Fannie Mae, Freddie Mac should run chattel lending test now: study

Housing advocates have long pushed for government-sponsored enterprises Fannie Mae and Freddie Mac to launch a pilot program for backing personal-property loans on ultra-low-cost manufactured housing but now is a particularly good moment to do it, a Urban Institute study suggests.

The largest affordability crunch in years and increased secondary-market options respectively make it more pressing — and feasible — to test financing for the lowest-cost manufactured homes, said Karan Kaul, principal research associate at the institute’s Housing Finance Policy Center.

“From a financing perspective, chattel is the biggest issue that needs to be fixed in this space,” said Kaul, co-author of the report published by the institute, a nonprofit thinktank that has produced Washington officials like Alanna McCargo, president of government bond insurer Ginnie Mae.

Ginnie, too, could play a role in developing a secondary market for these loans given that it provides an outlet for a minuscule number of Federal Housing Administration-backed chattel loans, but the GSEs have the scale to make more of an impact, said Kaul.

Many of the hurdles that have stood between the GSEs and chattel lending — such as the fact that the loans lack the security of real estate as collateral — remain, he acknowledged. But the study suggests some workarounds that have become more feasible recently.

These include the increased access to credit-risk transfers restored through amendments to the GSEs capital framework, Kaul noted, echoing an idea suggested by former Freddie CEO David Brickman. The institute published Brickman’s research on the topic earlier this year.

“The GSEs could work with existing lenders to develop a standardized product for manufactured housing chattel loans,” Brickman noted in that report. He added that “the GSEs could leverage this standardization by developing any one of several types of CRT structures.”

Private-market securitization of chattel loans has proved viable in recent years, which suggests potential for further secondary market development too, according to the more recent report Kaul co-authored with Daniel Pang, a research assistant at the institute. Recent private securitization, however, has been limited, Kaul noted in an interview.

Affordable housing advocates have been frustrated by the GSEs’ lack of involvement in chattel lending because while the homes can be accessed by people with lower incomes than those necessary to qualify real-estate secured loans, the financing rates are far higher.

The median income for a chattel manufactured-housing loan, for example, is $55,000 as compared to $58,000 for real-estate secured financing, the Urban Institute found in an analysis of Home Mortgage Disclosure Act data from 2021. But borrowers who took out chattel loans last year paid a median rate of 7.8% over 20 years, as compared to 3.5% over 30 years for real-estate secured home loans.

While GSE involvement might not completely erase that rate differential given that chattel loans have less secure collateral, it could reduce it, the researchers said in the report. 

“You're not going to be able to finance chattel at the same rate as a mortgage, but you may be able to do it at a rate much lower than 8%, and you would be able to offer a 30-year product,” Kaul said.