When is residential lending a “piece of cake”, a “walk in the park”, or “a cake walk”? Never. There is always uncertainty in the future, always challenges and competition in the present. Yet the industry will help borrowers with about $1.5 trillion in residential loans this year, and something north of $1 trillion next year, assisting borrowers in an efficient, compliant manner. Business models are shifting, however. Why?
I received this note from James Johnson. “Rob, there have been a number of postings in your recent commentaries about how tough the mortgage market is today, and I would like to share a few of my thoughts with you and your readers. These are directed to both company owners as well as production teams. For starters, I don’t see anything on the horizon that is going to lead to a quick turnaround, with the possible exception of a big drop in rates. It is possible that we will see another Central Bank bailout in the next year or two that leads to some sort of refi boom, but barring that, this market of shrinking volume and margins will be with us for quite some time. By that I mean 3-4 years, maybe longer.
“No doubt we are in a bear market for rates and people should be thinking about what happens when rates hit 6% in the next year or so, because that is where we are headed. Unless you were in the business prior to 1983 you have never seen a bear market, and I can tell you from experience, it is not much fun. Thirty plus years of falling rates created a whole series of excesses that are being corrected right now. I am finding too many company owners employing their bull market strategies in this bear market, and I think that is a very dangerous game plan. Bigger companies have their struggles, but I see the smaller companies ($1 billion and less annual) as being particularly vulnerable, They must staff every operations function without enough units to create any efficiency, a model that many are questioning. This operating leverage (fixed costs) will be brutal in Q4 and Q1, 2019.
“In many cases I think that owners of the smaller companies might be better off going back to being brokers and eliminating most of their operations expense. Or they can go the other direction and try to affiliate with a bigger company. Staying where they are today in no man’s land is probably the toughest route. The whole market is rolling up to capital, scale, technology, and cost efficiency, and not much doubt about that. In many cases owners could affiliate and eliminate most of their risk, take their capital out, and make more money with fewer headaches over the next few years. That should be compelling. The same is true for production teams, as they should be seeking scale and technology to compete going forward.” (If anyone would be interested in talking about this further or looking at your options, contact James Johnson.)
Manufactured housing in the primary & secondary markets
Recently I heard someone joke, regarding any house built in a factory, “Hey, if there’s a dog on a chain in the appraisal photo, or a license plate, we’re not going to lend on it!” But there is a lack of inventory of traditional stick-built homes available. With sales still decent many analysts believe that the market could be poised for a dramatic increase in manufactured housing. Creative and innovative companies are building manufactured housing today that rivals the quality of more traditional homes. Fortunately, homebuyers and originators are seeing an increase in financing options for this type of housing, as well.
I was fortunate to have spent some time last week in Washington DC with Dr. Lynn Fisher. (Most know her from her days on the economics team at the MBA. She is now Resident Scholar, Codirector, AEI Center on Housing Markets and Finance.) She observed, “The belief that housing can be produced more efficiently than is currently done is not a new idea at all. In fact, Americans have experimented with alternate ways of producing homes since at least the mid-1800s when sectionalized houses helped them to expand westward. But attempts to fully modernize and industrialize the production of housing have never had staying power. Over the last decade, we estimate that 87% of new homes, including mobile and manufactured housing, were built on-site and not in a factory. That number, however, ignores the extent to which prefabricated components are increasingly used in on-site construction – for example, window and door assemblies, prefabricated trusses and structurally insulated panels.
“In 1971, two scholars wrote in a report to the President’s committee on Urban Housing that the, ‘popular literature is filled with charges that the construction industry is inefficient and that it consciously inhibits cost saving innovations’ (Burns and Mittelbach, 1971). While the report, and many since, partially refute the claim about low productivity growth in housing construction, it seems fair to say that perceptions of homebuilding in the U.S. have changed little. A June 7, 2018 New York Times article proclaimed that the, ‘global construction industry is a $10 trillion behemoth whose structures determine where people live, how they get to work and what cities look like. It is also one of the world’s least efficient businesses’ (Dougherty 2018).
“Despite such claims, there is a lot going on in housing construction, and some if it could truly be game-changing. For example, next week at AEI’s Seventh annual AEI-CRN conference on housing markets and finance, we’ll be hearing from Jason Ballard of ICON. His company is developing the technology to allow 3D printing of houses. We’ll also hear from Jerome Smalley of Blueprint Robotics whose company, as the name suggests, is using robotics to flexibly produce a wide range of housing designs in its factory.
Dr. Fisher’s note went on to clarify some definitions. “In addition to site-built housing, a surprising variety of off-site housing production techniques have been tried in the US (and around the world) over time. We distinguish between two main groups of off-site production: manufactured or mobile homes on one hand, and panelized and modular housing on the other. In the case of manufactured homes (called mobile homes before 1980), the home has a chassis for over road travel and is built to the national Housing and Urban Development (HUD) building code first established in 1976 for such housing (confusingly also called HUD-code housing). By contrast, panelized or modular housing is at least partially built in a factory setting, must meet state and local building codes and typically does not have a chassis for towing. Panelized housing is usually shipped from the factory as components (floor systems, wall panels and trusses) to be assembled and completed on-site, whereas modular housing is typically shipped in three dimensional sections connected together at the site.”
Lynn mentioned one great (failed) example. “Following World War II the need for housing, a scramble to re-purpose the industrial war machine and a massive government intervention combined to spur the next boom in prefabricated housing firm start-ups even as on-site homebuilders continued to learn how to take advantage of economies of scale, as famously demonstrated by Levitt and Sons.
“The Lustron Corporation was a poster child of this era both in its massive government backing and the extent of its attempt to industrialize the homebuilding process. It invested more than $39 million in capital, the clear majority of which was financed by the national Reconstruction Finance Corporation (RFC), to produce a projected 100 homes a day out of porcelain enameled steel (both inside and out) in a former aircraft factory. Its government backing was highly controversial, its start-up delayed and its products launched during the 1949 recession. The RFC called its loan for a variety of reasons and as Carl Koch relates, almost as soon as it started producing homes, ‘the Lustron Corporation hoisted sail, and moved slowly and majestically into receivership’ (1956), It produced just over 3,000 homes.” Thank you, Lynn!
We’ve had advancements in robotics so fewer skilled workers are required in the building process. The final delivery and assembly of the homes, however, is done locally (skilled labor, plumbers, electricians, mason, landscapers) thus supporting the local economy.
Anne Elliott and Don Elliott, Jr. thought it important that lenders and investor know the terminology involved in the factory-built housing industry, and the associated risks. “Manufactured houses are built in a factory. Double-wides and triple-wides are too wide to be hauled on a trailer down the highway so are assembled on-site. Single-wides, double-wides and triple-wides (typically 16’, 32’ and 48’ in width respectively) are typically rectangular. Houses with more complicated exterior footprints are most costly to build. Inexpensive stick-built houses may also be rectangular, but usually differ from factory-built because they have non-standard width.
“Loans on manufactured housing are considered higher risk than stick-built housing for multiple reasons. Loan performance is poorer. The average borrower has a lower credit score and more problematic credit. Most manufactured housing is less durable and shows wear earlier than stick-built housing. Consequently, value depreciates like automobiles rather than appreciating like stick-built housing. In most areas, manufactured homes are less marketable. Much of the public does not distinguish between trailers and manufactured homes, despite the latter being permanently attached to a lot.
“Permanent attachment may be impermanent. Appraisers and servicing agents tell stories of arriving at an address and discovering an empty lot where a manufactured house once stood. Stick-built houses are capable of being moved from one lot to another, but manufactured housing can be moved more easily. Documentary requirements on manufactured housing (principally title- and appraisal-related) are complex.
“Manufactured housing may be an affordable option in an appreciating market, but value suffers in a depreciating market when borrowers can afford more structurally sound and centrally located stick-built housing. In some areas such as the Pacific Northwest, manufactured housing has better market acceptance and less of a stigma. Manufactured homes in California coastal communities may sell for prices consistent with or higher than luxury home prices in non-coastal states.
“Several years ago, when I announced that our correspondent division was discontinuing purchasing loans on manufactured housing, spontaneous cheering broke out. I cheered as well. For me, it meant fewer audit errors to research, less internal training and re-training, and no further repetition of my standard warning to originators: Assign manufactured housing loans to your most detail-minded and risk-savvy underwriters.
“Be aware of distinctions between manufactured, modular and prefabricated housing. Manufactured housing is assembled in the factory and transported to the site. Modular is built in sections, transported and assembled on-site. Prefabricated housing is factory-built with panels or walls attached to framing on-site. Some view the minor distinctions between modular and prefabricated as inconsequential. Unless the appraiser distinguishes and the investor does also, it may not make a difference. In most cases, modular and prefabricated housing are typically considered the equivalent of stick-built by investors.”
(Anne was kind enough to send a Kindle link to a good reference book titled “Mortgage Risk: A Blueprint for Smarter Origination.”)
In the secondary markets, there are certainly programs. FHA sets out rules for its manufactured home guidelines. FHA loans can be used to purchase mobile homes, manufactured homes and/or modular homes. HUD, of course, has its Title 1 program.
Freddie Mac has a page on its program with various links. Fannie Mae recently introduced the MH Advantage initiative, a mortgage program for specially designated manufactured homes with features comparable to traditional stick-built single-family homes. These manufactured homes can include interior features like drywall, energy- efficient appliances and upgraded cabinets in kitchens and bathrooms, as well as exterior amenities such as porches, garages, and architectural features like eaves and higher pitch rooflines. Once a manufactured house meets eligibility criteria, including construction, architectural design and energy-efficiency standards that are more consistent with site-built homes, an MH Advantage sticker will be affixed by the manufacturer for easy identification by lenders and appraisers.
Contractors know that manufactured homes have been architecturally like stick-built homes for years. This Fannie Mae program simply validates that quality for the mortgage industry and prospective homeowners alike.
Through MH Advantage, qualifying borrowers can secure financing with a down payment as low as 3 percent. Loans also feature cancellable mortgage insurance and can be combined with other Fannie Mae programs like HomeReady or HFA Preferred mortgages.
If you want to know more about MH Advantage™, the latest Fannie Mae Appraiser Update provides tips for appraising MH Advantage homes, information about a revised policy for manufactured homes with additions, and updates on its condo project standards.
And the Urban Institute’s Housing Finance Policy Center posted a blog: New evidence shows manufactured homes appreciate as well as site-built homes. In their blog, the researchers look at new data available from the Federal Housing Finance Agency and determine that the prices of manufactured homes guaranteed by the government-sponsored enterprises perform similarly to those of site-built properties. This is great news for expanding affordable housing, since manufactured homes are one of the most affordable and underused types of housing. This new evidence suggests a need to reevaluate the presumption that manufactured homes do not appreciate at the same rate as site-built homes – a presumption that may be contributing to their low demand.
A photographer goes to a haunted castle determined to get a picture of a ghost on Halloween. The ghost he encounters turns out to be friendly and poses for a snapshot. The happy photographer later downloads his photos and finds that the photos are underexposed and completely blank.
Moral to the story: The spirit is willing, but the flash is weak.
Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “The Rise of the Credit Unions.” If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.
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