July 27, 2000

Manufactured homes are improved and so is financing

By TOM KELLY
The Real Estate Advisor

Bob Schoos admits it’s a good time to buy a manufactured home - and that’s not just because of innovative designs and affordable pricing.

"Some of the sub-prime lenders and consumer credit companies made deals with retailers and manufacturers beginning in 1997 that the industry is really starting to feel," said Schoos, chairman of the finance division of the Manufactured Housing Institute. "A lot of product came back on the market via foreclosures, making a huge supply readily available to consumer. We’ve got to do a better job of setting financial standards and protecting the consumer."

Manufactured homes, built in warehouses and trucked to specific sites, now make up about one-quarter of all homes built in the United States, according the Manufactured Housing Institute. In some rural counties, pre-fab homes make up a majority of the new housing stock.

The trouble surfaced when some consumer finance companies began paying manufactured home dealers huge incentives, or "spiffs" to steer customers to a particular mortgage product and lender. In addition, the dealers then would sell insurance policies for little or no money down, putting enormous risk into the deal. This amounted to a different twist on predatory lending.

"Some of these spiffs amount to five or six points," said Schoos, one of the pioneers of manufactured home finance who recently retired from Washington Mutual Bank after 31 years. "By the time the loan was made, the sub-prime lender could have written the loan for 110-115% of the value of the package."

One point is equal to one percent of the loan amount. Therefore, five points on a $100,000 loan would equal $5,000. When a deeply leveraged asset can’t be sold for its value - or when the consumer is no longer able to make the payments - the bank gets the property back via foreclosure.

The dilemma with manufactured homes in land-leased communities (formerly known as mobile home parks) is they often depreciate, especially if they are older units. So, any mistakes made in the financing package are not "washed" by rising home values, as is the case in many traditional neighborhoods. In land-lease communities, manufactured homes are financed via consumer loans because the manufactured home is actually "personal property" when the owner does not own the land under it.

When a manufactured home is sold and built on property owned by the home owner, the home becomes "real property" because the owner holds title to the real estate. Real property means conventional loans, both fixed and adjustable.

"Not all units in a leased land community depreciate," Schoos said. "Some of these homes are $25,000-$28,000, and there’s definitely a lot of demand for that type of affordable dwelling. And, some manufactured homes built on lots have appreciated at the same rate as a stick-built house."

While retirees still make up a large percentage of all manufactured-home owners, recent surveys found that about 40 percent of families living in manufactured housing have a head of household who is 40 or younger.

Mobile has become a relative term. These days a manufactured home may roll into a home site with 2,000 square feet of living space and include everything except a basement, and even those have been added later. The sunken bath, country kitchen and custom fireplace may be on wheels for the trip, but it's very unlikely they will move again.

The big change for the manufactured home industry occurred in 1976 That's the year the United States Department of Housing and Urban Development enacted standardized building requirements for manufactured homes, essentially substituting one national code for numerous state codes.

Now, Schoos and others seek to standardize lending requirements for manufactured homes. While personal property lenders often set their own rules in how far they will go to extend credit, a "best practices" gauge would push manufactured home dealers and retailers toward lenders who subscribe to that gauge.

"I think if that were done, you would see more prime lenders coming back into the manufactured home finance market," Schoos said. "That would benefit the consumer because there would be more choices in the marketplace."

"Prime" often means better rates and conditions. It can also mean reputable.

Previous columns:

• New wrinkle in reverse mortgages, 07-20-2000
• Referrals offer risks, rewards, 07-13-2000
• Vacation is no time for worrying about escrow, 07-06-2000
• AIRD will mean big changes for appraisers, 06-29-2000
• Rules vary on renting your cabin, 06-22-2000
• Credit: You really are just a number, 06-15-2000
• Reverse mortgages have come full circle, 06-08-2000
• Virtual home tours are a big hit, 06-01-2000