|
|
Manufactured housing: A home that the law still treats like a car Febrary 2005 Executive Summary Sidebars: Charts: Director Author Editor For more information, contact: Kathy Mitchell, Rafael Ayuso, This report was funded in part by a grant from the Ford Foundation. Click here to find out more about manufactured housing.
|
In 2002 a lender repossessed an Alabama manufactured home with the owner still inside. Barbara Smith had purchased the home from a dealer in 2001. A year later the park where she rented a space for the home notified her that she was behind on her rent. The notice also said that the park had given permission for the seller’s representative to repossess the home. Although Smith filed bankruptcy and agreed to catch up on the loan and lot rent, the lender’s representative proceeded with the repossession. Smith told the judge in Alabama, “I continued… to get my belongings out of the home and, while I was trying to get just clothes and whatever of value that I could get, the guy that actually drove the home came to the door and he said ‘get out of the home, get out of the home now. We have orders to pull it now.’ I came to the front door, the steps were missing. The home was actually moving. I jumped out of a moving home.” The judge ruled that the lender violated protections of her Chapter 13 bankruptcy filing.1 Unlike conventional or site built homes, most manufactured homes can be hauled off like a car or a couch if the consumer falls behind on payments. For homes where the land and home are financed together under a real estate mortgage, the lender must follow a formal foreclosure process to retake the home. However, manufactured homes that are not tied to land can be repossessed by the lender if the borrower defaults on the loan. It is far easier to repossess personal property than to foreclose on a home. State laws provide a range of protections for homeowners in financial trouble, from the more protective judicial foreclosure to the least protective — repossession of a manufactured home. Between these, some ordinary homeowners face a quick foreclosure... called “power of sale” foreclosure. Easy repossessions are of special concern to manufactured home buyers, who often start out “underwater” or owing more on the loan than the home is worth due to problems with valuation, pricing and financing. These consumers usually have severe problems when a creditor comes after their home. A lender can sue for a deficiency, which is the difference in the amount owed on the loan and the amount the lender receives for the sale of the home.2 Because the borrower starts out underwater, if a creditor repossesses a home and then sells it for less than the amount owed on the loan, consumers not only lose their homes but may end up with significant debt enforced by a judgment as a legacy of the purchase. A Del Valle, Texas resident purchased a new 1998 Crestridge manufactured home from Tori Homes of Del Valle for $36,000, paying 12 percent interest on the loan, according to her legal aid representative. She traded in a 1987 home for a $5000 credit. After two years, she defaulted on the loan. The company repossessed the home in 2001 and sold it in 2002 for a mere $5000 leaving a balance of about $25,000 on her unpaid loan. She couldn’t pay that amount, so the company filed a 1099 form in tax year 2002 for the $25,000 they claimed she owed. The consumer is disabled and lives on a fixed income. By filing the 1099 form the $25,000 is now considered income for which the consumer has not paid taxes. She now gets notices from the IRS to pay taxes on this income.3 Foreclosure procedures for most ordinary homes include all or some of the following protections, depending on state law4:
Power of sale clauses reduce foreclosure protections Over half the states allow the use of a “power of sale” clause in mortgage contracts and deeds of trust.5 The borrower agrees to let the lender sell the manufactured home if he or she defaults on the loan agreement. The clause eliminates the requirement that the lender go to court before foreclosing on a home. State law determines the amount of notice required before the home can be sold. Such nonjudicial foreclosures require borrowers to file an action in court to stop the foreclosure process in order to raise a defense instead of defending against a lender’s action to initiate a judicial foreclosure. In addition, most foreclosures involving a “power of sale” contract do not allow for redemption. A loan is only redeemed when the borrower pays off the entire balance.6 Charles Shrader’s five-year-old manufactured home was repossessed by a dealer in Conway, Arkansas. A week after the Sheriff stopped by with a notice, a repo company arrived to pull it off the lot. As the home was being hauled off the family, was “flinging stuff out the door.” Consumers like Mr. Shrader not only lack foreclosure protections, they also have limited resources to stop repossession of their home. “I didn’t have no income. I couldn’t go to a lawyer and say, ‘Hey, can you help me keep my house?’ They were requiring all this money and well, I didn’t have it to do. I couldn’t do anything but just sit here.”7 When lenders repossess a manufactured home, the rights of the homeowner are limited. The chart below illustrates the lack of protections for the repossession process. The ability to stop or slow the process, retain or regain the home or limit the deficiency amount are usually unavailable in the repossession process. Article 9 of the Uniform Commercial Code (UCC), enacted by all states, governs secured transactions in personal property (chattel) loans. It provides some consumer protections for the repossession of personal property, including manufactured homes. The UCC establishes a minimum standard for states to follow. States can enact stronger consumer protections and some have done so, limiting a lender’s ability to repossess property without a borrower’s explicit permission. Self-help repossession is commonly used for repossessing cars, furniture and other consumer items. The spectacle of a self-help repossession of a not very mobile home is much more disruptive and damaging to families. Instead of removing an item from the household, the repo man pulls away the whole home and all the contents that have not been previously removed.
Limits on self-help repossession Recognizing the inherent problems associated with repossessing a home with personal possessions inside, some states have specific laws that apply to repossession of manufactured housing. For example, they may give the consumer additional time to cure the debt, notice before repossession takes place or require lenders get a court order before repossessing the home. Examples of states with specific protections are: Colorado: The lender can take possession of a manufactured home used as a residence without the judicial process only if there is clear and convincing evidence that the borrower has vacated or abandoned the home or voluntarily surrenders it.8 Minnesota: The lender can only take a manufactured home through judicial action. The law states specific procedures that must be followed before the lender can repossess a manufactured home. The lender must notify the borrower of the court process 30 days before seeking a court order to remove the occupant from the manufactured home and repossess it.9 Pennsylvania: Lenders must notify consumers by certified mail 30 days prior to repossession of the home. The law lists the information to be provided on the notice, including how the homeowner can cure the default within a 45-day cure period. Borrowers have the right to cure a default up to three times in one year. The lender may not accelerate the loan or repossess the home during the cure period.10 Vermont: The lender must file an action in superior court to take possession of a manufactured home.11 Wisconsin: The “Wisconsin Consumer Act” prohibits self-help repossessions. Lenders must use the judicial process to take possession of collateral unless it is surrendered.12 Right to cure and right to reinstate: “Right to cure” laws give the borrower the opportunity to catch up on the unpaid loan payments and retain possession of the home prior to repossession by paying the defaulted amount plus any collection costs or fees.13 The Office of Thrift Supervision regulations encourage lenders to offer a 30-day right to cure on federally financed manufactured home loans. If the lender does not offer the right to cure, the borrower has no automatic right to cure under federal law.14 “Right to reinstate” laws allow the borrower to reinstate the loan after the manufactured home is repossessed by paying the defaulted amounts. All states give consumers the right to redeem a real property mortgage by paying off the balance of the loan, stopping the foreclosure process. Some states also offer a “statutory right of redemption.” These laws allow borrowers to get their homes back for a short time after its sale.15 Two states — Minnesota and Pennsylvania — have specific statutes that grant manufactured home borrowers a right to cure a loan that is in default. Minnesota: The lender must give the borrower of a manufactured home loan 30 days from the notice to cure to make a full payment on the default and pay a $15 fee to the lender. The lender does not have the right to repossess the manufactured home if the default has been cured. 16 Pennsylvania: The lender must send notice to the borrower by certified or registered mail at least 30 days prior to repossession. It should inform borrowers of their right to cure the default. The default may be cured up to the time the title of the home is transferred. The lender may not transfer the title until 45 days after the borrower has been notified the loan is in default and the lender intends to repossess the home.17 The following procedures for curing or reinstating a loan after the repossession process has been initiated can help consumers keep their home. Provisions outlining the right to cure prior to repossession should define:
In those cases where repossession has already started, provisions for the right to reinstate a loan should include:
A Phoenix area couple defaulted on their manufactured home loan after a disability left them incapable of making monthly payments. They agreed to have the home voluntarily repossessed. The lender sold the home for an amount far less than what was still owed and sued the couple in court for the balance. The lender successfully obtained a deficiency judgment for $35,000 against them. The couple’s only source of income after becoming disabled was social security, which the lender was temporarily able to garnish from the couple’s bank account. Fortunately, with help from a legal aid attorney, they overturned the garnishment because the income being garnished was social security. However, in accordance with Arizona law, the judgment against them will remain on their permanent credit record as long as the lender continues to file a renewal of judgment. The interest on the $35,000 will continue to accrue at 18 percent interest annually.18 Arizona state law does not allow deficiency judgments against a home foreclosure but personal property loans under repossession aren’t protected. If the Phoenix couple had a conventional loan, they wouldn’t have the deficiency hanging over their heads today. Because repossessed manufactured homes have flooded the market in the last four years, lenders often sell the repossessed homes for dramatically reduced prices, leaving large deficiencies. The effect on the selling price of used manufactured homes is huge, selling for less than a third of the value of a new home.19 Significant deficiency judgements can harm families for years. Because manufactured homes are rarely appraised at purchase, consumers often pay too much, and need anti-deficiency protections even more than other home buyers. In most states deficiency judgments can be obtained against all borrowers of personal property, including manufactured housing. Two states — California and Arizona — specifically address deficiency judgments against manufactured homeowners in the law. Oklahoma gives some manufactured home owners this protection through its homestead laws. Arizona’s anti-deficiency statute prevents a lender from suing a consumer for any losses after foreclosure as long as the reduced value of the home is not due to the owner’s neglect. This applies to real property loans only. Arizona’s anti-deficiency law does not protect manufactured housing financed as personal property. Deficiencies can be claimed against manufactured homeowners who have a personal property loan even if it is the borrower’s primary residence. The consumer may choose to deed the home back to the lender before foreclosure to avoid a deficiency judgment. This is known as a “deed-in-lieu” of foreclosure. However, if the lender forgives a certain amount of debt in this process, the consumer may have to report the amount as taxable income.20 In California the lender can repossess the home but does not have the option of suing the borrower for additional money owed on the loan.21 No deficiency judgment is allowed after the sale of a manufactured home for failure to pay off the balance of a manufactured home loan unless the deficiency is the result of damage to the house.22 The California Court of Appeals has ruled that the law’s intent is to protect against consumers paying for mobile homes that they no longer own.23 Oklahoma provides protections against deficiency judgments for designated homesteads financed with power of sale mortgages.24 The homeowner can require judicial foreclosure and request that no deficiency judgement be pursued by the lender. That is not the home I ordered Consumers often purchase a manufactured home sight unseen, based on a pre-selected floor plan, appliances, color and other fixtures. But consumers sometimes complain that the home delivered is not what they ordered. If that happens, the ensuing process to get the mistakes corrected is time consuming and frustrating. Often the consumer gives up on the process, tells the dealer to come get the home, and stops paying for a home that does not resemble the one they ordered. By extending foreclosure protections to all manufactured homeowners, consumers would have more time to pursue a complaint with the state. Weak or nonexistent repossession laws benefit the unscrupulous dealers who rely on the lack of protections to force the consumer to accept the home they did not want. Dealers can too easily repossess the home and sue for deficiency, forcing the consumer to pay for a home they no longer own. Most regulation of foreclosure and repossession takes place at the state level. Consumers of manufactured housing have even more limited protections if they finance their home with a personal property loan. Default and repossession rates of manufactured housing have been so significant in the past four years that the resale value of the homes has plummeted. The loss in value of these homes is too often passed along to consumers in the form of deficiency judgments. State laws can be constructed to protect consumers whose individual financial crises’ are exacerbated by systemic problems in the market outside of their control. Self-help repossession: Homes are not automobiles and repossession should go through a formal court process. Applying limits to self-help repossessions, such as requiring advanced notice of default on the home loan, gives the borrower time to make up the defaulted payments and retain possession of their home. Requiring the lender to get a court order to repossess the home gives the home owner the opportunity to challenge the default and repossession. Right to cure: Make right to cure laws apply to manufactured home loans and give consumers the opportunity to catch up on missed payments and avoid repossession. Anti-deficiency laws: States should limit the ability of lenders to sue for the unpaid balance on a manufactured home loan. Manufactured home owners who live in their home as a primary residence need this protection. If the home has been repossessed, there should be no further action allowed to collect on the debt. The consumer should not be stuck paying on a loan for a home they no longer possess. Manufactured home loans can leave the borrower owing more on the home than it is worth on the first day the consumer takes possession of the home. If lenders enter into these questionable financial agreements, they should take responsibilty for the outcome.
Homestead exemptions: Anyone should be able to declare a primary residence, whether real property or not, a homestead. Homestead exemptions in state law should apply to manufactured housing not attached to land, financed as personal instead of real property. The homestead exemption statute should:
Judicial foreclosures for power of sale contracts: Require lenders to go to court in order to foreclose on homes financed by mortgages or deeds of trust containing a power of sale clause.
Footnotes: 1 “ ‘Callous’ repossession costs creditor twice collateral’s value Debtor forced to jump from mobile home that was being towed away,” Consumer Bankruptcy News, Vol. 13, No. 3, 9/19/03. 2 National Consumer Law Center, Repossessions and Foreclosures (5th ed. 2002), p. 355. 3 Interview with Rio Grande Legal Aid representative Linda Paulson, 1/19/05. 7 Bleed, Jake, “Mobile home repos still a woe State sees about 100 taken back monthly for loan default,” Arkansas Democrat-Gazette, 1/4/04. 8 Colorado Revised Statutes §4-9-609. 10 Pa. Stat. Ann. Tit. 96, §623(G) (West); 10 Pa. Code S55.2. 11 Vt. Stat. Ann. Tit. 9, §2603. 12 WI Statutes Chap. 425.206 (a) (b) (c). 13 National Consumer Law Center, Repossessions and Foreclosures (5th ed. 2002), p. 513. 18 Community Legal Aid Services, Phoenix, AZ. 19 Bragg, Roy, “Manufactured crises; The rattled mobile home market tries to recover from the economy and its own mistakes,” San Antonio Express-News, 3/8/03. 20 Arizona Rev. Stat., 33 Chap. 6.1. 21 National Consumer Law Center, Repossessions and Foreclosures (5th ed. 2002), p. 364. 22 Cal. Health and Safety Code, 18038.7. 23 Lexsee 185 CAL. APP. 3D 1291; Bank of Sonoma County, Plaintiff and Respondent, v. Norman B. Dorries, Defendant and Appellant. 24 Oklahoma Rev. Stat., Title 46, sec. 46-40. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
 Consumers Union Offices: Communications Office, New York - Washington Office West Coast Office - Southwest Office - Consumer Policy Institute
|
|
