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Consumers need to beware
of dealer promises and too-good-to-be-true offers, according to more
than 400 manufactured home consumers who filed complaints with the
Attorney General (AG) or the Office of Consumer Credit Commissioner
(OCCC).
Unlike most home purchase transactions the mobile home sale can be
much more like an old fashioned, high-pressure auto deal. Consumers
must sign purchase and loan contracts before they have seen the home
installed, and lenders distribute the loan funds to the dealer without
an independent, visual appraisal to ensure repairs are adequate and
the home is worth enough to support the loan.
Consumers report a variety of dealer problems including falsified
down payment information on credit applications, and misrepresentations
about terms, price, or the home itself. And while dealers are quick
to ask for a deposit, they are sometimes much slower to refund it
when consumers change their mind after seeing the complete deal.
Deposit requirements and credit checks discourage buyers from adequate
comparison shopping. Some dealers made remarkable promises to get
a customer to fill out the credit application and put money on the
table-promises that start families off owing far more than the home
is worth. Consumers reported promises to pay off their credit cards
(and some dealers actually did this), or expensive extras like trips
or rebates. Documentation also reveals predatory lending practices
that leave families "underwater" and vulnerable to a deficiency
balance if they try to sell the home within 15 years of buying it.
General
Findings
Nearly half of the consumer
complaints we reviewed (46 percent or 196 individual cases) involved
allegations of dealer fraud or misrepresentation where the final deal
looked very different from the deal consumer's thought they made.
Consumers said:
-
the dealer
switched the house with a different make, model, year or size or
a completely different home (29 cases);
-
the salesman
tried to falsify loan application information, including falsifying
the down payment amount or taking money a consumer borrowed as a
down payment (27 cases);
-
the actual
price of the home increased from the original quote to the final
loan contract (17 cases);
-
the terms
or conditions of the sale worsened, including additional costs for
items consumers thought they had already covered, additional loan
fees, higher interest and more (21 cases);
-
ads were
misleading or promised things not delivered (five cases);
-
they
were asked to sign blank documents (seven cases);
-
the dealer
refused to give buyers copies of contracts, including loan contracts
(25 cases).
About 19 percent of consumer
complaints involve dealers who are unwilling to return money after a
consumer decides to walk away from a deal-even if they try to walk away
long before the home is built or delivered. Some dealers say once a
purchase contract has been signed the consumer is on the hook even if
the consumer has not seen the home or the final loan terms.
About 41 percent of consumers (175 cases) involved consumers who are
upset about the condition of the home, and 24 percent of consumers presented
no other issue (although home quality and installation complaints are
more properly addressed to the Texas Department of Housing and Community
Affairs (TDHCA) Manufactured Housing Division, which handled more than
6,600 complaints during this same period).
Consumers Union reviewed loan documentation for 127 consumers who included
such information in their complaint to the Attorney General or the OCCC.
Of the 127 loans with interest rate disclosure, we found that most loans
were typically issued to consumers at interest rates of 9 percent to
13 percent APR, with a significant minority (19 loans) issued at a rate
greater than 13 percent.(1) Ordinary home
loans for the same period hovered between 7 and 8.5 percent.(2)
We collected reasonably complete loan information (with detailed breakdown
of charges) for 65 of the 127 people who reported their interest rate.
Using standards recommended by the National Consumer Law Center (NCLC)
and the American Association of Retired Persons (AARP), more than three
quarters of these loans could be considered predatory. NCLC's new predatory
lending standard recommends a total "points" and fees threshold
of three percent of the home price after down payment.(3)
Thirty six of these 65 customers financed points, and in almost all
of these cases the points alone added more than three percent to the
net price. Additional consumers indicated some problem with pre-paid,
financed points but did not provide complete information.
Fifty four of the 65 complete loan documents included some kind of add-
on insurance or warranty, most commonly property insurance, credit insurance,
or an appliance/home systems repair plan. Such insurance add-ons do
not add to the value of the collateral, but they do add significant
cost to the loan.
About half of the 65 loans included more money to finance points, insurance
and extended warranties than the consumers' down payment, starting these
families off "underwater." The true number of consumers in
our study who are "underwater" is probably far higher, since
dozens of consumers reported down payment fraud, an inflated home price,
"extras" added to the loan that do not increase the home value
(like credit card payoffs and cash rebates), or reported delivery of
a less valuable home than the make, model, year or type of home they
thought they purchased. Taken together, a total of 21.5 percent of complaints
involved loans that were likely made for greater than the initial value
of the home--and this may be a conservative estimate. Vanderbilt Mortgage
recently told its asset-backed security investors that, upon repossession,
manufactured homes are generally worth less than the principal outstanding
balance on the loan contract.
Current studies of mobile home appreciation have produced conflicting
results.(4) But even assuming the home
holds its value, consumers who start out owing more than the home is
worth will have no equity for several years depending on the loan term
and rate (see sample graphs, p. 20). There is a good chance that a consumer
who tries to resell the home during that period will not be able to
get a high enough price and end up with a deficiency balance. Further,
consumers who have no equity in their homes have less incentive to keep
making payments when job loss or other crisis hits. Both consumers and
their banks pay when a loan is made for far more than the value of the
collateral.
Footnotes:
_____
1 Since many of
these loans disclose both at a "contract" interest rate and
a Truth In Lending Act disclosure rate, we report here the TILA interest
rate.
2 Federal Reserve Board, Statistical Release, 30-year Conventional Fixed
Rate Mortgages, Monthly average, 12/3/2001.
3 Calhoun, Mike, Margot Saunders, Elizabeth Renuart, Mark Benson and
Sharon Hermanson, Home Loan Protection Act, A Model State Statute, A
project of the Self-Help Credit Union, the National Consumer Law Center
and the AARP Public Policy Institute, November 2001, pp. 9-11. Cited
after as Home Loan Protection Model Act.
4 Real Estate Center, Texas A&M University, Manufactured Home Buyers
Guide, April, 1999, pp. 1-2. This study uses only land/home sales through
real estate agents and finds that smaller homes on land owned by the
dweller depreciate while larger homes appreciate. "Regarding resale
value, it is unrealistic to expect a manufactured home without land
to appreciate like a site built home. In reality, land provides most
of the appreciation in a home's value unless there is an unusual shortage
of local market housing." Shen, Guoqiang and Richard Stephenson,
The Impact of Manufactured Housing on Adjacent Site Built Residential
Properties in North Carolina, pp. 62 through 66. This study finds depreciation
for homes treated as personal property but appreciation for homes treated
as real estate. Consumers Union is currently conducting its own assessment
of depreciation in manufactured housing, to be released next year.
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