Will Private Investors Buy Manufactured Housing ABS?

Given the intention of policy makers at the Federal Housing Finance Administration, the manufactured housing industry may have to pin its hopes for recovery on the fickle interest of private investors on the secondary market.

They may have to wait.

Since 2001, the secondary market for asset-backed manufactured housing securities has been thin. The moment when Conseco imploded – the private investor that created most of the manufactured housing ABS – is when sales of manufactured homes begin their steep descent. In the late 90s, the industry sold as many as 300,000 homes a year. Last year they shipped about 50,000 units.

Only homes titled as personal property must be bundled as ABS. Some manufactured homes are able to qualify for mortgage financing, but the majority do not. All but a few homes delivered to a park are titled as personal property, because the ownership of the land is held by a different person than the owner of the home. In some instances, a person might have to title a home as personal property even when the home is sited on land that they own.

Manufacturers benefit when lenders can gain liquidity from a secondary market. It drives interest rates down and returns financing capacity to new sales. Some manufacturers have their own captive financing arms.

I recently spoke with a member of Congress about the crisis facing the industry. Although he had just heard from a series of industry leaders about the problems with financing, his only question with regard to financing was how more private investors could be brought in to the secondary market. With that hope, he was punting on an opportunity that would be within his power to facilitate: the expectation on the part of the GSEs to buy the loans.

Last year, FHFA sent out a notice of proposed rule-making where they signaled that it was not their intent to buy any loan for a manufactured home that was not classified as real property. This is the point where revitalization of the industry will either succeed or fail.

Today, the private secondary market investor is a rare species. If you spot one, let the manufacturers know. If you look at the approximately 4,000 loans originated by lenders whose primary regulator was the Department of Housing and Urban Development, almost 3,000 were never sold on the secondary market. Only 32 were purchased by private investors.

Loans face a hurdle and the problem is getting worse. Any loan made on a home whose interest rate is 8 percent points greater than a Treasury bill of comparable length triggers a special set of regulatory conditions. Under the Home Ownership and Equity Appreciation Act, lenders must make additional disclosures. In general, it is something that leads to additional scrutiny. The problem is getting worse because of the point of comparison. As Treasury and the Federal Reserve continue to buy down interest rates, the HOEPA threshold gets lower and lower.

Many analysts believe that without the GSE demand for securities, interest rates on standard mortgages for site-built homes  of the highest quality would go up by 300 basis points. It makes common sense. Would you rather hold a loan issued to a typical American household – where only about half have more than six months in liquid assets to cushion against a job loss – or to a middle quality corporation?

The evidence can be seen in the borrowing costs for medium term corporate debt. Yield on A2/A- Morgan Stanley debt is 7.117 percent today. Why would they loan money out without any kind of credit enhancement to a borrower with a far more risky credit profile of their own for anything approaching a prime rate? Well, although Morgan Stanley is a huge investor on the secondary market, they are not involved in manufactured ABS. GMAC does buy some of those bonds. Currently, their borrowing cost on 10-year debt is approximately 9.2 percent. There is simply no way that private investors are going to offer loans to borrowers that are trying to finance a home titled as personal property at any rate below the HOEPA threshold. Default rates on those loans are about twenty percent.

In this debt vacuum, builders often have to finance loans for homes that they sell. Selling homes starts to gobble up capital quickly.

The undercurrent for hoping that the private investors will return to the manufactured housing ABS market is driven by political will to eliminate the GSEs. The cries to do that were fervent last spring. You will notice that there is no serious legislation drawn up to realize that goal. People realize that it would crush any recovery in housing prices. Unfortunately, that means that the settling point is the status quo: do nothing.