Does this sound familiar?

Let me describe the state of an unnamed sector of the financial services market:

Stage One:

A healthy securitization market develops to buy loans. The new liquidity prompts lenders to make more loans. Borrowers, suddenly given the green light to buy homes, turn out in ever increasing numbers. Home sales go up. Builders prosper. Lenders get wealthy.

Stage Two:

Lenders, now flush with cash and operating with the , develop innovative new products that further extend the interest in buying homes. Suddenly a tipping point is reached. Mistakes are made in underwriting. Loans go bad. Investor cease to buy securities. Lenders hold loans. Restatements occur. Homes are repossessed. A glut of new homes builds, depressing the value of existing homes. Residents are “under water” in their mortgages – meaning that they owe more on their home than it is worth.

What am I talking about?

Well, actually, these words must sound familiar to anyone who has been reading the papers lately. The market for site-built homes, and the mortgages that finance them, are going through some rough times right now.

Those words could also describe manufactured housing ten years ago. The mid nineties were a cycle of high production and easy financing that developed after the secondary market grew excited about the prospects of the high-reward interest rates available on manufactured housing loans.

What is odd, though, is that the current struggles in the U.S. site-built housing market are leading some to suggest that it could stimulate new gains for manufactured housing. Now that subprime loans have frozen up, the low prices associated with manufactured housing may become more significant in the decision making of home buyers.

“The longer the withdrawal of liquidity in subprime
lending persists,” writes Jon Thompson, a CFA with Advantus Capital, “the greater the likelihood of a recovery in manufactured housing.”

Thompson seems to be saying that investors should seize on this moment, on the logic that the manufactured housing industry has had some time to get its house in order.  He makes a few points:

• the glut of homes has finally dried up
• lending practices have sobered up and earned the trust of investors.
• things have to look up, if only because it will be easy to improve upon the low rates of shipments in recent years.

He examines vintages of loans at Conseco and Origen for their loss rates and observes how much better performing the newer loans (2005 and 2006) have been compared to those made in 2000.

Origen’s recent filings hint at the same story. The Michigan lender reported that non-performing loans decreased in 2007, to just 0.5 percent of their outstanding portfolio, and that loan originations were up by 31 percent.

Fleetwood reported a slight dip in revenues within its housing group, but an overall gain in operating income. They also note that they have been successful in selling modular homes for military bases. Fleetwood’s Trendsetter Homes division will build modular units for Fort Bliss in El Paso.

Thompson goes on to suggest that the lack of refinance products further serves to encourage investors in manufactured housing.

More sales could help residents of existing homes.  For one, a return to the sector would support the resale value of homes.  As well, more homes in parks would stabilize those environments.  Good neighbors make good neighborhoods.  Empty houses do not.