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Executive Summary
Report
Solutions and Recommendations
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Promises Meets Reality
The promises of manufactured housing - the potential
that it can be just like conventional housing, but less expensive and
more rapidly built - are alluring.
Unfortunately, in today's marketplace many consumers take a risk by purchasing
a manufactured home. They cannot be sure that they will receive a product
that will be safe and durable and will hold its value.
Non-profit developers, housing counselors and advocates wishing to improve
housing for low-to-middle-income families need to confront the issues
that create this risk.
On the following pages we outline nine of the biggest issues practitioners
need to understand before venturing into the manufactured housing market.
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HIGH
PRESSURE SALES
Housing and credit counselors
frequently face consumers who have made a manufactured home purchase they
regret. Commission-driven, high-pressure sales techniques lead to problems
similar to those found in automobile sales.
- Deposits and credit checks
limit the ability of consumers to shop around for the best deal.
- Consumers report that the
terms or conditions of the sale often worsen at closing, including a
higher base price, additional costs for items consumers thought they
had already covered, packed insurance and more.
- Consumers report that dealers
may refuse to give buyers copies of contracts, including loan contracts;
- Consumers report the product
delivered is sometimes a different make, model, year or size - or a
completely different home - than originally ordered or expected.
| Sold with promises of
low monthly payments, quick closings and easy approval, manufactured
homes are distributed through a network of retailers. These retailers
typically mark up homes 18 to 26 percent over wholesale, not including
installation costs.(4) However, without
a requirement by most states to post the base price, there is little
to limit the markup. The opportunity for fraud and economic loss through
unscrupulous sales practices is exacerbated by a lack of controls
in the financing used for most manufactured homes. |
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Solutions:
Housing and consumer
advocates can push for changes in the sales process that would reduce
the opportunity for fraud. Slowing down the process with cooling-off periods,
posted sticker prices, and limits on the amount of deposits are just some
of the changes that can be made.
Housing counselors can help people determine the home's value in advance
using resources like NADA's appraisal guide or actual appraisals, and
help them avoid buying extras they do not need. By training clients to
recognize deals that are too good to be true and common tricks used by
high pressure commission sales, counselors can help them protect themselves.
Non-profit developers can purchase directly from the factory, site the
homes, and sell them later to consumers using standard financing. With
proper appraisal ensuring fair pricing, families can benefit directly
from the potential for cost savings.
For further reading on problems in sales practices in the manufactured
housing industry see:
"In Over Our Heads,
Consumers Report Predatory Lending and Fraud in Manufactured Housing,"
Consumers Union, Public Policy Series (V. 5, N. 1), February 2002.
Gordon Oliver. "Manufactured Promises; Some Buyers of Manufactured
Houses Find themselves Trapped in Bad Deals," Sunday Oregonian, August
2000.
FINANCING
Sales practices aren't the
only legacy of manufactured housing's automobile past. Many manufactured
homes are sold on so-called "chattel loans," also known as retail
installment contracts. These are the same financial instruments used to
sell cars and furniture. Once limited to ten or 15 year terms, these loans
now typically extend to 30 years at rates two to five percent higher than
mortgage loans. The home is personal property and the consumer holds a
title much as the owner of a car would.(5)
Salespeople generally pressure consumers to finance through the retailer,
allowing the retailer to collect a commission or to direct the financing
to an affiliated company. Because of this direct marketing channel and
the legal classification of the collateral as personal property, most
buyers borrow from a handful of lenders that specialize in the market.
Many mainstream lenders - with little experience (or a past bad experience)
in this market - simply make no mobile home loans under any circumstances.
Those mainstream lenders that are in the market suffer from inadequate
access to borrowers, who rarely eschew dealer financing.
The manufactured housing finance market took a spectacular nose dive in
2002. Its major lender, Conseco, (previously Greentree) filed bankruptcy
last year after repossessions in its manufactured housing portfolio reached
unsustainable levels. Symptomatic of the lack of safeguards in manufactured
home lending, an estimated 90,000 plus units were repossessed last year.(6)
Since chattel loans involve personal property, rather than real property,
different business practices and legal protections apply. For example,
lenders repackage loans for sale in the asset-backed securities market
(such as car loans and credit card debit) rather than the mortgage-backed
securities market for single family home loans. Appraisals, a standard
business practice in the mortgage market, are virtually unheard of in
the chattel loan market. Instead, lenders can use "phone audits"
to verify that the home has arrived on the lot. Special legal protections
afforded real property transactions, such as the good faith estimates
of costs required by the federal Real Estate Settlement Procedures Act,
don't apply. In case of default, homes can be quickly repossessed rather
than foreclosed.
In virtually every instance, these different practices lead to a less
disciplined market. This plays itself out on the dealership floor by facilitating
fraudulent and predatory lending practices. Consumers reported to us and
to state agencies that:
- the salesman tried to falsify
loan application information, including falsifying the down payment
amount or taking money a consumer borrowed as a down payment;
- the terms or conditions
of the loan worsened at the closing of the loan, including higher interest
rates, additional loan fees and other charges.
- dealers encouraged consumers
to verify by phone the home's placement even if the home still needed
installation.
- higher interest rates, financed
dealer "add-ons" ranging from cash rebates to "free"
vacations, packed points, insurance and fees put many consumers "underwater"
on their loans for years after their purchase.
Undisciplined
lending practices - and simple fraud - drove tens of thousands of families
from their new homes last year, resulting in a glut of used homes. Unfortunately,
a dearth of established financing for used manufactured homes in turn
reduces demand for, and drives down the value of, these homes. It also
traps consumers in their purchase, preventing them from refinancing or
selling their home to another consumer who wants to finance the purchase.
The high repossession rates that are symptomatic of the sales and lending
practices listed above have an impact on the community as well. Repossession
leaves abandoned homes and lots littering communities across the country.
These failures in home ownership depress values for neighbors, leave taxes
unpaid and disrupt the families who lose their homes.
Solutions:
Developers can avoid the problems
associated with high priced chattel financing by designing their projects
to meet conventional loan standards. Many lenders require the home to
be attached to the land as real property, along with documentation of
installation to a specific standard to qualify for their lending programs.
Lining up low cost financing and making sure your development meets the
lender's guidelines can help your clients avoid these pitfalls.
Housing and credit counselors can help consumers avoid pitfalls by warning
against pervasive practices like the use of prepaid financed points and
financed, single-premium property insurance. Just as important, housing
counselors can direct families to the lowest cost financing for their
home, which may not be the financing recommended by the retailer.
Community-based lenders should investigate new products to compete in
this market. Consumers need fairly priced alternatives to chattel loans,
both for new and used homes. Alternative options need to include checks
and balances against dealer fraud - such as on-site appraisals - that
exist in the site-built market. It can be difficult to get such products
in front of consumers and compete with the low-paperwork, sign-on-the-dotted-line
loans that currently dominate the market. Lenders need to consider outreach
through developers and counselors - as well as direct marketing to consumers
- to compete with the dealer market. The industry appears to be in a slow
transition towards conventional financing, which may open up further opportunities.
Re-financing existing manufactured home owners out of high-priced chattel
loans may provide yet another opportunity for entry into this market.
Most states still have not addressed the significant problems in this
marketplace. Advocates can promote legislation to equalize consumer protections
in the personal property market with those commonly found in the real
property market, and advocate for protections against all "predatory
lending" tactics. New predatory lending statutes should specifically
apply to all home-secured loans, including manufactured housing.
For further reading on manufactured home financing see:
"In Over Our Heads,
Consumers Report Predatory Lending and Fraud in Manufactured Housing,"
Consumers Union, Public Policy Series (v. 5, n. 1), February 2002.
"Mortgage Lending for Manufactured Homes: Maine State Housing Authority's
Experiment," Richard Genz, NeighborWorksr Campaign for Home Ownership,
September 2002.
"Manufactured Housing, A Guide to Mortgage Lending Programs,"
Manufactured Housing Institute, undated, circa 2000.
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Notes:
4 Burnside,
Kevin. "Buying a Manufactured Home," Van der Plas Publications,
2002, p. 81.
5 If the homebuyer using a chattel loan also buys land at the same time,
the land is financed through a separate loan.
6 "Fleetwood Enterprises 2nd Quarter 2003 Results Conference Call,"
Transcript CCBN, December 9, 2002.
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