A few days ago, I offered a critical opinion of HR 650 (the "Preserving Access to Manufactured Housing Act of 2015") would help manufactured housing manufacturers at the expense of the families that buy those homes. HR 650 claims to preserve access to manufactured housing by allowing lenders to increase the rates that they can charge before those loans become subject to additional regulatory scrutiny.
A better name for this bill might be "Doing a Little Something To Create Some Cushion Against the Risk-Adjusted Cost of Capital for Captive Finance Subsidiaries of Manufactured Housing Producers."
In its most recent annual report, Cavco Industries reflected on how state classification of manufactured homes as personal property impacts the availability of consumer financing:
"With respect to consumer lending for the purchase of manufactured housing, states may classify manufactured homes for both legal and tax purposes as personal property rather than real estate. As a result, financing for the purchase of manufactured homes is thereby characterized by shorter loan maturities and higher interest rates."
Beginning in mid-1999, lenient credit standards for chattel loans resulted in increased numbers of repossessions of manufactured homes and excessive inventory levels at that time. The poor performance of manufactured home loan portfolios made it difficult for consumer finance companies in the industry to obtain long-term capital in the asset-backed securitization market. As a result, many consumer finance companies curtailed their lending or exited the manufactured housing loan industry entirely. Since then, the lenders who remained in the business tightened their credit standards and, in some cases, increased fees and interest rates for chattel loans, which reduced lending volumes and lowered sales volumes of manufactured homes.
Once a manufactured home is classified as personal property, it falls out of the realm of subsidy. Most significantly, it may no longer fit with the GSE's guidelines. In 2013, Fannie Mae purchased 37 manufactured housing loans from the entire state of California. The originators can still sell loans on the secondary market, but it is left up for private enterprises to purchase them. Banks and insurance companies are the most common buyers.
As a result, producers end up holding a lot of these loans in their own portfolio. According to the CFPB, seventy percent of chattel loans are held in portfolio. The end result is that the cost paid by the consumer has to increase due to liquidity challenges. According to the leading finance professor in the United States (Aswath Damodaran), the weighted average cost of capital across all industries was 5.87 percent in January 2015. It was 6.78 percent among corporate homebuilders. It is a fair bet that Cavco's cost of capital is far higher than it for Lennar or Pulte. Thus, if their WACC is conservatively 7 percent, then how easy can it be to finance the purchase of their own inventory at 10.5 percent, accounting for the significant jump in risk when taking on borrower risk?
This is the essential problem with cost. Raising the cap might impact a symptom, but HR 650 will do nothing to address the fundamental illness.
The Industry Wants GSE Intervention
Through some work on HUD's Manufactured Housing Consensus Committee, I have had the opportunity to get to know a number of manufactured housing executives. To the last, they all have a very clear sense of who they are serving: younger households or retirees who generally have lower incomes or less in the way of savings.
They are distinct for their common aversion to government. In particular, there is a segment from Indiana who adopt a stridently libertarian attitude. In the name of choice, they seek to empower the HUD code in order to pre-empt strong state level building standards. Check out the coverage on the MHCC's discussion surrounding sprinklers and some independent analysis on the value of this technology.
But that distance could reflect the fact that they get very little from government. The banks like to talk up the idea of a free market, but they could not do their work without government support. To that end, witness how many bankers end up working at Treasury, the Federal Housing Finance Administration, the CFPB, or the Office of the Comptroller of the Currency. Government is very friendly to banks, but not to manufactured housing.
I digress. My point here is to establish that gap between government and this industry, and to further state that such a relationship is not the norm. This is why the relationship between the manufactured housing trade associations and government is contradicted by one issue. Consider the language in a recent Manufactured Housing Institute communication:
Expanding secondary market access for manufactured home loans, including those secured by personal property has been a long-standing priority of MHI—dating back to at least the duty-to-serve requirements that were included in the Housing and Economic Recovery Act (HERA) in 2008. We have, and continue to, work with FHA, FHFA, Fannie Mae, Freddie Mac, Ginnie Mae, HUD, and the House Financial Services and Senate Banking Committees to improve the availability of financing options in the manufactured housing market, both from a residential and commercial standpoint.
The Manufactured Housing Association for Regulatory Reform, a smaller group with a stronger libertarian bent, echoed this perspective in their comments for an FHFA rulemaking in 2010.
They have a point. The duty-to-serve mission of the GSEs somehow manages to ignore financing for a product that puts families in new houses at a fraction of the cost of other property types. This makes no sense at all, given the GSEs order to expand access to homeownership.
I know what a reader might be thinking right now:
"Well, the problem with chattel loans is that they come with so many abusive features. They have balloons, prepayment penalties poor disclosures, and a litany of other aspects that harm consumers."
I will not disagree with this statement. But GSE intervention is also a solution to loan quality. Captive finance arms of producers are eager to get these loans off of their books. If the condition to do so is that they have to make them consumer-friendly, then I have to believe that they would do so readily. GSE intervention does not just lower pricing. It improves loan quality.
The manufactured housing industry wants GSE reform, not marginally higher interest rates on their consumer receivables.
But none of these points seem to have reached the minds in Congress. Instead, the House Financial Services Committee is pushing for higher interest rate caps. That might help with the margin on capital costs for producers, but it will do so at the expense of consumers. It is a solution that undermines access and which would ultimately reduce demand. If I am a producer, I am scratching my head. Industry says they want access to the secondary market, but supposedly pro-business voices are turning their backs to the idea.
In this country, we subsidize ownership of single-family housing. We do it through a variety of means. Most people see discrete evidence of those endeavors when they file their taxes. If you itemize, then you can deduct mortgage interest against your gross income. But I will speculate that fewer people realize how Fannie Mae and Freddie Mac change the the price and availability of credit.
The GSEs are why people can qualify for a 30-year fixed rate mortgage. True, that is a blanket statement that overshoots the mark to some degree. Some people would be able to get a long-term FRM. But that would only be the safest of borrowers - those with pristine credit and for loans that were far below 70 percent LTV. The professionals who evaluate the risk-adjusted returns would never be willing to take on the interest rate risk associated with a loan of that duration. Instead, we would probably see a market made up of 5-1 ARMs with terms of 7 to 10 years offered at rates of four to six percentage points above the cost of a 10-year Treasury. Who would lock in a rate of 5 percent over 30 years when you can get 6 percent over 7 years from a Fortune 500 corporation? Think how that would change the demand for housing. Suddenly servicing the debt on a $200,000 home jump from $1,074 to $3,117 (7 years, 8 percent vs. 30 years, 5 percent).
Homebuyers don't lose alone. Home sellers share their pain. A home is worth what someone is willing to pay for it. Voila! Your $200,000 home is now worth $68,884.
But some people in Congress seem to be bent upon contracting the GSEs. The PATH Act called for the "complete dissolution of Fannie Mae and Freddie Mac." If passed as written, PATH would have eliminated the GSEs within five years. Their portfolios would have been liquidated. Liquidity for lenders and government guarantees for investors, the tools that effectively allow money center banks to make loans at rates below their own cost of capital, would be eliminated.
Thus, we have HR 650. Too bad.