been historically excluded because of the way our homes are financed."

The top item on the wish list of Tim Williams of 21st Mortgage is to, "lift the Ginnie Mae moratorium on new issuers [of FHA Title I loans]. That is critical to adding liquidity to the manufactured home mortgage market," he said.

Clifton agrees, "HUD has traditionally excluded manufactured homes in its definition of affordable housing because they aren't normally financed by conventional mortgages. Lifting the moratorium on Title I by administrative action would be a positive signal to our industry that HUD is including us in its affordable housing goals for the country."

And at the same time, the industry must follow sound business principles by not refraining from the extension of credit to people who simply can't afford it.

To increase the size of the market, Martin V. Lavin of Mortgage Services says the industry needs to expand sales to groups that can pay-"between our upper-end and the low-end of conventional housing." One such group is retirees, who may wish to relocate to upscale manufactured home communities.

In 2001, the manufactured housing industry is poised to a return to equilibrium and, having learned some lessons, is looking ahead cautiously. By opening doors to greater access from the lending community, the industry stands to become a strong competitor in the wider housing market.

"One of the key things MHI has done is create a Lenders Best Practices (LBP) program," Clifton says of the initiative, "The LBP is intended to correct the financing abuses of the past business cycles and make sure there is no repeat performance."

"This industry found religion in the last 20 months," Walt Young says. "We need to keep to sound business practices."

© 2002 by Manufactured Housing Institute. All rights reserved.