FHFA’s Manufactured Housing Reform: A Missed Opportunity?

The Federal Housing Finance Agency has just issued a notice of proposed rule-making that will change how the GSEs approach the acquisition of manufactured housing. It is part of a larger response on the treatment of under-served markets, and the proposed rule would effect not just manufactured housing, but also affordable housing preservation and rural housing.

This rule-making is a long time coming, but I am going to contradict the gospel of progressive non-profits acting in this field and say that I think it the very proponents of manufactured housing have conspired to limit the gains that could have come from the FHFA’s interest.

The new rules put the GSEs on the hook to buy more manufactured housing mortgages, and to at least venture into providing capital for parks, too.

If you have followed the story of manufactured housing, you would know that this industry tanked in the early 90s when Greentree and Conseco withdrew from the secondary market for these loans. Good financing dried up. It is hard to get a mortgage on a “trailer.”today almost two in three applications to get a loan for one of these properties is denied. Of those that are approved, sixty percent bear interest rates that exceed the current standard for high cost: they are at least 300 basis points above comparably termed Treasuries for first lien loans, or 500 for second lien loans. Since most of these loans are for 15-year terms, the relative affordability of a manufactured home is muted by the expense of financing. It is a market that shouts “under-served.”

Even worse is the fate of the parks where many of these properties are ultimately sited. There are several troubling trends here. For one, the first response by land-use planning departments is reliably to say “not in my backyard.” These parks rarely get sited on choice land. All too often, they end up in out of the way places, where there is no sewer or city water. The roads aren’t paved. There aren’t any lights. In some instances, there isn’t even enough space for firetrucks to turn around.

All of that means that new parks aren’t being started. Of course, there are other factors. For one, many manufactured housing communities are located in rural areas. Rural areas are not doing so well these days. America is losing the kinds of jobs that work in these places. In North Carolina, we have lost most of our textiles, much of our tobacco, and just about all of our furniture industries. What is left? Government. The new answer is to site prisons, landfills, and military bases. The last is fine, but the others are no boon at all.

Then there is the lack of financing for parks. Banks are willing to make loans on these parks, but usually they are reticent to finance the entirety of a park. The second is still needed, and it hard to get that last twenty or thirty percent. Even the very institutions that should be serving these markets – state housing finance agencies – are largely disinterested. In North Carolina, the NCHFA won’t even offer to make loans on the land for these parks, let alone for a finished community.

Enter the reforms by FHFA. The FHFA solicited comments last August. They received 100 comments from non-profits and policy advocates, as well as from trade associations and industry.  The comments from the latter were understandable. This is an industry that has had to work without the benefit of financing for its customers, on top of systematic crises born by fuel costs (many make RVs) and by the disastrous public relations snafu that was the aftermath of Hurricane Katrina. The industry that still exists are just the ones left standing: In the last year, Fleetwood entered bankruptcy,  as did Champion.

The non-profits argued for FHFA participation, but they didn’t speak on behalf of manufactured housing’s most needy issues. In financing, rather than argue for policies that would provide relief for chattel lending, pushed to set aside FHFA help only for units classified as real property. That’s a hard line to hold. The Census Bureau reports that 63 percent of new mew manufactured homes purchased for residential use were classified as personal property.

The rationale among the non-profits is understandable, even though it is a self-reinforcing position. They observe that financing costs are higher for personal property. Yet, that is exactly the kind of problem that might be relieved by more GSE demand. As it is, those loans are largely packaged into asset-backed securities.  At this moment, demand for those kind of products is best described as “limited.” Actually, that is the exact word that industry used to describe the predicament. “Non-existent” would also be a fair term.

To be fair, some non-profits offered some better solutions. Some said that the GSEs could buy those personal property loans if they were required to meet some basic standards. The expectations weren’t that high – keep interest rates low, exclude those with prepayment penalties, ban yield spread premiums, and impose the expectation that lease terms extend beyond the life of the loan.

Maybe the real property standard will help. Actually, that’s fairly certain. It will allow originators to pass along some of the benefits that they experience when selling loans to the GSEs on to consumers.

The non-profits probably caused more trouble with the issue of financing for parks. Given some of the preferences among the current non-profit manufactured housing cognoscenti, the preference out there is for co-operative and non-profit owned parks. That is where the action has been in the last few years. Indeed, these efforts have brought a lot of success to residents in New Hampshire, Vermont, California, Kentucky, Nevada and Florida. However, they have largely been limited to a few states. In the South and Southwest, where manufactured housing is most prevalent, it is still a market defined by the classic “trailer park.”  You know what it looks like – a shapeless piece of land dotted by broken-down singlewides and gravel roads. It is a picture of disinvestment.

I think it is great to see more financing available to those “best case scenario parks.” I just think it is a shame that those benefits won’t extend to the great majority of parks.  Tons of parks are being closed across the country, and the mass evictions are the result.

What a missed opportunity. The need is greatest for conventional parks, as well as for people living in homes that are financed as personal property. An improvement in service to the under-served should address need first, and not cater to enhancing only a few parks that are already well-served by existing solutions.