saving chattel lending - marty lavin · ing deficiencies of the chattel lending model. i do not...

THE BIG PICTURE

20 Manufactured Home MERCHANDISER, December 2007 www.mhmerch.com

By Martin V. Lavin

As I get ready to journey to NewYork City to attend MHI’s Manufac-tured Housing Finance Forum, I’mgoing to propose some measures Ithink need to be instituted through-out the industry to correct the exist-ing deficiencies of the chattel lendingmodel. I do not believe we can havemuch of an industry recovery withoutbetter chattel (home only) lending es-pecially in land-lease communities,and I have been saying so for yearsnow.

I’m still surprised some folks fail tounderstand even today that manu-factured home chattel lenders haven’t“lost their nerve” and are not “con-spiring” to control the market forlending. No, the reality is far easier toexplain. If heretofore (pre-2003) thebasics and statistics of manufacturedhome chattel lending were poorly un-derstood, today that has all changed.While the “smart” industry lendershave continuously updated their loanperformance figures, always seekingthe keys to more expansive lendingwhile remaining profitable, the gener-al understanding of manufacturedhome chattel lending still survivestoday on immense caution. Profitablemanufactured home chattel lendingis still very much a niche productbest practiced cautiously; and there-in lies the constraint to increasing theshipments of HUD Code homes.

In order to believe chattel lending isthe key to industry growth, one has toreflect with clarity on the inability, sofar, of real estate-secured HUD Codetransactions to lift the shipments toany extent. As the late 1990s pro-gressed and chattel deliveries firststalled, then plummeted, many in-dustry participants and outside pun-dits believed conforming and non-conforming real estate mortgagedHUD Code sales, tied to the land,would pick up the slack. That was notto be.

Drop to low levelsWhile chattel secured homes,

placed in land-lease communitiesand scattered sites were dropping tounimagined low levels, real estate-se-cured transactions did in fact in-crease slightly, but hardly enough tomake up the loss of at least 150,000chattel financed homes no longerbeing financed as the “Greenseco Fi-nance” chattel loan model fell fromfavor, its non-profitability lethal forthose using it, and dangerous even tobystanders, especially the borrowerswho lost their homes in record num-bers. That episode was a preview ofthe current subprime mortgage prob-lem.

As we survey the last 50 years oflending on our product, there hasbeen a constant effort to “main-stream” the product. By that, I meanallowing an intelligent lender, withgood money availability, at marketrates, staffed by average lending per-sonnel to enter the manufacturedhome lending market, proceed asthey might lending on boats, cars orsite-built housing and stand a goodchance of financial success, creatinga lengthy history of profits. Thismakes a lending product popularwith banks, credit unions and fi-nance companies, and spurs indus-try success. It is indisputable thatonly successful manufactured homelending can revive this industry.Keeping it a niche product for just afew companies to exploit might helpthem, but will do little for the totalityof the market. The ability to main-stream the product has thus far elud-ed successful chattel lending.

Come and goHistorically, while innumerable

lenders have come and gone in the in-dustry, profitability has eluded al-most all of them, with exceptionallyfew successes. That of and by itselfsays a great deal about lending onmanufactured homes, most of which

(historically 80-85 percent) has beenchattel, especially into land-leasecommunities.

During the 1960s and early 1970sera, the “automobile lending model”was in vogue for manufactured homelending. Apparent down paymentswere generally higher than today (ifnot actual), homes were far moremodest, repayment terms were farshorter and mobile home parks,where the vast majority of homes soldwhere sited, were in the hands of peo-ple whose primary source of incomewas from the sales of the homes goinginto the parks. It wasn’t until muchlater that rental income from theparks became the greater incomeproducer rather than the sales ofhomes. When this occurred through-out the industry, it brought new play-ers and many changes occurredwhich are being sorted out even now.

Today of course, the refugees fromthe late 1990s-2000s downfall inmanufactured home lending popu-late lender staffs at enumerablebanks and Wall Street firms. Theirexperience was so bad and our mar-ket size of profitable lending today isso small, why get involved? Why in-deed.

And as I head to the WallStreet/MHI lending forum, I believethat thought is very much on theminds of many of the participants weexpect to attend. “After the cripplinglosses suffered by manufacturedhome securitized loans from origina-tions between 1994-2003, perhapsthe greatest percentage ABS bondlosses of all time, what are the rea-sons we should get involved in manu-factured home receivables?” I assumethey will ask that?

And there are some positive an-swers we can give. Fraud in loans isfar less. Loan documentation is verygood, a previous weakness. Loans aremade to far, far better credit risksthan before and defaults will be de-creased by an order of magnitude of

SAVING CHATTEL LENDING

www.mhmerch.com Manufactured Home MERCHANDISER, December 2007 21

3-5 times less than before. Interestrates are significantly higher as com-pared to site-built housing than be-fore and should render a good in-vestor yield. And finally, you have abetter customer, buying a betterhouse, with more loans tied to land insome fashion, with ABS bond-perfor-mance-prediction recently being metand even surpassed. All pretty goodstuff, frankly.

Good, but not enoughYes, all the positives I’ve enumerat-

ed above are great, but to paraphrasethe Wendy’s lady, “Where’s the vol-ume?” You see, industry lenders haverationalized lending to become sur-vivable based on loan quality, butthey are having great difficulty chang-ing other aspects of the industrymodel, which without changing, loanvolume cannot increase much. Theresimply are no loan volume increasesas new and even used home sales areskimpy. Is there a great HUD Codehome buying demand? Yes, but it’sprimarily coming from a non-finance-able group of chattel buyers.

The HUD Code industry recentlygrafted many elements of rationallending, enumerated above, unto anoverall industry model, which hasarisen over many years of insufficientsafeguards activity, lacking trans-parency, with few borrower/lenderprotections, and the industry seemsincapable of sorting out what the finalchanges need to be or how they canbe implemented. I think the situationis pretty clear; the marketplace hasalready rationalized manufacturedhome lending into an 80-130,000homes per year industry, even now ascompany consolidation continues todrive down capacity and costs forpeople and places no longer needed inthe industry. A permanent resizing isalmost in place. Anyone who does notrecognize that must be listening to in-dustry rhetoric rather than viewingindustry results.

ChangesAll right, let’s get into the changes

that, in my mind, need to occur inorder to start a new industry ship-ments increase, sustainably derived,and tending to make it a more main-stream lending product. You cannotcreate a larger industry without aprofitable and survivable lendingmodel, which can successfully ac-commodate at least double the pre-sent volume, in an attempt to grow itback into the long-term new annualhome shipments annual pace of

250,000 homes. This will require sur-vivable lending to an average FICOtier at least 60-70 FICO points lowerthan recent ABS bonds and increasedbuying demand from reasonablecredits.

I’ve spoken to a number of peoplelately, industry stalwarts, who finallyagree that the industry model is bro-ken. They recognize that the presentgrafting of a highly protective under-writing and loan closing regimen ontoan otherwise disorderly industrymodel may well benefit some individ-ual industry participants, but in theend, we are creating a far smaller in-dustry. Some few prosper even as theindustry sinks further.

At the Chicago industry retreat,which met several years back, I vol-unteered that I thought the industrydefects could easily be broken downinto two key elements:

The Roper Study Factors: Thoseare items which our consumers iden-tify as industry weaknesses andtending to have our product sales, de-livery, installation and after-sale yieldfar less satisfaction than our cus-tomers would like.

Home Value Deprecation: Thoseindustry practices which tend tocause the home to lose enough valuethat with a modest down payment atpurchase, the home is not later resal-able within a reasonable time so as toallow the homebuyer to gain suffi-cient proceeds to pay off his or herhome loan.

Note that without controlling homedepreciation, significant industrygrowth is not really possible. And inthe alternative, if you do control it,then the “Roper Factors,” while al-ways important, take on less impor-tance although complete industrysalvation will require action on bothweaknesses.

General MeasuresLet’s start with general measures

which tend to create better consumersatisfaction and progress into mea-sures which tend to reduce home de-preciation. An easy breakpoint be-tween the two is difficult as a betterhome warranty, as an example, willnot only create better consumer sat-isfaction, but also tend to reducehome depreciation. And many mea-sures will be like that.

Without prioritizing measures, let’sjust start a list.

• Image campaignAs I sat around John Diffendal’s

(BB&T stock analyst) “investor din-ner” in New York City the night before

the MHI Financial Forum, my tablewas composed of several Wall Streetinvestors, Larry Keener (CEO of PalmHarbor Homes) and myself. After lis-tening to Keener and me respond totheir queries, Christopher Abbott, se-nior vice president of Chilton Invest-ment Company asked a simple ques-tion:

“You guys have a great story to tell,but I don’t think the public knows it.Have you thought about a ‘Go-RVing’type campaign?”

Whoa, that made ole Marty jumpfor joy! That has been one of mydrumbeats for years. An image cam-paign to tell the public the role facto-ry-built housing plays in the Ameri-can housing segment is simply a ne-cessity. Every day that goes by wecripple ourselves because we are notdoing it. I suggest it is not only neces-sary, but frankly, inevitable. Whywait?

• Builder responsibility for integrityof the home installation/delivery

One of the big problems our con-sumers face is that they often feel leftto their own devices after they buy.Our builders often don’t want to takeresponsibility for the shortcomings oftheir retailers and their subcontrac-tors, because they don’t trust them.And the retailers don’t want to takeresponsibility for the installation sub-contractors, again, for lack of trust.Yet both seem to have no difficultytransferring the results of that mis-trust to the consumer and, by de-fault, to the consumer’s lender. Thisis a major problem and the new MHselect conforming mortgage programat Fannie Mae is the first to requiresignificant protections for the con-sumer from that weakness in the pre-sent model. In a sense, this is like therecourse model so effectively used bymany for years in the industry to pro-tect a vulnerable lender from thetroubles of manufactured homeloans. This will ultimately spread tothe chattel model as well.

• Longer and better home war-ranties

The consumer needs far betterwarranties and longer ones, say threeor even five years, to insulate themfrom the financial shocks home re-pairs or breakdowns can bring. In theevent some major home system diesat 18 months after purchase and therepair is $300 or more, a default-causing event may have occurredand, without the warranty providingthis protection, we’ve potentially cre-

(continued on page 22)


ated a repossession. Make no mis-take, warranty adherence is expen-sive, but far cheaper than selling awhole industry down the river for lackof overall consumer value. We castour customers aside because withvery limited warranties, meager war-ranty compliance (see Roper Study)and short warranty term, the cost ofhomeownership, especially duringthe early years when its impact hasthe greatest financial impression, canstrain the homeowner’s ability to payhis or her loan, if an untoward eventhappens.

• Cost of home site occupancyAfter we put the homeowner into

the dwelling, we frequently have sitedthem in land-lease communities,where the future cost of site occupan-cy has become an unknown, oftenwith annual rent increases outstrip-ping the ability of the homeowner tokeep pace with costs through his orher earnings. This has contributed tosubstantial home value depreciation,resulting in a large decrease in chat-tel lending into communities place-ments.

• The high gross profit, low volumeof sales model

The industry has evolved into lowsales per location. This has seen anaverage of 36 new homes deliveredannually by the average retailer. Asales location selling more than 100homes is a giant retailer; howeververy few of those exist. The sales vol-ume at each location is so low that ahigh gross profit must be achieved onthe home in order to have any chanceto survive. Even today, with far morerational lending, it is not unusual tosee loans being made that represent125 percent of the “invoice.” Note thatthis does not exclude the “slush” al-ready in the invoice, such as volumebonuses, advertising allowance, duesand other items. Nor does it encom-pass the customer’s down payment,being the 5 percent or greater we seetoday in most lending. With downpayments commonly averaging morethan 10 percent and invoice “slush”more than 10 percent commonly; it iseasy to see that basic home grossprofit can easily be 145 percent oftrue invoice or more. Home value de-preciation starts there. This type ofmark-up will have to be throttledback. The industry must try to moveto the “high sales volume, low grossprofit sales model.”

• We treat used homes differentlyfrom new for financing

Most lenders will admit that givensimilar underwriting and scrutiny,

loans for new homes and resalehomes will perform in similar fashion.Still, the loan-to-value advance, theinterest rate and other loan factorsare usually harsher for resales thanfor new. This continues the homevalue depreciation as such treatmentfor resales creates value depreciationat first sale. The industry is not goodat treating resale homes with thesame respect it does new. In thewhole, they treat resales as “throw-aways” and so they’ve become. A con-certed effort to treat resales better isnecessary.

• Our home loan closings lack for-mality

The real estate industry hasevolved a voluntary and mandatorysales and closing routine calculatedto protect the consumer, who is oftenunsophisticated in these matters.While it hardly guarantees an entire-ly trouble free transaction, it does afar better job than we do. Our indus-try has essentially refused to complywith real estate-type safeguards forchattel loans and only a few jurisdic-tions have forced such safeguards onus. We chafe at those few restraints.Transparency and consumer protec-tions seem little on our mind.

In manufactured housing, we seefew non-real estate escrow closings orearnest money going into trust, littleinvolvement by appraisers, lawyers orthe various other measures createdas transparency and safeguards forthe consumer. Many of these mea-sures are avoided in chattel lendingon manufactured homes and loanperformance has been far below thatof real estate loans. Many don’t wantthese safeguards in place because itslows the “process” down. I can’t helpbut think there is a lesson some-where in there.

Without attending to these two, theRoper Factors and home value depre-ciation, there is little beneficialchange that is likely to result. Themarketplace is currently rationalizingthe manufactured housing industry,imposing an ever-lower shipmentsbasis that is survivable. This iscaused because profitable lendingcannot occur at the level that is need-ed without significant industrychanges and we have yet to find a wayto increase the attention of bettercredits in and to our products, ignit-ing the demand side.

Changes in attitudesAnd what are those needed indus-

try changes? In no particular order,we need help

in these areas:• Invoice DatabaseAll invoices of all homes produced

must go into an MHI controlled data-base available easily and inexpen-sively to lenders, appraisers andhomeowners, with the proper protec-tions as they are accessed via the In-ternet. This also allows cradle tograve tracking of the home with useswe don’t even know yet. While invoic-es are provided for every loan for newhomes, the industry does not makethem available for used.

• Shorter loan repayment termsWhen I polled chattel lenders to

prepare for this article, to a person,they all recommended reduction ofloan terms to 10-15 years on single-section homes and 15-20 years onmulti-sections, both with sales pricecutoffs. More than $40,000 to get 15years on singles, and more than$60,000 to get 20 years on multis.This would tend to reduce the nega-tive impact of home value deprecia-tion with far quicker paydown of thenote. Sales proceeds would then morecommonly allow note repayment.

• Tighter loan-to-value advanceLenders limit what they advance on

all sorts of products. If using an in-voice to loan on autos succeeds, it isbecause the allowable advance overtrue invoice rarely exceeds 10-12 per-cent, more commonly 5-7 percent.We have been allowing 140-150 per-cent and more of true invoice lend-ing—and it is proven not to work well.A large loan advance to invoiceamount guarantees home value de-preciation. A high gross profit canonly work on items which have highconsumer demand coupled withscarcity of supply, like diamonds.Manufactured housing has neitherhigh demand from creditworthy buy-ers nor limited supply. Continuing toget a high markup from a commodityin plentiful supply sold primarily topeople on a budget is keeping the in-dustry at low levels of volume. Tighterloan-to-value advances of not morethan 10-20 percent over dead invoice,with limits on profit at sale will needto be instituted. This will tend to re-duce home value depreciation. Usingreal home value appraisals for newhomes might be even better than con-tinuing loan-to-invoice to determineloan amount.

• Using standardized formsThe more we standardize proce-

dures, regulations, safeguards andunderwriting, the easier we make it toenter the industry and appeal tomainstream lenders. Keeping manu-

THE BIG PICTUREcontinued from page 21


factured housing a small niche in-dustry with arcane operating proce-dures, documentation and practicestends to shield existing participantsfrom competition, but under currentconditions, creates a very small in-dustry. Standardized forms, likeeveryone using the same credit appli-cation, delivering it to lenders via theInternet and using standardized clos-ing documents, as they do in con-forming mortgages, is an importantelement to better action. Industrylenders must move towards this if weare to mainstream product lending.

• More use of appraisalsUsing real value-based appraisals

is said to reduce sales. Yet, if the con-sumer does not do an appraisal forus, they surely can’t avoid it by goingto real estate. They will get one thereif they go forward. The use of “books”only, with standard lender formulasand advance-to-invoice is no way torun a large, profitable industry,which delivers value to everyone. Thebook is only a cog in a complete ap-praisal, not to be used alone. Know-ing the real market value of the col-lateral is a necessity for sound lend-ing. Only market-based appraisalscan do that.

• Longer house warrantiesHomebuilders must find a way to

deliver a fairly comprehensive three tofive year warranty for homeownerprotection. This might be done by theuse of appropriate third party war-ranties, the cost of which is built intothe invoice of the home. This will helpstabilize the cost of home ownershipfor the early years when the borroweris most financially vulnerable. It alsois a unique benefit differentiating ourproduct from site-built.

• MLS systemWe have the beginnings of an MLS

for manufactured homes in severalvenues already. Most are just in thebeginning stages. Far more is needed.Industry zeal must be directed at trueissues, such as working towards anMLS, training of manufactured homeresale brokers and every element ofcreating an organized resale market-place. Can we partner more effective-ly with Realtors? Without a well-orga-nized resale market, the homeowneris left to his or her own devices to re-sell the home. Failing frequently inthat effort, they resort to “giving thehome back” to the lender or selling, ata sacrifice, to another. Creating anorganized resale marketplace is acenterpiece to rescuing the industry.

• Manufacturers statement of retailprice (MSRP)

This is needed for several reasons.First of all, it provides greater clarityand shopping comparison opportuni-ties for the consumer. Secondarily, itallows the builders to “guide” its re-tailers into a proper sales profit, con-sistent with volume and profits forthe builder and the retailer. The cur-rent lack of pricing guidance is a dis-respect to our consumers, putting intheir minds that we are a disrep-utable bunch. Finally, the MSRPhelps lenders deal with all customersbeing treated more alike. No onewants the black eye of “certain” con-sumers being treated differently. Italso can be illegal.

• Posted home pricesI really don’t even know why this

one is an issue. Most people do notlike to buy items that are not priced,as they fear they are not being treatedfairly. Yet, nothing is more commonin the industry than waiting for the“up” to demonstrate an interest in thehome before he is quoted the price.This simply is not ethical treatmentand undermines our regard in theminds of our consumers. And this is

an issue AARP and others have railedabout. Isn’t it the right thing to do?What is the hold-up? Every home forsale at a retailer should have a clear-ly posted sales price. (The largest re-tailer chain told me recently everyhome they have for sale will have aposted price shortly!)

• Final Inspection of the home be-fore delivery

No lender should fund a loan untilit is convinced the home is properlydelivered and the customer is satis-fied. While this is moving towards in-dustry lender practice, we are notthere yet. Until the industry has es-tablished a long-term track record ofcompliance, this must be requiredand verified. The walk-throughpunch list site builders use beforetheir closing with customer sign-offsis a good start for us. Not foolproof,but one more safeguard for all partiesto the transaction. It is one more stepto assure the integrity of the processand deliver more value to the con-sumer and his lender. It also keeps



the sellers and builders on their toesmaking them do the right thing.

• Community Attribute SystemAn important compendium of the

details of land-lease communities in adatabase owned by MHI and operatedby Datacomp Appraisals in GrandRapids, Mich. Still in its infancy, thedata is building, the cost to get data islow and over time can be used in tan-dem with an in-community MLS. Nolender should be lending in land-lease communities without accessingthis data. It doesn’t take a genius tolook at the 100+ attributes compiledtherein, and if correct and current, alender has a very good idea if that is acommunity wherein you want to lend.This is an important lender safeguardand allows better loan decisions.Lenders are using it and the datafields are being updated. It is also animportant spur to community ownersto work towards excellence.

• Better finance treatment of re-sales

No Virginia, all resale manufac-tured homes are not crap-boxes to befinanced for 5-15 years less termthan when they sold new. We shouldrequire a real value appraisal so thequick “appraisal book” standard for-mula won’t undervalue (or overvalue)the home. We should not have thesignificantly higher interest rates onresales than we now see on new. Wenow know debasing the value of re-sales debases the new homes as welland you see the result of that allaround you. For profitable lendingand delivery of value to the customer,as go the used, so go the new.

• Proper and easy home identifica-tion

I did a quick study once on thedamage caused by standard formulabook appraisals coupled with im-proper home identification. I foundthe loss of value substantial. We allknow the industry produces a bewil-dering variety of homes, often withenormous differences in selling priceand some even being the same sizeand having similar model names.Yes, content does count in a home.Drywall construction, better win-dows, upgraded appliances, architec-tural details, better insulation and anumber of other factors can make abig value difference.

Since most builders do not providegood (or any) home identification intheir serial number, the true contentaspects of the home may not be read-ily available, except in the invoice. Atresale, invoices are rarely available, ifever. Lenders being the highly prag-

matic bunch they are will take thelowest value that home could be,often without a great deal of furtherinquiry. In the event of calls to thefactory for better home identification,some are helpful, but many are not.

The invoice database I discussedabove is a great way to properly iden-tify the house. A second way is to usea standardized serial number as isused in the automobile and other in-dustries. The special serial numberrange could identify the many rele-vant factors so that by using theproper code sequence one couldknow all about the home. This wouldmake home identification certain andmore importantly, stop the guessingand depreciation of value occurringby use of standard valuation formu-las because we can’t properly identifythe home easily or at all.

As between the two, if I could onlyhave one, I would prefer the serialnumber, as once you know the num-ber all the relevant information isavailable to you immediately and freeof cost. But the invoice databank isimportant for good identification pur-poses and also may have cost data,which appraisers and lenders love.

This one is the canary in thecoalmine. By that I mean it will be asure tip-off that if the industry is notserious about taking action to assistlenders, appraisers and homeownerswith proper home identification afterthe home is sold, and being resold,where can the industry start to solveour dilemma?

• Third party final home inspectionNo loan should be funded without a

reasonable third party inspection andassurances that the home installa-tion is proper, the customer got whatthey bargained for and the homebuy-er has had a walk through the houseand is satisfied. Expensive you say? Itwill create problems because we findout the process is incomplete orwrong? The retailer doesn’t want youto do this? Just think about thosereasons for not doing it, as thoughdefaults are cheaper or unhappyhomebuyers don’t cause problems.We continue to avoid this at our ownperil.

• Quality of homesI am the first to tell my clients that

in general, the industry builds com-petent homes and actually some arebetter than competent. However, I’vebeen in far too many homes whichare three or more years old and myimpression has often been how“used” the home appears. Many timesthe visual impression is one of a

home many years older than it is.Yes, I am aware some of our cus-tomers can be hard on a home. Wecan build for that.

It is easy to create extra space in amanufactured home and oftenbuilders will induce buyer interest bythe large amount of space at very lowper square foot costs, but use non-durable materials to achieve it. Ourindustry is very cost driven. Thedownside is that the home appears so“worn” in short order, that it createsproblems at resale. The tatty homeappearance reduces its appeal incontrast to the new similar home of-fering, which the homebuyer can getwith more attractive financing, for lit-tle more in price than the payoffamount of the loan on the resale. Canyou say “home value depreciation”anyone?

Substituting more durable materi-als of better quality and reducinghome size might be a wise tack for theindustry. Sell the consumer ondurable materials for their satisfac-tion. Consumers are not all stupid,are they? At least not the ones withgood credit who make informed deci-sions, which are the ones we need.

• Residential architectural charac-teristics

A recent industry move is to createhomes, even modest ones, with a res-idential appearance. Couple this withmore durable materials and we in-crease consumer appeal and createfar better resale action. Extremelymodest, chattel financed homes seeman endangered species. Appearanceand good presentation grow evermore important, reducing home valuedepreciation.

• Factory invoice with clear retailercosts

The Truth in Invoice PracticesStatement (TIPS) is calculated to tryto create a verifiable home invoice sothat any lender and its appraiser cansee what is being paid for the home.While recent changes have createdmore reliable invoices, the fact is thatonly within ranges can a lender todayeasily know what the retailer is pay-ing for the home. Strange you say? Iagree. Invoices should clearly showwhat the home costs the retailer. Pe-riod.

• Long-term leases and lender/community agreement

Many of our best rental homesitesare bent on maximizing rents. Oftenthat is done without other considera-tions. In order to induce in-communi-ty lending, the elevated depreciationhomes in land-lease communities



undergo all too frequently, must beabated. One of the ways to do this isto negotiate lender/communityagreements which determine acourse of dealings between the two,especially after default and reposses-sion. This can save lenders largesums upon default and gain the com-munity owner’s valuable assistanceto handle the repo, refurbishmentand resale.

The other necessary ingredient willbe the use of long-term leases to in-duce a lender to extend a loan for ahome going into the community,tying the rent increases to real in-creases in operating expenses plusreal increases in earning capacity ofthe homeowners. Since we’ve allowedpeople to borrow on 20-25 year loanterms, closing a land-lease communi-ty without homeowners recompenseor relocation assistance is a majorand increasing problem. “GoogleAlerts” sends details of a new com-munity closure almost daily. It doesand will continue to cause the indus-try major problems.

• Use of indices for long-term leas-es

There is a current popular notionthat a homeowner should be payingas rent the capitalized value of thehomesite according to the OFHEOindex of single-family residences,plus the increase in operating ex-penses. This has tended to be lessthan successful for both the land-lords and the resident. The formerhas gotten increased vacancy and thelatter suffered a high default ratecaused by the resulting home depre-ciation. Lending in communities hasgreatly diminished as a result. Thisindustry cannot prosper without astrong chattel-into-land-lease busi-ness and neither can the land-leasecontingent.

The homeowner we need, aslenders to finance, will not value therental homesite anywhere near asmuch as the OFHEO. And that indexusually overwhelms the resident’sability to pay based on annual earn-ings. As homesite rents increase an-nually, the resident “buys” the siteover every year, unlike the real estate-secured borrower, who unless he refi-nances and gets money out, has fixedthe cost of the purchase of the siteuntil he or she sells. With rising rents,we never fix the cost of homesite oc-cupancy.

Lenders will want to be protectedwith long-term leases to create moresurety that the value of their collater-al will not drop in tandem with

overzealous rent increases. Aslenders, we all understand the desireof landlords to maximize their returnon their land-lease community. Still,if done at homeowner/lender ex-pense, lenders must draw the line.The line drawn has tumbled in-com-munity lending and without signifi-cant changes, is going to change littlein the near to mid-term future.

• Proper installationsRecently, I heard a lender describe

the actions his company has taken toencourage proper home installation.He rewards low set homes, thoselooking more like site-built founda-tions than the easy-to-do, not-so-good looking high pier home installa-tions so common heretofore. Hewants to see covered entryways,proper porches, front and rear entrystairs, good architectural design. Andthis is not conforming mortgages, butchattel! And why is this industry-leading lender doing this?

Simple, good installations, com-pleted on time, delivered as agreedupon with the homebuyer, set lowwith a distinctive home creates fargreater home satisfaction for thehomebuyer, AND when it comes timeto resell the home, appeals muchmore to subsequent buyers thanmodest homes, poorly sited and in-stalled, sitting on stilts up in the air.This reduces repossessions by great-ly increasing the ability to resell andpay off the home loan through salesproceeds. To say nothing of the in-creased consumer satisfaction deliv-ered and increased homeowner desireto keep the home “because he likesit.”

This lender is using the carrot ap-proach. He gives a substantial inter-est rate reduction for such installa-tions. It may take more than that inthe future.

• Too many defaultsPart of the defense subprime

lenders have given the media and reg-ulators for the elevated defaults andrepossessions likely to occur is that“they gave subprimers a chance forhomeownership.” I’m not sure howmuch currency this will have as Con-gress and the regulators stick theirnose into the causes of the subprimemess. But I would guess that in thecase of manufactured housing, werewe to continue to loan into communi-ties, with known default rates in the35 percent range (even with goodcredits), that if we use the above ex-cuse and justification, we may wellsee an eyebrow or two raised. Methinks that while the carrot approach

can work well with a very hands-onlender who really works at his craft,in order to mainstream chattel lend-ing in community placements mayrequire a little more stick. And charg-ing high chattel rates and having highdefaults may work financially, but itis a poor business model. It smacks of“Buy Here, Pay Here” and is belowwhat our dignity level should be. Italso may catch the unwelcome atten-tion of “busy bodies.”

• Retailer/builder relationshipIt seems that the relationship be-

tween these two important industrysegments has always been a handful.Retailers with good financial capabili-ty and experience in the industry arerare. It has historically been a “boot-strap” industry where retailers camewith little, made little over a businesscareer, tried to hang-in during thedown times and ultimately faded intothe sunset.

Along the way, consumers had var-ious difficulties with them and con-sumer surveys find this industry par-ticipant, the retailer, with low grades.The industry itself views the retaileras a weak link. The difficultieslenders have with them are leg-endary, although I must admit thatlenders too often have failed to protectthemselves.

Lenders and builders are going tohave to have far greater concerns overthe experience and financial capabili-ty of the retailer. Where those are in-sufficient, and that is common, retaillenders are going to have to secureback-up performance from thebuilders the retailer represents. With-out this builder back-up, the processcontinues to be a high default/largecharge off endeavor which stands lit-tle chance of shipments increases,unless of course you believe thatGreenseco Finance is alive and well inthe wings, ready to burst back on thescene, chattel loans a-blazing.

• Protected territories and a goodchance to make a profit

By being well capitalized, experi-enced, with protected territories andguided by their franchiser builder, wecan turn retail locations into realbusinesses with an excellent chanceof success. The ability to make a rea-sonable profit, consistently, draws re-tailer candidates with both experi-ence and capital. We see this doeswork in some parts of the industrywhere builder-owned sales outletsare made financially capable throughthe parent’s financial strength, their



managers are carefully selected andguided, and they have protected terri-tories. Often, their managers are se-lected with greater care than theirfranchised retailers. Builders mustmove towards distribution represen-tation, where franchised retailers arecommonly experienced business peo-ple, with strong financial capabilityand protected territories.

As an industry, this very perplexingmatter will need serous attention. Butwhether the industry fixes it or themarket does, it will be settled. Themarket is likely to settle it at lowershipments than a unified industryapproach that precedes a pace.

Final reflectionsI’m not sure there may not be other

needed measures. I have never beenable to sit down and read this list ofindustry model enhancements need-ed to correct the failed model. And ifyou disbelieve me that the model isfailed, I repeat the words of the“World’s Greatest Investor,” WarrenBuffett. In my March 2004 newslet-ter, which was the early precursor tothe comments in this letter, I quotedfrom Buffett’s Feb. 27, 2004 state-ment to his shareholders. In part re-garding his view of the manufacturedhousing industry, Buffett said the fol-lowing:

“During those years, (the 1990s)moreover, both the quality and vari-ety of manufactured houses consis-tently improved.

Progress in design and construc-tion was not matched, however, byprogress in distribution and financing.Instead, as the years went by, the in-dustry’s business model increasinglycentered on the ability of both the re-tailer and manufacturer to unloadterrible loans on naïve lenders. (em-phasis mine)

“A different business model is re-quired, one that eliminates the abilityof the retailer and salesman to pocketsubstantial money up front by mak-ing sales financed by loans destinedto default... Under a proper model—one requiring significant down pay-ments and shorter-term loans—theindustry will likely remain muchsmaller than it was in the ’90s.” (em-phasis mine)

And I agree with Buffett that if onlydown payments and shorter loanterms are involved, we are likely to re-main much smaller. The measures Iproposed are to start a return to the250,000 annual home shipments in-dustry long-time trend line, with farmore comprehensive action.

And why do I repeat Buffett’s wordsagain? Because when I say what hesays I know many people do not be-

lieve me. I’m a “nobody” and when Ispeak of a “failed industry model” inmanufactured housing, people thinkthey can disregard it. And for others,the concept of a “failed model” is be-yond their comprehension.

I can hear their words. “This indus-try has always worked in the past”,“The lenders have just lost theirnerve” (In reality, what the lenderslost was their shirt) and “This is sim-ply a collusion by certain entities totake advantage of the market.” Theonly people I know who are doing wellwould prosper even more with a ro-bust market. Alleging market collu-sion is so childish and avoids realityso deeply, that I can only shake myhead when I hear it. It’s usually spo-ken from atop the “grassy knoll.”

Warren Buffett is a SOMEBODY.As you read his words above, can youafford to ignore them? Hasn’t he beenproven right with such force that weshould not doubt his words and un-dertake an immediate series of stepsto correct the failed model?

That would seem an intelligent re-sult, finally, and as the industrystudy committees met again in HiltonHead, S.C., we’ll review for industryprogress. Can we rescue ourselvesfrom the housing niche into whichwe’ve fallen and can’t get up?

Martin (Marty) V. Lavin, is a 35-year veteran of the manufacturedhousing industry from Burlington,Vt. He is an attorney, consultantand expert witness to factory-builthousing interests. He is past chair-man of the MHI Financial Services(2001-04) and recipient of theTotaro Award for OutstandingAchievements in the ManufacturedHousing Financial ServicesIndustry. You may reach him at802/862-1313 or [email protected].


Historically, while innumerable lenders havecome and gone in the industry, profitabilityhas eluded almost all of them, with excep-tionally few successes. That of and by itselfsays a great deal about lending on manufac-tured homes, most of which (historically 80-85 percent) has been chattel, especially intoland-lease communities.

saving chattel lending - marty lavin · ing deficiencies of the chattel lending model. i do not...

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