Manufactured homes get a boost as inventory crisis persists

March 22, 2021 6:26 PM

Mortgage lenders who have traditionally been reluctant to go too far down in the home price spectrum are increasingly interested in manufactured homes as elevated unemployment, inventory shortages, rising prices and higher rates make traditional houses less accessible to a growing number of borrowers.

From the slightly higher-end structures that rival site-built houses to the smallest single-section manufactured home, mortgages for these types of home have become more attractive to lenders who are using them to reach more buyers and offset dwindling refinancing.

“They [lenders] are offering both [higher- and lower-end manufactured homes], but when COVID hit, demand for traditional singlewides and doublewides really picked up,” said David Battany, an executive vice president of capital markets at Guild Mortgage, noting that loans are increasing important as lenders become more reliant on purchase volume. “We’re big believers [in the idea that] manufactured housing is a big part of the solution to lack of supply.”

While relatively few traditional mortgage lenders fund manufactured housing, some interest has picked up in recent years as the government-sponsored enterprises have increased the attractiveness of financing in the market, partly due to a legislative mandate called Duty to Serve, which requires Fannie Mae and Freddie Mac to support a secondary market for mortgages on housing for very low-, low-, and moderate-income families in manufactured housing, affordable housing preservation, and rural housing.

“There’s a 2.5-million-unit shortage of homes, and that’s only growing,” said Mike Dawson, single-family vice president of strategy and policy in affordable lending at Freddie Mac. “Manufactured housing could be part of the solution to that.”

The GSEs’ increased involvement, in combination with government programs called Title I and Title II, the former of which allows the flexibility to lend on land and/or the MH unit alone, have helped fuel growth in the niche, according to American Financial Resources, a lender that specializes in the product.

“At AFR, we’ve seen an increase of more than 10% in loan volume specifically for manufactured homes, year over year, for the last two years,” said President Laura Brandao in an email.

The GSEs are reporting gains in manufactured home loan volumes as well.

“From the start of Duty to Serve in 2018 to the end of last year, we saw a 27% increase in the number of single-family customers who delivered a manufactured housing loan,” said Patrick McCarthy, vice president at Fannie Mae, in an email.

Price points

The high building costs associated with traditional single-family homes have driven interest manufactured housing, said Stacey Epperson, president and CEO of Next Step, a nonprofit engaged in manufactured housing education efforts in Appalachia and other low-income communities.

“Homebuilders no longer can construct homes that the average American can afford,” she said.

The number of borrowers that could afford a house goes up markedly as price points go down, a recent National Association of Home Builders study shows.

For example, the median price of a traditional resale or new home runs from $300,000 to $350,000, with a recently-constructed, stick-built house landing at the higher end of that range.

More than 1 million households can afford a house at that price. The manufactured homes that have features and GSE financing competitive with traditional houses could bring prices down roughly into the $200,000 range, making them affordable to roughly 1.5 million people. Get into the price range around $100,000 that new double-section manufactured homes can be bought for and eligible buyers number 1.9 million.

Go even further and offer new GSE financing for single-section homes and the number of people who can afford them tops 2 million. Prior to the shift in demand amid the pandemic, Fannie and Freddie have been focused more on higher-end or larger manufactured homes.

“For borrowers who have been increasingly looking to change their living situations from an apartment, a manufactured home is an attainable option,” said Lesli Gooch, CEO of the Manufactured Housing Institute.

Loan limits

Mortgage lenders have generally kept their distance from the most affordable form of manufactured homes because they aren’t real estate-secured. So-called chattel loans haven’t made their way to the GSEs’ menu, and not for lack of trying, Gooch said.

“Chattel is 70% of the market. If the government agencies are going to be supporting homeownership, they need that too,” she said.

Real estate adds the price of the land involved to the costs of purchasing the home and installing it on the property. In the separate government-insured market, chattel loans can be made, but they’re rare, Gooch said.

The Biden administration could encourage more MH lending, and possibly even in the chattel market, because small loans are one way of advancing racial equity goals, she suggested.

Even though manufactured housing has some protections under the law, it’s been zoned out of some communities due to stigma from the days when construction quality was lower, or restricted by the availability of land.

Also, while manufactured housing solves for a lack of affordable inventory in some ways, it’s got its own constraints. Supply chain disruptions amid the pandemic led to backlogs that stalled its growth relative to housing starts. Those have recently begun clearing.

But manufactured housing, while a key part of the solution to inventory concerns, is by no means the sole one, according to Dawson.

“Solving for affordable inventory is a broader effort. It’s got to be multiple things: townhomes, condos, smaller-footprint homes in general, community land trusts, land banks, housing preservation and possibly commercial conversions,” he said. “Conversions could be interesting as businesses re-examine their footprints, but right now it’s too soon to tell.”

Facilitating growth

While hurdles remain for manufactured housing, it has gained ground, said Battany, who advocates for that housing type as the chair and co-chair of the Mortgage Bankers Association’s residential production and affordable housing committees.

Builders are increasingly realizing their price points are leaving people out of the market. Meanwhile, lenders like Guild, American Financial Resources and Triad Financial Services are forging ties with home manufacturers or those that have MH divisions like Clayton Homes. Government-related agencies are also updating appraisal policies to allow for traditional home comps in some cases. They’re also making land-installation financing easier by offering that as a single-close loan rather than two that have to be closed separately.

Like any small loan, home lenders do make less on manufactured housing financing than they do on a larger mortgage, and the return varies depending on the company, whether it’s held on balance sheet or sold to an investor like Fannie and Freddie. Nonmortgage lenders historically charge the borrowers higher interest rates to account for risk given that fewer of their homes are less typically secured by land. Because Fannie and Freddie increasingly treat the higher-end loans as comparable to those secured by traditional homes, mortgage lenders typically also receive a similar price for them and can offer them at lower interest rates. However, a 0.5% loan-level price adjustment is charged for lower-end homes.

“The biggest reason these homes haven’t taken off on a big scale yet is more people need to have them on their radar screens,” said Battany.