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The most affordable manufactured homes are financed with private loans with higher interest rates, shorter terms and fewer consumer protections than mortgage loans.

The homes financed by these loans come without land, like a car, and the homeowner typically rents the land beneath their home. The home itself is a depreciating asset, which makes it difficult for manufactured homeowners to build equity or intergenerational wealth. The loans, called chattel, are rarely refinanced.

That means the 17.5 million Americans who live in homes financed with chattel — about 42% of the manufactured housing market — don’t enjoy the consumer protections that long-established legislative bulwarks afford those with a traditional mortgage.

But the government sponsored enterprises may now be on the cusp of entering the chattel market.

The GSEs, which back mortgages on traditional site-built homes, currently do not provide financing for chattel. That’s despite being ordered by Congress, in the aftermath of the Great Recession, to specifically serve manufactured housing.

The enterprises thus far have shunned the affordable end of the market. Instead, they have opted to finance manufactured homes that more closely resemble site-built homes, are titled as real property and cost much more. Both Fannie Mae and Freddie Mac also have backed commercial loans on mobile home communities. Freddie Mac has sought to educate borrowers on options to convert chattel financing to real property.

“Instead of serving the market as it is, they’re essentially trying to change the market to something it isn’t by favoring real estate loans,” said Mark Weiss, CEO of the Manufactured Housing Association for Regulatory Reform, which represents manufactured housing lenders and builders.

Freddie Mac aims to purchase 1,500 to 2,500 chattel loans by 2024, though it does not yet have a product for it. Fannie Mae is considering the matter with its regulator, the Federal Housing Finance Agency.

Freddie Mac’s goal to finance chattel loans also received a prominent shout-out in the Biden administration’s national affordable housing plan. To observers, it’s a clear indication of momentum building for the GSE to finance chattel, for which affordable housing advocates continue to argue.

Proponents of government-backed chattel loans say the sector is not as risky as it has been in the past.

Manufactured homes are no more vulnerable than site-built homes in extreme weather events, industry groups claim. Manufactured housing lenders say the sector has reformed its past risky underwriting practices. A subprime crisis afflicted the sector long before it appeared in the wider mortgage market. Faulty loans on mobile homes led to the downfall of the nation’s largest manufactured home lender in 2002, ensnaring Fannie Mae on its way down, an episode both GSEs remember well.

The GSEs have not yet explained how they would provide liquidity for loans made on a depreciating asset. Also up in the air is whether they would shape the market to fulfill their charter, or act as a passive secondary market participant. The chattel market is still highly concentrated, with the top five manufactured housing lenders accounting for nearly three quarters of chattel originations, the Consumer Financial Protection Bureau found.

Despite potential risks, manufactured homes as a source of affordable housing backed by the government is tantalizing.

Aside from renting, it’s often the only available option for many borrowers who can’t afford to buy the now median $375,000 home. The median chattel loan amount is $59,000, according to the CFPB, versus $237,000 for a site-built loan.

But it’s not clear manufactured homes financed by chattel loans can be an engine for long-term wealth building, as conventional mortgage financing is.

“The public policy purpose behind promoting homeownership is to create an avenue for long-term wealth building. There’s also a public policy interest in ensuring people have safe and affordable housing,” said Ed DeMarco, former acting director of the FHFA. “Chattel can be one form of providing safe and affordable housing. But it doesn’t mean that [type of] housing is going to be a path for wealth creation.”

A little bit jumbled

Fannie Mae has good reason to be cautious about manufactured housing. It’s been burned before.

Years before subprime took hold in mortgage, risky underwriting wreaked havoc on manufactured housing. Now-defunct Green Tree Financial Corp. made loans hand-over-fist in the 1990s, with loose credit requirements on depreciating mobile homes. It was able to conceal the faulty loans for years through creative accounting, however, and sold itself to Conseco for $6 billion in 1998.

But when home prices depreciated, it flamed out, and its parent Conseco filed for bankruptcy protection in 2002. At the time, 70% of Fannie Mae’s $9 billion manufactured housing portfolio were Green Tree loans bought by Conseco.

Fannie Mae waived liens on the portfolio, in exchange for servicing fees and increased servicing oversight, and recorded a loss of $83 million on securities it held, Fannie Mae documents show.

Fannie Mae did not respond to a request for comment.

“A lot of subprime behaviors showed up in the chattel market first,” said Paul Bradley, president of ROC USA, a nonprofit that helps manufactured housing communities convert to resident ownership. “This was classic fog-the-mirror underwriting and lending, invoice-fixing.”

A former Fannie Mae official who observed the debacle firsthand said mortgage finance was not built to address a depreciating asset, and Fannie Mae did not understand counterparty risk well enough at the time.

“We were really good at getting things really wrong when we got them wrong,” the former official said.

Fannie Mae “stepped in right before bankruptcy and wound up taking it on the chin,” said Weiss, of the Manufactured Housing Association for Regulatory Reform.

“The underlying lender had significant problems and was not handling things in the proper manner,” Weiss said. “But that’s not the market today — it’s just a completely different situation.”

Although the underwriting has changed, according to Weiss and other lenders, Fannie Mae still remembers the Conseco debacle. And both of the GSEs are demonstrably cautious when it comes to supporting chattel lending.

“Our friends at Fannie and Freddie who have put boots on the ground and really decided to educate themselves on manufactured housing have been fantastic,” said Cody Pearce, president of Cascade. “They believe in the product, that it’s the No. 1 solution for affordable housing. But then they run up against the credit risk and pricing teams, and it seems to get a little bit jumbled.”

Momentum builds

Regardless of whether the GSEs have an appetite for financing the affordable end of the manufactured housing spectrum, financing for chattel is gaining political traction.

On May 16, the Biden administration released a sweeping affordable housing plan, which specifically called out chattel loans as a vehicle for affordable housing.

The plan bluntly stated it would “Deploy new financing mechanisms to build and preserve more housing where financing gaps currently exist: manufactured housing (including with chattel loans that the majority of manufactured housing purchasers rely on).”

The Biden administration is banking on FHFA’s approval of Freddie Mac financing chattel loans.

That’s far from a foregone conclusion. Freddie Mac, the plan points out, first will conduct a feasibility assessment of whether it can finance chattel, and then it will seek FHFA’s approval. Although the president can now remove the FHFA director at-will, giving the Biden administration much greater authority over the agency, it is still an independent regulator, not a cabinet-level agency, like the Department of Housing and Urban Development.

Freddie Mac declined to comment. An FHFA spokesperson said that “any personal property loan purchases for DTS would be subject to FHFA approval as we explore manufactured housing financing options with the Enterprises.”

The FHFA also said it plans to host a public listening session sometime in the summer, focusing on financing options and consumer protections related to manufactured housing.

The Biden administration housing plan also highlighted increases to Fannie Mae and Freddie Mac’s purchase targets for manufactured housing loans titled as real estate, as well as efforts by HUD to update its building code, to “modernize and expand their production lines,” and help manufacturers respond to supply chain issues.”

A HUD spokesperson said the Federal Housing Administration would look to increase its loan limits to align with manufactured home sales prices to increase usability of the program. The agency will continue to monitor supply chain issues and maintain flexibilities, to help continue the production of manufactured homes “which are necessary to meet the demand for this important source of affordable housing supply,” the spokesperson said.

Despite the Biden administration’s stated plan, the path forward for government-financed chattel lending remains uncertain. It’s a frustrating dilemma for Lesli Gooch, president of the Manufactured Housing Institute. Research her organization conducted based on data from lenders — which it shared with the CFPB — contradict the idea that chattel loans are riskier than real estate loans.

The seriously delinquent rate for chattel loans in the first quarter of 2021 was just 0.38%, compared to 1.75% for manufactured home loans titled as real estate. The delinquency rate also was orders of magnitude lower than that of FHA loans, with just over one in every 100 chattel loans at least three months past due in March 2021, compared with more than one in every 10 FHA loans at the same time.

“We have data showing these loans are performing well — this is not about risk,” Gooch said, of the GSEs’ reluctance. “A lot has been done to get over the sticking points. At some point we have to stop doing research and move forward.”

Here’s an idea

Industry stakeholders have some ideas for how the GSEs could finance chattel loans without taking on too much risk. Affordable housing advocates hope the GSEs would not just provide financing, but seek to improve the market for consumers.

The GSEs already require tenant pad lease protections for manufactured housing communities for which they provide commercial loans. Could the same logic be applied to chattel loans?

Currently, the Truth in Lending Act and the Real Estate Settlement Procedures Act don’t apply to chattel. Mortgages require a detailed loan estimate when a borrower applies for financing, and a lengthy disclosure at closing. Not for chattel.

Site-built homes and manufactured homes with mortgages have foreclosure protections and are covered under the CARES Act. In case of default for chattel loans, they go through repossession, a process with fewer consumer protections.

“We’re seeing what they’re able to do with the tenant pad lease protections initiative,” said Rust. “They’re driving consumer protections with their market power. Why can’t they do the same thing in chattel?“

Freddie Mac protections for manufactured housing communities it finances already include a one-year renewable lease term, unless there is good cause to not renew, 30-day written notice for rent increases and the right to sell the manufactured home to a buyer that qualifies as a new tenant in the community.

But the GSEs could make further demands, given the right leverage. Bradley, of ROC USA, said the GSEs could provide secondary financing that requires longer loan terms, and limit rent increases for the land on which manufactured homes sit.

“If they came in with a mortgage conventional residential rate and term, they would find the industry very receptive to whatever added protections they would need to provide on that product in the community. But if they are going to just mimic what chattel lenders do — 15 to 20 year term financing, 6% to 8% to 10% interest rate — then no, the industry is not going to change one bit.”

But what of the inherent risks in manufactured housing?

David Brickman, Freddie Mac’s former CEO, last month posed a solution: using credit risk transfers as a mechanism to offload that risk and spur affordable housing, including manufactured housing.

“Specifically, the GSEs could work with existing lenders to develop a standardized product for manufactured housing chattel loans, including a single set of loan terms and documents, credit parameters and delivery mechanics, which would create significant value and bring helpful liquidity to an otherwise fragmented market,” Brickman wrote in a piece published by the Urban Institute.

To guard against the higher risk of chattel loans, Brickman suggests the GSEs initially could require lenders or investment partners to take on risky portions of loan pools.

Having an established secondary market is a tantalizing idea for Pearce, of Cascade. But his firm is not only waiting for the GSEs.

In 2019, Cascade, which specializes in chattel loans, went to market with its first private-label securitization. It securitized another manufactured housing loan pool in 2021 of $163 million over 1,889 loans, which were mostly chattel. Fitch rated a $103.2 million notes tranche with a preliminary AAA rating.

Gooch, of the Manufactured Housing Institute, asked, “If you have lenders able to do this with PLS offering, why can’t Fannie and Freddie do it?”

Pearce chalks the GSEs’ reluctance up to their past experience with the manufactured housing sector’s subprime crisis in the early 2000s. After that point, he said, underwriting guidelines changed and the sector was “ahead of the curve” when the single-family crisis hit.

Ultimately, after the Dodd-Frank reforms, the GSEs were able to move beyond the mortgage crisis mindset on site-built housing, Pearce said. But they have not moved beyond past blunders with affordable manufactured housing.

“The GSEs’ memory of that is strong, they’re passionate about it,” said Pearce. “But it’s not fair to hold manufactured housing accountable for such a long time for something that was repaired and changed.”