Two Rates For FHA Loans?
March 1st, 2010
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Each year at this time the very smart — and very rich — Warren Buffett issues a letter to shareholders of the company he heads, Berkshire Hathaway.
Berkshire Hathway owns Clayton Homes, what Buffett describes as “the country’s leading producer of modular and manufactured homes.” Or, what many people call mobile homes.
In discussing Clayton in this year’s letter to shareholders, Buffett says there’s a “punitive differential in mortgage rates between factory-built homes and site-built homes. Before you read further, let me
underscore the obvious: Berkshire has a dog in this fight, and you should therefore assess the commentary that follows with special care. That warning made, however, let me explain why the rate differential causes problems for both large numbers of lower-income Americans and Clayton.
Rate Differentials
“The residential mortgage market is shaped by government rules that are expressed by FHA, Freddie Mac and Fannie Mae. Their lending standards are all-powerful because the mortgages they insure can typically be securitized and turned into what, in effect, is an obligation of the U.S. government. Currently buyers of conventional site-built homes who qualify for these guarantees can obtain a 30-year loan at about 5 1?4%. In addition, these are mortgages that have recently been purchased in massive amounts by the Federal Reserve, an action that also helped to keep rates at bargain-basement levels.
“In contrast, very few factory-built homes qualify for agency-insured mortgages. Therefore, a
meritorious buyer of a factory-built home must pay about 9% on his loan. For the all-cash buyer, Clayton’s homes offer terrific value. If the buyer needs mortgage financing, however — and, of course, most buyers do — the difference in financing costs too often negates the attractive price of a factory-built home.”
Title 1
In fact there are FHA mortgages for manufactured homes, but not the same loans which are available for traditional houses. If you have a typical house you get financing insured under the FHA’s 203(b) program, if you have a mobile home you can get financing backed under the Title 1 program.
“A Title I loan,” says HUD, “may be used for the purchase or refinancing of a manufactured home, a developed lot on which to place a manufactured home, or a manufactured home and lot in combination. The home must be used as the principal residence of the borrower.”
But Buffett is right, the rates for traditional FHA loans and Title I financing are very different. Why? Traditional FHA loans are secured by a property and its improvements — the house. Title 1 loans are secured in whole or in part by a mobile home, something which is likely to depreciate like an aging Hummer.
Given the differences between traditional homes and mobile houses, the differential in the interest rates is not surprising. However, what could help lower monthly costs would be to extend Title 1 loan terms to 30 years from today’s maximum of 25 years.
If you have or are considering a manufactured home, take a look at the Title 1 program available through FHA mortgage lenders.
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March 2nd, 2010 at 8:48 am
TxLIHIS’s (texashousers.net) response to Buffett’s discussion of the “punitive differential” on MH:
On Friday Warren Buffett released his annual letter to shareholders of Berkshire Hathaway. Berkshire Hathaway owns Clayton Homes, a major manufactured home manufacturer. In the letter, Mr. Buffett laments that “very few factory-built homes qualify for agency-insured mortgages”
Mr. Buffett compares the market rates of 9% on manufactured housing loans to the current rate of 5.25% and states “If qualifications [on conforming loans] aren’t broadened, so as to open low-cost financing to all who meet down-payment and income standards, the manufactured-home industry seems destined to struggle and dwindle.” In doing so, he implies that the 375 basis points (bp) (3.75%) differential between manufactured home loans and conforming loans is due to market intervention by the “all powerful” FHA, Fannie Mae, and Freddie Mac.
Mr. Buffett is being disingenuous. The current market rate on “non-conforming” site built housing is about 80 bp (0.8%) higher than conforming loans. This 80 bp is the interest rate subsidy provided to loans purchasable by Fannie Mae. The other 295 bp is the market discount for manufactured housing.
Why does the market discount manufactured housing?
Research by Consumers Union, the publisher of Consumer Reports, shows that prices of manufactured homes over time have more volatility than conventional homes. (Full disclosure, I was the leader researcher on Consumers Union’s Manufactured Housing Research Project and author of the linked report.) This means that a greater percentage of manufactured home buyers are under water at some point in the life of a loan. Homes worth less than the loan balance have a higher risk to the lender. Ergo, they demand a higher interest rate.
But Mr. Buffett must know this, because he also owns Vanderbilt Mortgage, a manufactured home lender. And with $30.5 Billion in cash on hand, if he wanted to make cheaper manufactured home loans, he would do it. If the subsidy was the only difference, he could be making loans at 6.05% on all manufactured homes and profiting tidily.
But he’s not.
We should note that manufactured homes can be eligible for conforming loans. They generally have to have a permanent foundation and meet other guidelines. Even more subsidy is available through the USDA 502 loan program, which accepts new manufactured homes on permanent foundations, and offers highly subsidized interest rates for very-low, low, and moderate income borrowers. However, this program is almost never used: in 2008, USDA made or guaranteed just 9 loans in Texas.
The reality is most dealers and consumers don’t structure their purchase transactions to meet the lending requirements of these programs. For example, they may place the home on a short-term foundation and lease in a park rather than on a permanent foundation on owned land. Such homes are generally not eligible for subsidy.
Whether or not the government should provide an 80 bp subsidy to all manufactured homes would need to be the subject of a much longer blog post. (The short version: the answer depends on whether the purpose of the lending subsidy is to put roofs over peoples’ heads or to promote access to the asset building opportunity of homeownership. (see this report)) But what Mr. Buffett says the industry needs to stay alive is not an *equal* 80 bp subsidy, but a much larger 375 bp subsidy.
In short, he wants a 468% higher loan subsidy for manufactured housing than conventional housing. And that’s not leveling the playing field, that’s tilting the table.
(Version links available at:
http://texashousers.net/2010/03/01/buffett-wants-to-tilt-the-market-towards-manufactured-housing/)