The Com­plete Pack­age

New fi­nanc­ing op­tions and bet­ter in­ven­tory have bol­stered the man­u­fac­tured hous­ing sec­tor. Is this the an­swer to lenders’ pur­chase-mar­ket woes?

National Mortgage News - - Contents - By Bon­nie Sin­nock

New fi­nanc­ing op­tions and bet­ter in­ven­tory have bol­stered the man­u­fac­tured hous­ing sec­tor. Is this the an­swer to lenders’ pur­chase-mar­ket woes?

Lend­ing on man­u­fac­tured hous­ing is more com­pli­cated and risky than orig­i­nat­ing mort­gages for tra­di­tional sin­gle-fam­ily homes. But a dearth of en­try-level hous­ing, along with new Fan­nie Mae and Fred­die Mac ini­tia­tives, are prompt­ing main­stream mort­gage lenders to ven­ture into the sec­tor as it is be­ing re­vi­tal­ized by new com­pe­ti­tion and higher-qual­ity in­ven­tory.

Man­u­fac­tured homes ac­count for al­most 10% of hous­ing starts na­tion­ally and can rep­re­sent an even larger share of ex­ist­ing in­ven­tory in some re­gions, like the Pa­cific North­west. Their num­bers can grow rapidly be­cause pro­duc­ing and in­stalling man­u­fac­tured homes is less la­bor-in­ten­sive and faster-paced than site-built new homes.

That’s at­trac­tive to the mort­gage lenders, re­tail loan of­fi­cers and mort­gage bro­kers seek­ing new sources of pur­chase orig­i­na­tions to make up for the sig­nif­i­cant de­cline in re­fi­nance lend­ing vol­ume over the past year.

And while many is­sues that con­strain growth in the stick-built mar­ket are ab­sent from man­u­fac­tured hous­ing, the sec­tor comes with its own unique set of chal­lenges.

For ex­am­ple, it might be tough for a tra­di­tional mort­gage lender to as­sess risks that are unique to the fac­tory-built hous­ing process, like those in­volved in fi­nanc­ing the in­stal­la­tion of the home af­ter it is man­u­fac­tured. But there is less con­cern about fac­tors like bad weather that hold back pro­duc­tion time­lines for site-built homes and their fi­nanc­ing.

Along with Fan­nie and Fred­die, the Fed­eral Hous­ing Ad­min­is­tra­tion is de­vel­op­ing its own plans to in­crease fi­nanc­ing of­fered through its man­u­fac­tured hous­ing pro­grams. But even with­out greater in­volve­ment from the FHA and govern­ment-spon­sored en­ter­prises, the mar­ket for fac­tory-built homes is grow­ing in size and qual­ity, mak­ing it a more vi­able en­try-level hous­ing al­ter­na­tive for lenders to serve.

“It is part of the fu­ture, and there are sev­eral rea­sons why it is good for af­ford­able lend­ing, and for first-time home­buy­ers,” said David Bat­tany, the ex­ec­u­tive vice pres­i­dent of cap­i­tal mar­kets at San Diego-based Guild Mort­gage. “But the mort­gage in­dus­try is still catch­ing up to it.”

Higher-qual­ity, fac­tory-built homes are catch­ing on with con­sumers be­cause they fill a need for hous­ing that costs more than a man­u­fac­tured home with­out land, but less than a site-built home.

“It fills the gap that is be­tween $89,500 and $220,000, which site-built home­builders aren’t fill­ing,” said Lesli Gooch, ex­ec­u­tive vice pres­i­dent of govern­ment af­fairs at the Man­u­fac­tured Hous­ing In­sti­tute, a trade group for the sec­tor.

While some man­u­fac­tured hous­ing com­pa­nies pre­fer to keep their costs and prices low, oth­ers are in­creas­ingly com­pet­ing in this niche. The most no­table is Clay­ton Homes, a builder owned by bil­lion­aire War­ren Buf­fett’s Berk­shire Hath­away con­glom­er­ate.

The trend is sig­nif­i­cant for mort­gage lenders be­cause it bridges dif­fer­ences be­tween man­u­fac­tured and tra­di­tional hous­ing in ways that could make the prod­uct more ac­ces­si­ble to them.

“If you look at pic­tures of these homes, they look com­pa­ra­ble to site-built hous­ing,” said Gooch.

That should make these houses el­i­gi­ble for fi­nanc­ing at the same in­ter­est rate as tra­di­tional sin­gle-fam­ily homes, she said.

“Just be­cause it was built in the fac­tory, that doesn’t nec­es­sar­ily mean it should be that dif­fer­ent than the fi­nanc­ing for a house that’s built on site,” said Gooch.

His­tor­i­cally, the GSEs have charged a pre­mium that deducts from the price they pay for man­u­fac­tured hous­ing loans based on the view that the col­lat­eral is riskier than a sin­gle-fam­ily home. But that’s chang­ing.

Fan­nie is test­ing a man­u­fac­tured hous­ing loan that omits that pre­mium if the home has ver­i­fied fea­tures that make it more com­pa­ra­ble to site-built homes. Fred­die also is ready­ing new pilots in re­sponse to this trend.

“One thing we are look­ing at is how we can sup­port that type of home,” said Den­nis Smith, an af­ford­able lend­ing man­ager at Fred­die Mac.

Fan­nie’s new pro­gram, MH Ad­van­tage, prices man­u­fac­tured hous­ing loans at the same rate as tra­di­tional res­i­den­tial mort­gages as long as the homes have fea­tures like en­ergy ef­fi­cien­cies, at­tached garages and a pitched roof.

“If the man­u­fac­turer pro­duces a home that in­cludes those ameni­ties, then they are go­ing to of­fer fi­nanc­ing at a rate on par with site-built homes,” Gooch said. “That’s huge for us.”

Tra­di­tional mort­gage com­pa­nies are start­ing to see these higher-qual­ity, fac­tory-built homes as a mar­ket that could ben­e­fit them as well.

“It’s a way to get in­ven­tory in the mar­ket,” said Mike Fon­taine, chief fi­nan­cial of­fi­cer and chief op­er­at­ing of­fi­cer at Plaza Home Mort­gage, a com­pany that is con­sid­er­ing buy­ing MH Ad­van­tage loans.

This form of hous­ing is marginally dis­plac­ing some other al­ter­na­tives con­sid­ered by en­try-level home­buy­ers and down­siz­ing re­tirees, but in­creas­ing af­ford­able hous­ing stock over­all, ac­cord­ing to Bat­tany.

“It will al­low com­pa­nies to build more houses, more quickly,” he said.

There were more than 92,000 man­u­fac­tured homes shipped in 2017, up from al­most 50,000 when the mar­ket bot­tomed out in 2009. For tra­di­tional mort­gage lenders start­ing to be­come more ac­tive in the sec­tor, this is the source of an in­cre­men­tal gain in vol­ume rather than a no­table one, but ev­ery lit­tle bit helps in a mar­ket with fewer lend­ing op­por­tu­ni­ties, and more com­pe­ti­tion for loan of­fi­cers.

“With in­ter­est rates go­ing up, and vol­umes go­ing down, more and more peo­ple are look­ing for pro­grams and prod­ucts that will fill the gap,” said Jim Lov­ing, direc­tor of na­tional sales for Planet Home Lend­ing’s cor­re­spon­dent chan­nel. Planet Home has in­creased its in­volve­ment in the man­u­fac­tured hous­ing sec­tor due to grow­ing de­mand from third-party orig­i­na­tors, and is con­sid­er­ing of­fer­ing MH Ad­van­tage loans, ac­cord­ing to Lov­ing.

While man­u­fac­tured hous­ing loans cur­rently rep­re­sent a mere 1% to 2% of the com­pany’s over­all vol­ume, it is grow­ing.

“It is not go­ing to re­place all the vol­ume mort­gage lenders have lost, but for com­pa­nies that want to hire and re­tain loan of­fi­cers, it’s an­other ar­row their LOs can add to their quiver,” Lov­ing said.

Bar­ri­ers to en­try

Hous­ing in­ven­tory short­ages, the con­ver­gence be­tween fac­tory- and site-built homes, af­ford­abil­ity pres­sures, and new forms of GSE fi­nanc­ing are com­ing to­gether to give lenders un­prece­dented ac­cess to the man­u­fac­tured hous­ing mar­ket.

But lenders do face head­winds. Most of the coun­try’s man­u­fac­tured hous­ing in­ven­tory is in­el­i­gi­ble for tra­di­tional mort­gages. The homes are treated as per­sonal, rather than real, prop­erty, be­cause they’re not built per­ma­nently af­fixed to land. In those cases, con­sumers ob­tain chat­tel loans, a type of se­cured debt sim­i­lar to an auto loan. The home is ti­tled in pub­lic records, which the lender holds un­til the debt is paid.

The GSEs have pledged to ex­per­i­ment with chat­tel lend­ing in high-needs ar­eas as part of their “Duty to Serve” leg­isla­tive man­date. But in the mean­time, their man­u­fac­tured hous­ing ac­tiv­ity re­mains con­cen­trated in real prop­erty.

Chat­tel lenders, on the other hand, do en­gage in some com­pe­ti­tion with real-prop­erty lenders and may have in-house con­nec­tions with man­u­fac­tured hous­ing builders.

The ad­van­tage mort­gage lenders have is that bor­row­ers can get a much more fa­vor­able rate if they are will­ing to work with a lender that will help them con­vert their home into real prop­erty.

Chat­tel loans tend to have 10- or 20-year terms and rates rang­ing from around 6% to a lit­tle over 10%, de­pend­ing on un­der­writ­ing con­sid­er­a­tions like credit score, down pay­ment and home size, ac­cord­ing to Gooch.

When the land as well as the home is pur­chased, the rate may be lower, even if the land re­mains per­sonal prop­erty. In this case, rates tend to be in the 5.75% to 8% range, de­pend­ing on the term and un­der­writ­ing con­sid­er­a­tions in­volved.

In cases where man­u­fac­tured loans are se­cured by real prop­erty, and a pro­gram like MH Ad­van­tage is in play, qual­i­fy­ing bor­row­ers and prop­er­ties may be able to ob­tain 30-year rates slightly be­low 5%.

But chat­tel lenders can give con­sumers ac­cess to a home with a lower price point and un­der­write a loan more quickly. They also may be quicker to of­fer a loan to a bor­rower with a lower credit score, al­beit at rates that could go as high as 12%.

While there is some com­pe­ti­tion be­tween the two mar­kets due to the con­ver­gence be­tween the tra­di­tional site-built and fac­tory-built homes, both largely con­tinue to co­ex­ist, ac­cord­ing to Bat­tany.

“Peo­ple can still al­ways buy the lower-qual­ity man­u­fac­tured home if price is the most im­por­tant driver of their de­ci­sion,” he said. “Also, a high-qual­ity man­u­fac­tured home qual­i­fies for bet­ter-priced fi­nanc­ing through a GSE pro­gram will ac­tu­ally re­sult in a home­buyer get­ting a lower in­ter­est rate than on a tra­di­tional man­u­fac­tured home. So the lower monthly cost of the in­ter­est sav­ings will off­set some of the higher cost to pur­chase the home.”

An­other is­sue is that lenders are still wait­ing for units that qual­ify for MH Ad­van­tage to be pro­duced.

“I do see an emerg­ing, po­ten­tial mar­ket, but I don’t know how long it is go­ing to take,” said Brad Waite, pres­i­dent of Land Home Fi­nan­cial Ser­vices, a mort­gage lender that has an es­tab­lished side­line in man­u­fac­tured hous­ing that’s grown from 5% to as much as 10% of its busi­ness in the past year or so.

What’s more, there’s no guar­an­tee that man­u­fac­tured hous­ing builders will all start pro­duc­ing in­ven­tory that meets the MH Ad­van­tage spec­i­fi­ca­tions, par­tic­u­larly among firms that sell lower-priced homes.

“We’re a lit­tle bit con­cerned that it may drive up some costs that would be passed on to the con­sumer, but any­thing that be­gins to get the agen­cies com­fort­able with the man­u­fac­tured home, we’re def­i­nitely be­hind that,” said Bill Packer, chief op­er­at­ing of­fi­cer at Amer­i­can Fi­nan­cial Re­sources, a mort­gage lender that spe­cial­izes in man­u­fac­tured hous­ing and de­rives more than one-third of its busi­ness from it.

Still, MH Ad­van­tage is start­ing to catch on with builders. Land Home has a de­vel­op­ment af­fil­i­ate that is build­ing model homes with MH Ad­van­tage in mind. It plans to mar­ket them as a way to quickly re­place tra­di­tional sin­gle-fam­ily struc­tures dam­aged by wild­fires.

Com­modore Homes of Penn­syl­va­nia and Colony Fac­tory Crafted Homes are also en­dors­ing MH Ad­van­tage, as is Clay­ton Homes.

“We are en­cour­aged by the de­vel­op­ment of MH Ad­van­tage. As our in­dus­try evolves, it is im­por­tant that home­buy­ers are of­fered more di­verse op­por­tu­ni­ties to ac­cess af­ford­able hous­ing,” Clay­ton spokesman Ryan Wil­son said in an email.

The learn­ing curve for mort­gage lenders that want to of­fer man­u­fac­tured hous­ing loans is not as steep as it was. Lend­ing pro­grams to­day are “friendlier for a lender that’s not in the mar­ket” than past ef­forts like MH Se­lect, a pro­gram sim­i­lar to MH Ad­van­tage that had the bad for­tune to launch around the time mar­ket turned in 2007, said Waite.

But man­u­fac­tured home lend­ing still has nu­ances that could trip up mort­gage lenders less ex­pe­ri­enced with it, he said.

“The qual­ity of the man­u­fac­tured home has im­proved im­mensely over time,” said Lov­ing. But the prod­uct is still a lit­tle more com­plex than a tra­di­tional home loan for a mort­gage lender, “es­pe­cially on the ap­praisal,” he said.

With new types of higher-qual­ity man­u­fac­tured homes go­ing into pro­duc­tion and man­u­fac­tured hous­ing of­ten found in more ru­ral ar­eas with fewer homes, it is tougher to find com­pa­ra­ble prop­er­ties to base val­u­a­tions on, said Lov­ing.

Be­ing aware of dif­fer­ences in what fore­clo­sure prop­er­ties sell for in the mar­ket is also im­por­tant to un­der­stand, said Waite. The fact that MH Ad­van­tage, un­like MH Se­lect, per­ma­nently val­i­dates the struc­tural stan­dards that homes are built to with a sticker should help up­hold their values, he said.

In ad­di­tion to un­der­stand­ing the nu­ances in­volved in val­u­a­tions, lenders will have to ini­tially find a way to learn how to help fund the in­stal­la­tion of homes that qual­ify for Fan­nie’s new fi­nanc­ing.

If there al­ready were ex­ist­ing MH Ad­van­tage units, in­stal­la­tion loans would be less cru­cial, noted Bat­tany. Guild is us­ing con­struc­tion lend­ing tech­nol­ogy to help it sur­mount that ob­sta­cle. An­other op­tion is to part­ner with other ex­pe­ri­enced lenders in the sec­tor, he said.

Man­u­fac­tured hous­ing his­tor­i­cally has had higher de­pre­ci­a­tion and loan delin­quency rates than tra­di­tional mort­gages. This may not be the case when it comes to newer homes built to higher stan­dards, but lenders like Planet that are con­sid­er­ing ex­pand­ing into man­u­fac­tured hous­ing are still be­ing cau­tious about draw­ing up un­der­writ­ing over­lays.

Es­tab­lished play­ers hope newer en­trants prop­erly size up the man­u­fac­tured hous­ing risks cor­rectly, be­cause not do­ing so has hurt the sec­tor in the past.

“I don’t mind other lenders com­ing in, I just hope they don’t blow it,” said Waite.

If tra­di­tional mort­gage lenders find ways to ap­pro­pri­ately un­der­write and make more man­u­fac­tured home loans to sup­port it, the in­creased pro­duc­tion of higher-qual­ity man­u­fac­tured homes could have a net ben­e­fit for home-fi­nance com­pa­nies, said Bat­tany.

“It could re­place some ex­ist­ing forms of man­u­fac­tured hous­ing, but it also will ex­pand the hous­ing mar­ket for lenders,” he said.

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