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Time to End the Monopoly Over Manufactured Housing

For too long we have ignored a segment of our housing system that offers an affordable path to homeownership: manufactured housing.

A manufactured home is the only option for many low-income families to own a piece of the American dream. But those families often have limited access to competitive loan-pricing that is available to more conventional home buyers, thanks in part to low participation by Fannie Mae and Freddie Mac in the manufactured housing market.

The system currently discourages Fannie and Freddie from investing in manufactured housing. The two government-sponsored enterprises will more typically buy or securitize loans secured by real estate, while staying clear of "chattel loans" — used for most manufactured home purchases — a type of financing in which a home is not legally bound to its land.

That means borrowers of manufactured home loans often must turn to an uncompetitive market, dominated by Clayton Homes, which does not have to rely on the secondary market for capital.

But the recent Federal Housing Finance Agency proposal on Fannie and Freddie's "duty to serve" underserved housing markets offers hope. The FHFA's December proposal, mandated by a provision in the 2008 law that created the agency, would bring about two key reforms.

First, Fannie and Freddie would get "duty-to-serve" credit for doing more to finance manufactured home loans secured by real estate. While this would still exclude chattel loans, the proposal is meant to encourage states to change titling laws to recognize manufactured homes as real estate. (The proposal, as drafted, does not provide credit for chattel loans but also asks for comment on whether the GSEs should invest in chattel loans through a pilot program.)

Second, the mortgage giants would be required to consider expanding their buying of loans that finance whole manufactured housing communities. Those include communities with 150 rental sites or fewer; those owned by residents, nonprofits or government agencies; and those where tenants have certain protections. Of those three options, Fannie and Freddie would likely focus their compliance on communities with no more than 150 sites. Yet targeting only that segment may not be sufficient to have enough impact. We need to ask hard questions about whether Fannie and Freddie should get such an easy pass.

The plan could go a long way toward creating a secondary market for manufactured home loans, but only if states and others challenge the prevailing business model in the manufactured housing industry.

Manufactured housing is the largest source of unsubsidized housing in the country, home to 18 million people in 8.6 million units. But uncompetitive lending practices prevent residents from enjoying the many benefits that come from homeownership, including building family wealth.

According to the Consumer Financial Protection Bureau, even families who own the land beneath their manufactured home — and therefore in certain cases qualify for a real estate loan — tend to rely on a chattel loan.

Those borrowers often follow the suggestion of firms such as Clayton Homes, which dominates the market for building, marketing and financing of manufactured homes. The company has no need for Fannie and Freddie since it accesses the capital markets through its parent Berkshire Hathaway.

This is likely why it and the Manufactured Housing Institute — the industry's trade association — have been unwilling to criticize the exclusion of chattel loans from the rule, even though including such loans could bolster manufactured home sales by attracting new lenders. (For the record, we do not support including the typical chattel loan in the rule, but not for the same reasons that Clayton opposes it.)

Those dominating the industry likely fear incursions into their vertically integrated market. For example, the rule explicitly advocates for state titling reform to allow more manufactured home loans to be secured by real estate and therefore be eligible for GSE backing, but the MHI has actively lobbied against titling reform as it would direct lending away from the national behemoths to smaller, nimbler regional players.

Meanwhile, a pilot program to provide credit for Fannie and Freddie backing chattel loans would likely include certain protections and underwriting standards akin to the CFPB's criteria for "qualified mortgages." That would be anathema to many industry operators.

We need states, local lenders and housing practitioners to comment forcefully on this rule with a strong emphasis on the need for improved titling laws, and a safe chattel loan pilot program.

This pilot is an opportunity to explore financing for manufactured housing loans that are not secured by real estate, but are done in a nontraditional and responsible way. High-touch servicing and better underwriting could be extended to the chattel market if chattel loans are matched with lease protections and other assurances.

By imposing on Fannie and Freddie a strong and meaningful "duty to serve" manufactured housing, the FHFA can help provide owners of manufactured homes the value appreciation, consumer protections and financial stability that most homeowners take for granted.

Doug Ryan is the director of affordable homeownership at the Corporation for Enterprise Development.

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