The Federal Reserve has given advance notice of a proposed rulemaking on Regulation Z. As you may or may not know, Regulation Z concerns how consumers should be protected from deceptive and/or harmful lending. It often plays a role in litigation surrounding claims of predatory lending.

The Manufactured Housing Institute, aware that the change would govern almost three in four loans on manufactured housing, is seeking to energize its constituency to manufacturers, dealers, and park owners.

The new rulemaking, announced on Feb. 13th, would impose four new requirements on all loans that bear a high interest rate.

A “high” (Higher Priced Mortgage Loan – HPML) interest rate is designated as one that is 300 basis points above Treasuries. While only about one in four stick built homes would fit this criterion, MHI says that 70 percent of manufactured housing loans fall into that group. So, while this rulemaking may be aimed at impacting a small subset of the larger housing market, it would become a primary aspect of future manufactured housing lending.

HPMLs would have to demonstrate that the lender

• considered a borrower’s ability to repay the loan
• verified the income and assets of the borrower
• established escrow accounts to pay for taxes and insurance
• and that the loan, if it contains prepayment penalties, meets certain additional tests.

The Manufactured Housing Institute (MHI) has decided to fight this proposal. They have drafted a form letter for their members to submit to write to the Federal Reserve.

MHI believes that while only about one in four site built homes will be subject to this standard, that almost all manufactured housing loans will be HPMLs.

They assert that manufactured housing lending deserves a different treatment.

True, manufactured housing lending already melted down in 2001 and 2002. The fast and easy money that some would say contributed to this current financial crisis is not available in manufactured housing. More than half of all loan applications for manufactured housing are turned down.

MHI makes some strong points to show how things have changed: most loans that are originated are fixed rates, for terms shorter than 20 years, borrowers usually make down payments of at least 15 percent, and the average credit score in manufactured housing lending is above 700.

Some recent news also shows how manufactured housing lending is behaving in ways that defy historical expectations. While almost 6 percent of all mortgages were delinquent at the end of 2007, recent reports show things are better in mh. Origen’s portfolio, for example, for its 2007-a pool had a delinquency rate of 1.13 percent.

It is one thing to agree with MHI that lending on manufactured housing has improved. The next question is how to best protect consumers against predatory lending in a way that keeps regulation up to date with financial innovation.

MHI’s preferences are to cede to the Federal Reserve on creating a new regulatory scheme based upon interest rates. They would set the bar higher, though, at 600 and 800 basis points for manufactured housing loans in first and second lien positions.

They would avoid requirements on escrow altogether.

Origen Financial, the Michigan-based REIT, announced losses of $39.1 million in the fourth quarter of 2007 today.

Origen is a large originator as well as a securitizer of manufactured housing loans.  It is one of the businesses with the most concentrated exposure to manufactured housing finance.  For that reason, it offers some good insight into what is happening to manufactured housing lending.

Origen acknowledged in its conference call today that it had a rough quarter.  Here were some of the ‘high’ lights:

• As its share price ($0.95 per share) was now well below book value ($7.87 per share), Origen elected to write off $32 million in goodwill.
• Although it has paid a quarterly dividend in the past, Origen suspended its dividend this quarter.

Origen finds itself a victim of the credit troubles roiling the whole economy.  Origen would prefer to package its loans and sell them on the secondary market.  It needs to sell some of those loans in order to satisfy its ongoing debts.  Right now, Origen can’t sell its securitizations.  It has resorted to selling loan elsewhere.  Those loans, sold at distress prices, are not generating ideal value for the company.

In fact, Origen would have been profitable for the year, were it not for the impairments it took in selling its loans.  The company reports that it would have made $9.7 million.  However, in February of this year, Origen sold an asset-backed security for $22.8 million to satisfy four obligations.

There are some consequences to today’s filing.  For one, Origen announced that because of the lack of an exit for its loans, that it will cease originating new manufactured housing loans.  It will continue to take on loans through 3rd party channels — presumably loans from brokers — but this certainly slows the flow of loans.

Since it is one of the largest lenders (US Bank, Clayton, and GreenTree are the others) for manufactured housing loans in the country, the availability of capital for borrowers will surely suffer.  New shipments are declining.  This probably makes the recovery of builders an even more remote possibility.

The company needs to address how it will meet obligations on its $146 million warehouse facility.

Origen plans to seek some alternatives.  If there was ever an invitation for a grave-dancer, then this is it.

Supporters of California’s Proposition 98 come from two discrete and somewhat separate factions. That alliance is holding, but it could crack.

Often known through its simple slogan, “Yes on Prop 98, Protect Property Rights,” a supporters include farm owners, libertarians, a set of tax payer advocacy groups, small business people, and some representatives within the Republican Party. Also, Drew Carey and Daniel Guggenheim.

The Farm Bureau are among several whose motivation stems from a desire to protect the interests of their members in the wake of the Kelo Decision. Kelo gave municipalities more power to use eminent domain to seize land or property for economic development purposes. This was a new wrinkle. Also, given the broad interpretation of what constitutes economic development, Kelo could potentially expand the power of the government in ways that are not yet established.

The interest in thwarting rent control is another issue dear to the agenda of property rights advocates.

Supporters of the Howard Jarvis Taxpayers Association, a group spearheading the Proposition 98 campaign, count contributors from mobile home parks and large apartment complex owners as well.

The question remains open about how well these related, but still separate interests can co-exist within the same proposition. While landlord groups such as apartment REITs or park owners have concerns for both eminent domain and rent control, the latter is most likely an academic interest, if any at all, to farmers or small business owners.

Jon Coupal, President of the Jarvis group, acknowledged this in a recent interview.

“I can tell you that the two top contributors to the initiative are the Howard Jarvis Taxpayers Association and the California Farm Bureau, neither of which are that focused on the rent-control element,” Coupal said said in an interview with Capitol Weekly on Feb. 28th, “All this crap from the other side that the whole thing is about rent control is just not true. The core of our initiative is the eminent domain reform.”

Politics makes strange bedfellows, though. The eminent domain advocates have put their weight behind 98 and usurped the rent control interest.

In turn, mobile home park groups have stepped up the plate. More than one-quarter of all monetary contributions (about $450,000) come from mobile home groups, according to current records from the California Secretary of State’s office.

A lot of support for Prop 98 comes from outside of California. That interest is not from the agricultural or small business lobby, but solely from within the manufactured housing industry. Groups in Illinois, Arizona, and Indiana have together contributed $63,200 to Jarvis. The largest, not surprisingly, is Sam Zell’s Equity Residential Properties. Equity owns many mobile home parks across the country. Almost 30 are located in California. Equity Residential contributed $50,000.

In 2006, Equity Residential estimated the rent control at its California properties cost the corporation $15 million per year.

The largest monetary contribution comes from the Western Manufactured Housing Communities Political Issues PAC. WMA gave $150,000.

That could be a political mistake for the Farm Bureau and the other small business groups. Proposition 99 includes eminent domain protections, but it is not linked to rent control. That legislation has the support of labor, environmental groups, some state and municipal organizations, as well as the Golden State Manufactured Home-Owners League.

Government interests stem from belief that there is a place for eminent domain, such as when it comes to finding land to build new infrastructure or public facilities.

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.

When North Carolina Governor Michael Easley expressed his concern about formaldehyde in FEMA trailers, he joined a long list of critics. Easley was only the latest and perhaps an unusual voice.

What has not been said is that the manufactured housing industry was not entirely eager to be put in the center of the short-term reconstruction of the Gulf. The industry needed the sales, but still regrets the implementation and layout of the Katrina villages. FEMA’s land use plans went against prevailing wisdom within both the manufactured housing industry and the traditional public housing community.

In segregating the poor into concentrated communities, FEMA’s approach looked more like the Chicago Housing Authority (before Gatreaux) and less like Hope VI.

True, the acquisition of so many units provided a much-needed shot in the arm for sales departments of many of the leading manufacturers. FEMA bought approximately 20,000 trailers shortly after Hurricanes Katrina and Rita. Clayton Homes, for example, recorded more than $188 million in contracts from FEMA.

Nonetheless, the devil is in the details and that is where FEMA made trouble itself. The agency staged those trailers inland in places like Selma, Alabama and Purvis, Mississippi while seeking locations to establish new villages for displaced residents. Once they found their spots, they puts scores of displaced people in sometimes remote locations.

Newt Gingrich predicted that it would create “ghettos of despair.” Susan Popkin, a housing policy expert from the Urban Institute, simply said, “we know how to do this better.”

In the years since then, scores of encampments have sprung up. If the evaluation criterion was solely the ability of these units to provide temporary shelter, then they may have met that goal.

Unfortunately, there is no more permanent fix like the successful temporary solution. So, in some counties FEMA trailer parks are still intact.
The Katrina parks are now well-known eyesores. These communities remain, and as they persist, they become a vocal and malignant symbol of manufactured housing in the minds of the public. While one study found that rates of mental illness were high among Katrina survivors. Another report showed that rates of crime and drug use were high in the camps.

In a prescient Sept. 2005 note from the Manufactured Housing Institute, MHI pans the impact of the trailer communities. The note acknowledges the capacity for the FEMA plan to damage the reputation of the industry.

We also stated that the manufactured home industry is greatly concerned over FEMA’s plans to concentrate up to a thousand of these temporary homes, placed closely together, into large “cities” to house displaced victims. We noted the industry’s preference for FEMA to place these homes in smaller communities dispersed in multiple locations or incorporate them into existing manufactured home communities located throughout the affected area to lessen the social tensions and concerns inherent in these types of large, concentrated temporary “cities.”

The MHI statement goes on to say that “these FEMA-specified homes…” do not reflect the true nature of today’s manufactured homes or manufactured home communities, which provide a level of comfort and livability quite different from the images and perceptions being created by sensational media coverage. ”

The academics had doubts about the plan, too. One thought that it would re-create troubled neighborhoods. The Katrina parks create a rural version of the very set of problems that housing advocates have already moved past in urban areas. Think about the Richard Daley, Sr. approach to housing in Chicago.

Today’s approaches, implemented through Hope VI, focus on mixed-income, mixed use development plans. New Orleans began such a plan with the Department of Housing and Urban Development prior to Katrina.

The fact that Easley, as well as North Carolina Senator Richard Burr, have put manufacturers in their crosshairs, speaks to the fallout for the industry.

It tells us that you should not make toxic products.  It demonstrates once again that the manufactured housing industry has chosen short-term gains at the cost to its long-term reputation.  It dramatizes the consequences of letting an indifferent government agency have control of your reputation.