Affordable Housing Institute : US

[Continued from the previous Part 1, Part 2,and Part 3.]

 

The preceding three parts have brought us from the mobile home’s accidental invention as an acromegalic growth from the unassuming trailer into a full-fledged industry to build, produce, and market a unique form of affordable housing.  One leg, however, remained weak:

 

The industry, despite wonderful advances in its products, continues to be flawed by a largely unregulated system of selling and financing its products that invites abuses — collusion, misrepresentation and fraud, to name a few. 

 

Problems are not simply lack of regulation, although it’s understandable Mr. Grissim would see it that way.  Exclusion from the community of real properties means that mobile homes are invisible to the capital markets, and therefore that their financing, in general, does not benefit from the rising-tide advances of other financial innovations up through securitization.  One such, of course, is basic consumer protection:

 

These ongoing abuses, which have victimized thousands of unwary home buyers, in some cases leaving families literally homeless, are the manufactured home industry’s twenty-first century stigma and one that continues to taint its reputation.

 

At the moment, the home owners have no champion:

 

Unlike the auto makers, the manufactured home builders have never fostered a strong cradle-to-the-grave system to protect the buyer after the sale. 

 

Why should they?  Their goal is sales of new homes.  Resale is the home owners’ problem.  But where are the home owners?

 

We’re still in the dark

 

There is no unified chain-of-accountability or unified oversight of a home’s site preparation, its installation, delivery inspection, follow-up warranty work, or 24/7 customer support.  Instead, the system relies on dealers, installers, contractors and sub-contractors-each an independent operator-to work together by informal agreement.  Most of the time this system works, as long as everything goes smoothly.  But as later chapters illustrate, the consumer can get burned when things go wrong.

 

There is some movement, albeit painfully slow and exogenous to the home owner community:

 

Then, in 1997, Fleetwood Enterprises announced a partnership with Pulte Homes, one of the nation’s largest site-built home builders, to establish a large chain of retail sale sales centers.  Shortly thereafter, Champion Industries, by far the industry’s biggest manufactured home builder, announced it was acquiring Home USA, a chain of 91 retail locations (with more to come), triggering an industry stampede.  Many other manufacturers soon followed, including Cavalier, Palm Harbor and Southern Homes.  Some did so defensively in order to prevent their retail distribution networks from being bought out from beneath them, but all touted the virtues of so-called vertical integration.

 

We also see some glimmerings of awareness that this represents a stream of financial products:

 

Enter Wall Street

 

Several of the manufacturers — Oakwood, for example — also owned subsidiary financing companies that made consumer loans to manufactured home buyers, mostly through their own dealership chains.  Like the other lenders during this free-for-all scramble for market share, these subsidiaries loosened their borrowing requirements for less credit-worthy consumers.  Everyone knew that the result would be an increase in loan defaults, but many lenders figured the substantial profits from the higher-interest subprime loans (averaging 12% to 15%) would more than offset the losses. 

 

The credit conundrum at work.

 

A major exception to these practices was Clayton Homes, whose home financing subsidiary, Vanderbilt, took a conservative path, maintaining higher loan standards for which only the most creditworthy home buyers qualified.  Palm Harbor Homes steered a similarly conservative course.

 

This isn’t the place to delve into who’s-better, the conservative or liberal lender. 

 

I can lend anything better than you.

 

Back on Main Street, with dealers demanding a fast turnaround approval time, bank and finance company loan officers, themselves under pressure to meet monthly quotas, didn’t have enough time to properly check out an applicant’s credit worthiness, and okayed questionable loans. 

 

Agency risk is always a problem in the lending arena; it’s not unique to mobile homes.

 

To top it off, many dealers, unbeknownst (and never disclosed) to the consumer, were getting healthy kickbacks from lenders for sending them borrowers. 

 

Again we see how conceding that mobile homes are not real estate hurts consumers.  Under the Home Mortgage Disclosure Act, which applies to all residential property, these things must be disclosed.  HMDA (pronounced hum-dah), does not apply to chattel.

 

In short, there were a lot of questionable dealings between dealers and finance companies.  For awhile there, a case could be made that what was really being sold were not homes, but loans.

 

Mr. Grissim has hold of a core truth: if mobile home owners are really renters, as my friend Mister E posited, then the loan payments are simply a long-term lease masquerading as a loan. 

 

If mobile home owners are really renters,

 

You’re really a renter in disguise, aren’t you?

 

None of the appreciation, all of the financial immobility.  A dreadful state of affairs.

 

Single-wide, Estonia, Tennessee

 

Further, it arose because manufacturers, having geared up their production, needed buyers to take it off their hands:

 

Lenders were falling over themselves to lend money to the dealers to pay for their lot inventory because the manufacturers co-signed for these “flooring” loans, agreeing to repurchase the homes if the loans defaulted. 

 

Such takeback guarantees are not unknown with financial instruments, but here the manufacturers were putting themselves in harm’s way, for there are many reasons why a particular borrower might default, and as we have seen in previous posts, mobile homes generally do not retain their residual value, in part because the home owner is a land renter, and the land rent can suck up all the value.

 

Adjust the land rent, suck up all the value

 

Nevertheless, in the short run it moved the units:

 

Home shipments rose from 170,000 in 1991 to 353,000 in 1997.  At one point, one out of every four new single-family homes was a manufactured home.

 

Twice in the last forty years, mobile homes have been a very significant contributor to housing affordability.

 

The answers came that fall.  In November, 2002 Oakwood Homes filed for Chapter 11 bankruptcy.  [Chapter 11 is a reorganization, not a dissolution, and Oakwood emerged and is still in business. — Ed.]  A month later Conseco, after defaulting on loan payments on $6 billion of debt, followed suit.  For this $52 billion company, the failure was stunning — the third-largest bankruptcy in U.S. history; behind only WorldCom and Enron.

 

In retrospect, it would appear that the principal cause of Conseco’s eventual demise stemmed from its 1998 acquisition of Green Tree Financial, at the time the largest lender in the manufactured home/mobile home industry. 

 

As a side note, when a company goes through bankruptcy, it often re-emerges with a collapsed capital structure, because (a) the company is worth more as a going concern than a liquidation, and (b) without a compaction of capital, the incentives are entirely misaligned.  That in fact happened here:

 

Conseco Inc., an insurance, investment and lending company based in Carmel, filed for Chapter 11 bankruptcy on Dec. 17, 2002, after reaching a tentative pact with major creditors to restructure its debt. In September 2003, Bankruptcy Judge Carol A. Doyle approved a plan which cut the company’s debt from $7 billion to $1.4 billion, allowing it to emerge from what had been the third-largest bankruptcy in U.S. history and paving the way for financial recovery.

 

Back to our story:

 

Not only did Conseco wildly over-pay for the acquisition (critics say) but its timing could not have been worse.  As one industry observer quipped:  “Yup.  Got too close to the trailer rattlers.  Got bit.”

 

 

What default risk?

 

Some, Sam Zell among them, would suggest that a fevered pursuit of yield down the credit pyramid not only culminates in defaults — as are rolling through the subprime industry today — but also leads and even prefigures them.  Certainly the shakeout was immense:

 

From 1999 through 2004 the industry suffered a whopping 65% contraction which at least squeezed out a great many of the crooks and the fast buck operators.  Many reputable companies barely hung on.  Not surprisingly, bargain hunters appeared, notably Berkshire Hathaway, Inc., the huge holding company managed by billionaire investor Warren Buffett, purchasing industry leader Clayton Homes, Inc., for $1.7 billion, triggering a wave of consolidations.  The “Berkshire effect” included a much needed infusion of new capital into the lending market, particularly for chattel loans, a welcome development for both the industry and its home buyers.

 

In the conventional arena, unstimulated by government, capital follows opportunity. It seldom leads.

 

Opportunity leads, capital follows

 

There’s effective demand in mobile homes, and substandard financing.  This, coupled with mobile homes’ quasi-illegitimate zoning birth, has given the entire industry the dubious standing of a red-headed stepchild among types of housing, and a complete invisibility in affordable housing.

 

Conclusions.  What began as something you could tow on a trailer hitch behind a Ford Model T has developed, over the last 75 years, into a very significant if largely unacknowledged provider of affordable housing throughout the United States. 

 

I outgrew my humble beginnings

 

Big conclusions include:

 

1. Mobile homes are sui generis, an industry that grew up by accident, creating spontaneous communities located and assembled with no thought to long-term property or community value.
2. They have historically represented a large source of supply, twice accounting for one quarter of all new home production, and routinely generating more affordable homes than HUD’s entire production.
3. Affordability is largely unrecognized, in part because of the ‘trailer trash’ stigma, so that it has only been recently communities have woken up to mobile homes’ value as affordable housing for the elderly.
4. Transferability is impaired because mobile homes are outside the consumer-protection legal infrastructure.  Because they are not legally real property, they have not benefited from advances in disclosure, consumer protection, intermediary professionalism (better brokers), and an interlinked safety net that site-built homeowners take for granted.
5. They are offered substandard financial products, partly because they are not real estate, partly because they historically have not appreciated (and are therefore seldom worth the financial markets’ time because they cannot scale large enough).  Weak financial products reinforce their second-class economic status.
6. Mobile home owners lack for champions.  Until very recently, mobile home owners have been muted, having their issues carried instead by manufacturers. 

 

On this last point, there are stirrings.  As I’ve posted over the previous several months, throughout the country, communities and mobile home owners are simultaneously discovering that they, not the manufacturers or financiers, have the most at stake in turning mobile home owners into genuine owners, and mobile home clusters into proper communities.

 

We live in a proper community

 

[Some previous posts on mobile homes may be found here:

 

Attempt to rezone: Paradise Park, Highlands, New Jersey: Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, Part 7

Land worth $510 million!: Briny Breezes, Florida: Part 1, Part 2, Part 3

Gouging in space rent: Modesto, California: Part 1, Part 2

Contrast in state laws influences policy: A tale of two states

Co-op seeking to buy its land: Seattle, the price of security

Rezoning moratorium: Davie, Florida: Time out!]

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