The Manufactured Housing Credit Disaster

John G. Stoss If you bought and financed a manufactured home (the new term for mobile home) between 1995 and 2003, you are probably well aware of how easy it was to get your loan. During this period of time, manufactured housing lenders essentially lent money to anyone who asked for it, regardless of their credit or ability to pay their mortgage payments.

Of course there were a few responsible lenders, but the big names in manufactured housing were lending money like there was no tomorrow. Not only were they writing "bad paper" to lend to those with poor credit or otherwise couldn't afford it, but they were also allowing the manufactured home dealers to charge overly inflated prices for the homes they sold. For example, a home with a factory invoice of $20,000 was selling for as much as $45,000. I'd say that's a pretty huge markup.

On top of all this, the lenders were charging exorbitant interest rates to help compensate for all the poor credit loans they were underwriting. It was not uncommon for a single-wide manufactured home load to be written at 17% for a 20 year term. Sure, the bad-credit car lenders charge similar interest rates, but that's on a car, which is a much smaller-ticket item than a home, and in that case you're looking at 5 year loans, not 20 year mortgages.

So to recap the situation; you've got people with bad credit who can't afford a home, you've got homes being sold for much more than they're worth, and you've got ridiculously high mortgage rates. Already this is a recipe for disaster, but there are even more elements to this great scandal that we haven't even mentioned yet!

On top of this already dangerous market condition, we add the fact that manufactured homes depreciate. That's right, in contrast to conventional real estate, these homes actually go down in value each year. The reason is that they are not real estate--that is to say there is no property tied to them. There are actually some that are tied to property (called land-homes), but in this case we're talking about the vast majority of manufactured homes that end up in mobile home parks (aka manufactured home communities).

OK, now you've got a home that's depreciating sitting in a mobile home park (probably on the bad side of town), and the home owner must pay RENT to the mobile home park owner each month for their home to sit in the community. Yes, and even while the home is ever decreasing in value, the lot rent continues to rise each year just like the housing and apartment rental markets.

Now that we've got an understanding of the elements at play in this situation, let me paint the picture for you. The year is 1999 and you've got someone with a poor credit history who is unable to qualify for a conventional mortgage, so they go to their local manufactured home dealer and easily qualify to purchase a new manufactured home. They choose a nice singlewide for $45,000, and since they have poor credit, the lender charges 16.75% interest on the 20 year loan (also called a chattel mortgage). They put the home in a local mobile home park where the lot rent is a reasonable $250/month. Their house payment is $651, and their monthly insurance is $50 which is added to their mortgage payment. They're paying $950 to live in a single wide in a trailer park, but that's OK with them because at least they "own" their home instead of renting an apartment.

Now let's fast forward four years later to 2003. They've made all their payments on time, but since the interest rate is so high the principal balance of the home is still $43,415.86 (yes that's the actual amortized balance at the end of year four of the loan). Their lot rent is not $325, and their insurance is $60. So they're paying $1035/month to live in a single wide in a trailer park. At this point, their credit has improved as a result of making their payments on time. They realize that they could be making a conventional mortgage payment and owning their own home for the same amount of money, so they decide to sell their mobile home so they can buy a real house. They do what about half of the residents in their mobile home park have already done, and put a sign in the window, expecting to attract a buyer at they're payoff price of $43,000. After all, they figured, they're not trying to make any money off it...they just want out of it for what's owed. Several months go by and not a single phone call comes in. Finally they take a trip to their manufactured home dealer to see what the problem may be. Of course they find the place under totally new management, and the new salesman politely explains to them that their home is no longer worth what they paid for it.

To their shock, they learn that their home currently has a blue book value of $21,000. That means if they sold the home for book value, they'd have to come up with $22,000 of their own cash just to pay off the balance at closing. They certainly don't have that much in savings, and the entire ordeal has left them disgruntled and unhappy to be in the home any longer. So they do what many of their neighbors have already done: walk away and let the bank have it back. They've had bad credit before, so they figure what the heck--we'll be in the same place we were in before we bought the home. It will be a repo on their credit report for at least seven years, but they'd rather have that than stay in the mobile home park a day longer.

The bank repossesses the home, and adds it to their list of repos for sale. Since about 10,000 of this family's peers around the country decided to do the same thing, the market is oversaturated with repos. The lenders have written so much bad paper at this point that they're literally hiding stacks of loans in vaults, for fear of their investors finding out and their stock plunging. Eventually there became no way to disguise the situation, and the major manufactured housing lending institutions went bankrupt. In order to fulfill court orders to pay off as much of their debt as possible, they are forced to liquidate all repo inventory as quickly as possible. By the end of 2003 there are so many repo's on the market that that singlewide with a $21,000 book value is liquidated for $7,000 to the highest bidder.

Now a couple of years past the industry's meltdown, things have stabilized a little, as the remaining lenders have tightened their credit standards for the most part, and reduced the maximum prices that can be charged for new homes. However, there are still many problems within the industry, mobile home parks will continue to raise their rents, and manufactured homes will continue to depreciate. Hopefully this overview has given you a better understanding of the manufactured housing credit disaster.

John Stoss is a former sales lot manager for a manufactured home dealer, who saw the industry go through great turmoil, and watched as his previous customers suffered the consequences. Today he is dedicated to educating people about the risks of manufactured housing, and steering them towards sound real estate investments. He runs a website at www.american-lender.com, which provides free advice and profiles the best lenders for loan approvals for Americans with credit problems, and www.debthelpers.us to help them get out of debt.