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What's it worth? Murky
pricing hurts consumers January
2005 Executive
Summary Sidebars: Director Author Editor For
more information, contact: Kevin
Jewell, Rafael
Ayuso, Click here to find out more about manufactured housing.
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When Sammy J. Huey of Monohans, TX went to buy a manufactured home in the spring of 2003, he quickly learned how difficult it is to get a clear price for a home. The dealerships he visited didn't have posted prices, making it difficult to assess which homes among the dealer's offerings fit his price range. He was forced to rely on the sales staff's advice about which homes he should consider. One dealership refused to give him a price on their inventory until they'd had a chance to run his credit to see what he could afford! Even the dealership from which Mr. Huey finally bought his home was somewhat ambiguous about the final price. Mr. Huey described negotiations for the price of his home with the sales staff to Consumers Union: "They'd say 'It's about this' and it was about 'that', but 'about' was a couple of thousands of dollars higher." The final closing price was 28% higher than the teaser prices they had discussed earlier in the purchase process. Mr. Huey had the feeling the sales staff "talk you into a higher priced home," and without posted prices, shoppers can't easily assess which homes they want to consider.1 Stories like this one are all too common in the manufactured housing industry, where much of the traditional dealer sales process is based on the uncertainty surrounding the value of each home. We detailed in our 2002 report In Over Our Heads how this sales and financing process leads to problems for the consumers, lenders and communities touched by the manufactured housing industry. Consumers who pay too much for a home or end up in overpriced financing often end up with negative equity in the purchase, owing more on the loan than the home is worth. In the last decade alone, this led to repossession and financial failure for hundreds of thousands of families, and contributed to a widespread downturn in the industry. In this report, we look at how the market has changed since 2002, and examine closely how the lack of transparent pricing is a major barrier to this industry's ability to serve consumers.
Manufactured housing: The recent shakeout Today only a handful of the major lenders active in the recent industry boom remain in the manufactured housing market. Conseco, the largest lender during the boom years, entered a high profile bankruptcy.4 Chase Manhattan, one of the largest personal property lenders in the post-Conseco world for home-only loans, has recently announced its exit from the industry.5 The CIT Group, bought by Champion homes to act as a captive lender, closed down in 2003.6 These lenders all financed homes using personal-property rather than real-property loans. Lenders who made real-property mortgages tended to be less specialized in manufactured homes and were more likely to demand better underwriting practices, including independent appraisals, and so better survived the market downturn. Nevertheless, the mortgage market has suffered as the resale values of manufactured homes, even those legally attached to land, collapsed from the oversupply of repossessed units. This reduces the value of the collateral of the loan portfolio. These changes caused Fannie Mae to severely restructure its guidelines on manufactured homes, and the FHA title I program has reduced its volume to a negligible fraction of the market.7 Freddie Mac has also quietly wound down its program for park-placed manufactured homes.8 The tightening of personal-property lending has pushed the financing mix slowly towards mortgage loans (see chart below.) More homes are now titled as real estate, although personal property loans still dominate the marketplace. Nationwide, 80% of single section homes, which are those most accessible to low-income individuals, are titled as personal property.9 This varies by region – in 2004, fewer than 8% of singlewide manufactured homes titled in Texas were mortgage financed.10  A hybrid lending product has developed that still uses personal property loans even as fewer homes are being placed in rental communities. In a typical "land/home" deal, the home remains personal property, but a related transaction creates a separate note for real estate. This allows the seller to avoid conducting a formal appraisal on the home sale or providing the disclosures required by the federal Real Estate Settlement Procedures Act. It also gives the lender the ability to repossess the home like a car, rather than go through a more formal foreclosure if the buyer misses payments. (For more details on difference between foreclosure and repossession, see our upcoming report ""Manufactured Housing, a Home the Law Still Treats like a Car.") The industry trade group, the Manufactured Housing Institute, has been working to implement a voluntary "Lender Best Practices" project to better document the underwriting standards used by lenders on manufactured home loans. Participating companies must have procedures to verify loan characteristics such as borrower's employment and credit history.11 This program was developed in reaction to the loss of the sector's credibility in the financial markets after the drop in underwriting standards as companies fought for market share in the late 90s. Six companies have joined the program as of the end of 2004, but the true test of their commitment to this program will come when the market re-enters a boom. Previous attempts to tighten the underwriting in the sector failed to survive the boom years. See sidebar "Deja-vu all over again." Murky pricing – part of the problem In order to better understand the variation in the sales prices of new manufactured homes, Consumers Union surveyed Texas consumers who bought manufactured homes in the last two years and compared the prices paid by those who bought the exact same new home.12 We found differences in prices across consumers that made conventional 5% downpayment requirement look small in comparison. Twenty-four percent of the respondents to our survey paid a price that was more than 5% higher than the average pricing, washing out the equity provided by this 5% buffer. Some of this variation seems to be related to the bargaining position of the purchaser. We found first time homebuyers paid 8.2% more on average than experienced homebuyers. Consumers who felt they knew "a lot" about manufactured homes paid 4.1% less than other homebuyers. Consumers who find their own financing or pay cash have more bargaining power in the price negotiations. We found that consumers who financed their homes through the dealer paid 10.9% more for their home than consumers who bought the same model for cash or used an outside lender. For a consumer who buys an average home ($47,037 in our survey), that translates into $5,144 in additional costs. Consumers who compared the offerings of different dealerships are more likely to get a better deal. Consumers who shopped at more than 3 dealerships paid 9.1% less than consumers who shopped at 3 or fewer. For a consumer who buys an average home, that translates into $4,261 in savings. This variation in price hurts both consumers and the industry. Many consumers overpay for their purchase. The lenders are hurt when the consumers realize they owe more on the loan than the home is worth and give the home back to the bank via default. In the long run, the manufacturers and dealers are hurt when consumers interpret this large discrepancy in prices as a sign of a rip-off or "first day off the lot" depreciation and avoid buying manufactured homes all together. To curb fraud, stabilize the related lending market, and increase trust among buyers, the automobile industry developed the sticker price (see "Fifty years of auto sticker pricing"), and the real estate market adopted independent appraisals (see "Real estate: Appraisals are the norm") to help certify the fairness of transactions. Both of these practices could improve the manufactured housing marketplace. The current system is designed to make it hard for consumers to shop around, but our research shows that shopping around can save money. Consumers need to know which homes fit their price range, as well as the cost of options and available upgrades. Seventy-two percent of the recent purchasers who responded to our survey indicated that sticker prices would help make the purchase process easier, but only 26% indicated that prices were posted when they shopped for a home. Half a century of experience with sticker prices on automobiles indicate that a sticker price should include both MRSP and the wholesale invoice price to prevent the listed MRSP from becoming an inflated part of the bargaining game. Invoice pricing allows consumers to determine the cost of the home itself. Independent lenders already demand invoice information from dealers to establish the value of the collateral. Fannie Mae has proposed creating a central database of invoices that will allow lenders to access the original invoice at sale and for the life of a home. Any information available to lenders, including the invoice price, should be available to the consumer buying the home. This will allow the dealer's mark-up for their services to be transparent, giving the dealer, the consumer, and the lender the same information in the negotiation for the final transaction price.13 Today, real-estate mortgages commonly undergo an independent appraisal. But because many manufactured home transactions are still classified as personal property purchases, this independent oversight is rare. This is a direct result of the evolution of the manufactured housing sales process from its travel trailer roots – the homes are still sold like a car off a lot. Like auto dealers, manufactured housing dealers retain close ties to specific lenders.
When the lender's financial interest is completely independent from the dealer, the lender's interest in the sales price of the home is aligned with the consumers. Both the lender and the consumer want the best price for the home and expect that the home will be adequate collateral for the loan.
But when the dealer acts as the primary sales channel for the lender's loans, the lender must maintain an ongoing relationship with the dealer in order to access that dealer's consumer business. This need for access to consumers creates a conflict. Lenders fight for market share by offering dealers larger profit margins in exchange for loan volume. Those profits come from higher home prices. In this market, competition among lenders actually increases home prices, as lenders compete for dealers by allowing higher loans for lower collateral rather then competing for consumers by offering lower interest rates.17
Despite calls for appraised real-property lending as a solution to the problems in the manufactured housing industry since the 1970s,20 they have not been adopted by the industry. The state of Texas briefly required all manufactured homes constructed on nonrental land to be considered real property, a change which was intended to encourage real property conventions such as appraisals and third party closings. This requirement was rolled back after opposition by the industry.21 Today, few manufactured home purchases undergo independent appraisals. Sticker prices simplify the sales process and make shopping for a home easier. All homes should be required to have a posted price that includes the invoice price as well as the recommended dealer markup and the specifications and options included and/or available with the home. Consumers can then easily compare the value offered by different retailers. This information is already prepared by most manufacturers, because many lenders demand invoice information before financing a purchase. Any information a manufacturer or retailer provides a lender should be provided to the consumer before the sale. Independent financing puts the bank on the same side of the price negotiations as the buyer. In an industry that is ever more vertically integrated, dealers, manufacturer, and lender can often be the same company, and only independent lenders have the incentive to make sure the transaction occurs at a fair price. We recommend consumers shop for their loan separate from their home, and home ownership programs should require the use of independent lenders. Appraisals are the fundamental solution to stabilizing this industry. Consumers need a safeguard in the system, and an independent appraisal is an option that is available for both new and used homes. Several specific policies can be implemented to encourage the use of appraisals in this marketplace.
(Footnotes) 1 Survey response and follow up phone interview. Survey ID: 0603. 2 Automotive Information Disclosure Act, House Report No. 1958, June 24th, 1958. 3 Complaint to the Office of the Attorney General, 8/23/1999, El Paso, Texas. 4 Morse, Neil J. "Manufacturing the Dream," Mortgage Banking, 8/1/04. 5 "US Manufactured Housing ABS Continues to Struggle," Standard and Poor's, 8/2/04. 6 "Champion Enterprises, Inc. Exits Consumer Lending Business," PR Newswire, 7/31/03. 7 Comments of the Coalition to Advance Manufactured housing to HUD, Docket FR-4790-p-01, July 15th, 2004. 8 Leasehold mortgages are listed as ineligible for sale to Freddie Mac at http://www.freddiemac.com/sell/expmkts/mhle.html, Accessed 1/3/04. 9 "Selected Characteristics of New Manufactured Homes Placed by Region," US Census Bureau, Internet Source: http://www.census.gov/const/mhs/Char03.xls, accessed 1/17/05. 10 Texas Department of Housing and Community Affairs Home Ownership Records, accessed 1/13/05. 7.6% of single section homes were titled as real estate, a necessary step for obtaining a realproperty loan on the combined land-home property. 11 "Lender Best Practices Program Certifies First Applicants," Manufactured Housing Institute Press Release, June 17, 2002. 12 We received 100 responses to the survey. Consumer responses were compared to other consumers who bought homes that were the same model, width, length, number of sections, square footage, wind-zone, and approximate weight. Significant upgrades were controlled for, and respondents who indicated there were "exceptional factors" affecting the price of their home were excluded from the analysis. 13 Annual Meeting Report, Manufactured Housing Institute, October 17-19th, 2004. 14 Committee on Banking, Finance, and Urban Affairs, House of Representatives, Implementation of Appraisal Reform Sections of FIRREA p. 708, 9/12/1992. 15 Charles A. Luckett "Mobile Home Demand and Sources of Financing," 1979 Working paper No. 27, Credit Research Center, Purdue University. p.6. 16 John D. Grissim, "The Complete Buyer's Guide to Manufactured Homes and Land," 2003 p. 24. 17 "US Manufactured Housing ABS Continues to Struggle," Standard and Poor's, 8/2/04. 18 "Clayton Homes subsidiary buying $4 billion Chase portfolio," Associated Press State and Local Wire, 12/8/04. 19 Texas Department of Housing and Community Affairs Home Ownership Records, accessed 1/13/05. 20 Leichey, David, "Backward Attitudes Towards Mobile Home Financing Persist," American Banker, 10/16/1976. 21 Slater, Wayne, "Bill causes rift between mobile home sellers, consumer groups," Dallas Morning News, 4/28/2003. 1 U.S. Census Bureau Manufactured Homes Survey Series. 2 US Census C-25 report series, Table 1 "New housing units completed by ownership, type of structure and location." 3 Lichenstein, Grace, New York Times, Page 30, Column 1, October 25th, 1975. 4 Forbes "Return Of The Founding Father," March 1st, 1976. |
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 Consumers Union Offices: Communications Office, New York - Washington Office West Coast Office - Southwest Office - Consumer Policy Institute
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In some cases, the lender and the dealer may even be separate parts of the same company. For example, both 21st Century Mortgage and Vanderbilt Mortgage Finance Inc. are owned by the same holding company that owns both Clayton and Oakwood homes.