Doug Ryan is on a mission to persuade banks and regulators to create more financing options for manufactured homes — but he faces an uphill battle.
Ryan, director of affordable homeownership at the nonprofit Corporation for Enterprise Development, says manufactured housing is one of the best ways to expand homeownership to low-income families.
The problem is that most loans for manufactured homes are limited to personal property loans, similar to a car loan, and typically are originated by the captive finance arms of manufactured home builders such as Fleetwood Enterprises (FLE), Champion Homes and Palm Harbor Homes (PHHHQ). As a result, the loans typically have shorter terms, higher interest rates of between 6% and 14%, and higher monthly payments, which the nonprofit group claims undercuts the goal of helping low-income borrowers build wealth.
"There's a built-in bias against manufactured housing," says Ryan. "We want to show that these loans can work and that community banks should see this as a profit-making product, even if it's a small niche."
Many banks and mortgage lenders avoid lending on manufactured homes altogether because the loans cannot be sold to Fannie Mae or Freddie Mac. Lenders and investors also believe that loans secured by manufactured housing perform poorly, but there has been little research on the topic.
To nail down the data, Ryan's group released a study last month that analyzed $1.7 billion in loan performance data from 20 organizations, including housing finance agencies, credit unions and a handful of banks.
The study found that defaults of manufactured housing loans averaged 9.7% at Dec. 31, 2012, slightly better than the 10.8% default rate of government-backed loans tracked by the Office of the Comptroller of the Currency — but only when loans from the U.S. Department of Agriculture's rural development 502 loan programs were excluded from the data. Defaults jumped to 15.9% when the USDA loans were included.
Some state housing finance agencies that purchase and service manufactured housing loans report even lower default rates.
Rod Whitson, president of Bank 2, a $102 million-asset community development bank in Oklahoma City, says manufactured housing loans are tricky because a borrower typically only owns the home, not the land beneath it, so by nature the home is a depreciating asset.
Bank 2, a unit of Chickasaw Banc Holding Co., which is owned by the Chickasaw Nation, supports Department of Housing and Urban Development Section 184 loans for manufactured homes on tribal lands.
"The rates on car loans are what you see on manufactured housing loans," says Whitson. "The consumer groups want banks to offer loans at lower rates, but I'm not sure this is an underserved market. It's a niche that may be better served by nontraditional lenders who better understand the risk and can better price it."
Three other major federal programs insure or make loans on manufactured homes: FHA Title I (also known as chattel loans) and Title II (mortgage loans), USDA Rural Development 502 program guaranteed and direct mortgages, and Veterans Administration mortgages.
Howard Banker, executive director of the New York nonprofit Fair Mortgage Collaborative, and a co-author of the study, says manufactured housing is not "a magic bullet," for lenders or borrowers. But he holds out the hope that more bank lenders will extend credit in light of the study's findings.
"Many lenders are put off by the idea of manufactured home loans, and we wanted to show that they can perform as well as other types of loans, and even better with high-touch servicing," Banker says.