Tarnished By Image of Mobility

QUESTION:

Why is manufactured housing out of the financial mainstream? “I am purchasing a top-of-the-line manufactured house, but am being offered bottom-of-the-line financing, even though my credit is pretty good. They want 8-9 percent when other mortgages are going for 5-6 percent. Why.”

ANSWER:

You are paying a high rate because the lender views the loan on your manufactured house as a personal loan rather than a mortgage loan.

A manufactured home is built entirely in a factory, transported to a site and installed there. It is distinguished from “modular,” “panelized” and “pre-cut” homes, which are also factory built but assembled on the site.

Manufactured houses usually are built without knowing where they will be sited and are subject to a Federal building code administered by the Department of Housing and Urban Development (HUD). The other types of factory-built housing are not assembled until the site is identified, and they must comply with the local, state or regional building codes that apply to that site. These other types of factory-built houses are financed in the same way as houses constructed entirely on-site.

Most purchasers of manufactured housing are shut out of the mainstream mortgage market. They must find loans in a parallel market, which is much like the unsecured personal loan market. Lenders in this parallel market assume that loss rates on manufactured house loans will be high, as they are on personal loans, and they price them accordingly. They view manufactured houses as poor collateral that provides them with little protection.

One reason for this view is that manufactured houses can be moved. Before the HUD building code went into effect in 1976, manufactured houses were called “mobile homes,” and this term is still widely used. Even though few ever leave their first site, they remain tarnished by the image of mobility.

Lender concern that the collateral can disappear is well grounded when the house sits on rented land, which is the case for about half of all manufactured houses. Most leases are short, and if the landowner decides that it is more profitable to use the land in some other way, the manufactured house owner must move it or leave it. Since the cost of moving is very high, and in many cases the property is worth little more than the debt, owners sometimes just walk away. The lender’s collateral ends up in the trash heap.

Few owners of manufactured houses have built equity the way owners of site-built houses do. (Equity is property value less debt on the property). A major part of the appreciation in the in the value of site-built houses is due to rising land values. If you don’t own the land, you don’t realize this benefit. Furthermore, many purchasers of manufactured houses began with no or negative equity, putting nothing down, and including settlement costs (and sometimes furniture and insurance) in the loan.

In addition, manufactured houses seem to have more defects than site-built homes. Because they are geared to low-income purchasers, the materials used have often been inferior. Sometimes mishaps occur in moving houses from factory to site, and sometimes the installation is defective.

Many manufactured houses are not anchored securely to their foundations, making them extremely vulnerable to natural disasters. Hurricane Andrew in 1992 destroyed almost all of the manufactured houses in its path, compared to about one-third of houses built on-site.

Getting defects in a manufactured house fixed can be a hassle because responsibility is divided and finger pointing is common. The factory owner says the mover did it, the mover says the installer did it, and the installer says it happened at the factory.

According to Consumers Union, about 12 percent of all manufactured home loans end up in default. This is about four times as high as defaults on mortgages secured by homes built on-site. Last year, the largest lender on manufactured houses, Conseco, was forced into bankruptcy after losing about $4 billion in two years.

Despite these numerous problems, manufactured housing provides an important source of affordable housing, especially in the South and in rural areas. Because of efficiencies in factory production, manufactured houses cost significantly less per square foot than housing constructed on-site.

It is possible, furthermore, to purchase a manufactured house, install it permanently on your own land and qualify for mainstream mortgage financing. It is even possible to do it under a lease, provided the lease is long enough and provides adequate legal protections to the homeowner and lender. Mainstream financing remains small but it is growing.

Source: Inman News, Prof. Jack Guttentag, University of Pennsylvania