Manufactured housing, or mobile homes, is often the most attractive housing option for many low- and moderate-income Americans. Reinforcing the concept that it is expensive to be poor, the financing of manufactured housing is often much more expensive than it needs to be. This article reviews how the current financing for manufactured homes functions, explores why it is so expensive, and suggests an important strategy to reduce its costs by pursuing a secondary market for manufactured home mortgages.
The benefits to low- and moderate-income home owners of a more efficient manufactured home mortgage market would be substantial, for as many as 10 million families live in manufactured homes. Many are low-income families, the group for whom home ownership is one of the only sources of wealth and financial stability. Indeed, manufactured housing is a key resource when it comes to providing home-ownership opportunities for low- and moderateincome families, accounting for two-thirds of this country’s new affordable housing production in recent years.
There are many obstacles to creating this more efficient mortgage market, but that was also once true for site-built homes when credit was expensive and home-ownership rates were low. Over the past fifty years, however, the U.S. mortgage market has created ample capital flows and continued product innovation that have contributed to a home-ownership rate over 70 percent and a climate—unique in the international context—in which an 80 percent loan-to-value, thirty-year mortgage is considered “plain vanilla.” The following explores how that same vibrancy can spread to the manufactured housing market.
Although most families who live in manufactured housing consider themselves home owners like any other, the process by which they purchase and finance their home is radically different. This contradiction, in part, is a relic of the manufactured housing industry’s origins in the travel-trailer industry of the 1940s and 1950s. The technology used to produce manufactured homes has evolved in leaps and bounds, resulting in a product that today can be virtually indistinguishable from site-built construction. But even though a manufactured home today bears no resemblance to a “trailer,” it is still all too frequently sold and financed like one.
The trailer-inspired sales and finance system imposes unnecessary costs on owners of manufactured homes. For example, most manufactured homes are titled as personal property and consequently their financing is handled through personal property—or “chattel”—loans rather than normal real estate mortgages. Consider data provided by two different lenders who deal predominantly in manufactured home chattel loans. Don Glisson Jr. of Triad Financial noted that his loans start at 7 percent, but only 20 percent to 25 percent of customers receive this rate. Others pay up to 10.5 percent, which is reserved for those with the lowest credit scores who are borrowing on a single-wide unit. David Rand of Origen Financial noted that his average was 9.5 percent with a range of 7.5 percent to 15 percent.
The prevalence of chattel loans tends to push up the finance costs for the average borrower. The Affordable Housing Survey shows that manufactured homes on rented land have median terms of 9 percent interest for 15 years (or 8.7 percent interest for 18 years if on owned land), compared to median terms of 7.5 percent interest over 25 years for single-family site-built homes.
Although many manufactured home purchasers try to access the mortgage market as a way to get cheaper financing, they are rejected by lenders at a higher rate than homebuyers with similar credit scores who purchase site-built homes. Manufactured housing mortgage purchase applications were rejected 30 percent more often than applicants for site-built houses at every level of income (see Figure 1), according to 2004 lender data reported in compliance with the Home Mortgage Disclosure Act of 1975 (HMDA). In
fact, people well above the median income are rejected for manufactured housing mortgage loans at much
higher percentages than those with incomes below the median who apply for site-built home mortgages.
Finally, for those customers who are able to secure a conventional (non-chattel) mortgage, the loan is more expensive than sitebuilt home loans. Specifically, more than 50 percent of manufactured housing loans are made at rates that are three percentage points higher than Treasury rates, while only 11 percent of site-built home mortgages are made at these higher rates (see Figure 2).
Current Obstacles to an Efficient Mortgage Market
Many aspects of the current market for manufactured homes make them difficult candidates for long-term, conventional mortgages, including how they are sold, sited, titled, and appraised.
Dealers
Most new manufactured homes are sold through dealers. In many instances, dealers steer buyers into the personal property loan route because those loans are fast and simple, even though they are more expensive. Moreover, loans are often referrals from dealer to lenders, where the dealer captures a fee—sometimes a percentage of total financing—in return for the referral. These fees can come as direct transfers, bonuses for pushing particular products, or bonuses based on the performance of the loan. Finally, some dealers aggressively try to steer purchasers to their own financing program, which often is less competitive than a home mortgage.
In addition to pushing more expensive financing options, some dealers also create confusion around the price of a manufactured home. The practice of pricing a manufactured home varies from state to state. In California, dealers are required by law to display the Manufacturer’s Suggested Retail Price (MSRP). The MSRP information includes invoice price, recommended dealer markup, and the home’s specifications. This allows consumers (those shopping dealers’ lots, as opposed to those buying a home that has already been affixed to real property), to make apple-to-apple comparisons between different models and dealers.
In many states, however, this is not yet standard practice. Although many lenders demand invoice information for a personal property, or chattel loan, consumers are often in the dark on their home’s true price.