Can new manufactured homes, and loans, rebuild the housing market?

November 27, 2018 3:12 PM

Lending on manufactured housing is more complicated and risky than originating mortgages for traditional single-family homes, but several converging trends are driving traditional home-finance companies into the market.

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.

The changing state of manufactured housing

Manufactured homes have grown to the point where they now account for almost 10% of U.S. housing starts, and they represent an even larger share of existing inventory in some states.

In addition, their numbers can multiply rapidly because producing and installing manufactured homes is less labor-intensive and faster-paced than site-built new homes.

That's attractive to 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.

However, 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 Department of Housing and Urban Development is developing its own plans to boost manufactured housing programs.

But even without greater involvement from HUD 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."

Where manufactured and traditional homes converge

Higher-quality, manufactured housing is catching on with consumers because it fills a need for homes that cost more than a traditional factory-built structure without land, but less than a site-built house.

"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 that 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.

Moving forward, with some resistance

Housing inventory shortages, the convergence between factory- and site-built homes, affordability pressures, and new forms of financing are coming together to give mortgage 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."

Putting the home before the loan

Fannie Mae's MH Advantage loan could go a long way toward giving mortgage lenders and borrowers more access to the manufactured housing, but qualifying homes need to be produced first.

"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, Loving said.

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.