A:
You are paying a high rate because the lender views the loan on your manufactured
house as a personal loan rather than a mortgage loan. I'll explain why shortly.
A manufactured home is built entirely in a factory, transported to a site, and installed
there. It is distinguished from "modular", "panelized", and "pre-cut" homes, which are also
factory built but assembled on the site.
Manufactured houses usually are built without knowing where they will be sited, and are
subject to a Federal building code administered by HUD. The other types of factory-built
housing are not assembled until the site is identified, and they must comply with the local,
state or regional building codes that apply to that site. These other types of factory-built
houses are financed in the same way as houses constructed entirely on-site.
THE BAD NEWS
Most purchasers of manufactured housing, including you, are shut out of the mainstream
mortgage market. They must find loans in a parallel market, which is much like the unsecured
personal loan market. Lenders in this parallel market assume that loss rates on manufactured
house loans will be high, as they are on personal loans, and they price them accordingly.
They view manufactured houses as poor collateral that provides them with little protection.
One reason for this view is that manufactured houses can be moved. Before the HUD
building code went into effect in 1976, manufactured houses were called "mobile homes", and
this term is still widely used. Even though few ever leave their first site, they remain
tarnished by the image of mobility.
Lender concern that the collateral can disappear is well grounded when the house sits on
rented land, which is the case for about half of all manufactured houses. Most leases are
short, and if the landowner decides that it is more profitable to use the land in some other
way, the manufactured house owner must move it or leave it. Since the cost of moving is very
high, and in many cases the property is worth little more than the debt, owners sometimes
just walk away. The lender's collateral ends up in the trash heap.
Few owners of manufactured houses have built equity the way owners of site-built houses
do. (Equity is property value less debt on the property). A major part of the appreciation
in the value of site-built houses is due to rising land values. If you don't own the land,
you don't realize this benefit. Furthermore, many purchasers of manufactured houses began
with no or negative equity, putting nothing down, and including settlement costs (and
sometimes furniture and insurance) in the loan.
In addition, manufactured houses seem to have more defects than site-built homes. Because
they are geared to low-income purchasers, the materials used have often been inferior.
Sometimes mishaps occur in moving houses from factory to site, and sometimes the
installation is defective.
Many manufactured houses are not anchored securely to their foundations, making them
extremely vulnerable to natural disasters. Hurricane Andrew in 1992 destroyed almost all of
the manufactured houses in its path, compared to about one-third of houses built on-site.
Getting defects in a manufactured house fixed can be a hassle because responsibility is
divided and finger pointing is common. The factory owner says the mover did it, the mover
says the installer did it, and the installer says it happened at the factory.
According to Consumers Union, about 12% of all manufactured home loans end up in default.
This is about four times as high as defaults on mortgages secured by homes built on-site.
Last year, the largest lender on manufactured houses, Conseco, was forced into bankruptcy
after losing about $4 billion in two years.
THE BETTER NEWS
Despite these numerous problems, manufactured housing provides an important source of
affordable housing, especially in the south and in rural areas. Because of efficiencies in
factory production, manufactured houses cost significantly less per square foot than housing
constructed on-site. Further, there are some bright spots in the picture.
Community groups and foundations have begun to focus attention on manufactured housing
because they see it as an important way to provide decent housing to low-income families.
Laws have been passed in some states to give residents of rental parks more legal rights. In
New Hampshire, residents of some parks have banded together to form co-ops, which have
purchased the parks. There is a National Foundation of Manufactured Home Owners, which can
refer buyers to a local chapter in the area.
An increasing number of purchasers are middle-class retirees living in cities and
suburban areas, who own their own land. It is estimated that about 2/3 of all purchasers
today are landowners.
It is possible, furthermore, to purchase a manufactured house, install it permanently on
your own land, and qualify for mainstream mortgage financing. It is even possible to do it
under a lease, provided the lease is long enough and provides adequate legal protections to
the house owner and lender. Mainstream financing remains small but it is growing.
The quality of manufactured housing, including the quality of installations, is also
improving. In 2000, Congress passed the Manufactured Housing Improvement Act (MHIA), which
provided an improved system for keeping the HUD building code up to date, and required
states to improve the quality of installation and to set up dispute resolution programs.
The status of state compliance is summarized in Implementation
of MHI Act of 2000.
In California, some developers have used manufactured housing in lieu of on-site
construction, marketing and financing them in the same way. This avoids many of the
problems referred to above that have tarnished the industry.
Yet hazards remain for the unwary. Here are some guidelines for avoiding them.
Do not buy a home from a dealer in a package that includes installation, site, and
financing. Tempting as it may be, one-stop shopping in this market is a sure-fire recipe for
over-paying and not getting what you want. Take it one step at a time. It is easiest to
compare the houses offered by different dealers if the price applies only to the house.
Bundling muddies the waters.
Find the site first. Before I did anything else, I would decide where I want my house,
and whether on rented or owned land. If your credit is good and you have enough cash to buy
your own plot, you will be eligible for mainstream mortgage financing. The savings in
financing costs and in rent, if converted into a "present value", will probably be well in
excess of the cost of the land.
If you rent because you can't find a plot or don't have the cash to buy one, but your
credit is good, you may still be eligible for mainstream financing. This requires that you
obtain a proper lease, which is one that has a term of at least 5 years, and provides the
other legal protections required by lenders.
Freddie Mac will buy mortgages on manufactured houses secured by leaseholds in some but
not all states. Freddie’s requirements are complicated and you may need a lawyer to
determine whether any particular lease is in compliance.
If you can't purchase a plot or obtain an eligible lease, you will be obliged to settle
for personal loan-type financing, paying 2-3% more. Even so, you will want to pay careful
attention to the lease terms, which can vary widely. If you accept a monthly term, or the
landlord's right to approve a purchaser, you will be at the landlord's mercy. Before you
sign, talk to residents of the park about their experience.
Get a warranty on installation: Installation of manufactured houses remains
trouble-prone. The dealer may want to include installation in the price. That is one type of
bundling that makes sense, provided the dealer assumes responsibility with a strong
warranty. If the dealer includes installation in the price but will not provide an adequate
warranty, either ask for a price without installation, or walk.
If you buy the house without installation, you have to hire an installer yourself. This
is no small matter, which is why so few buyers do it. The MHIA requires states to develop
installation programs that include installation standards, training and licensing of
installers, and inspections, but compliance has been spotty. Check your own state from the
spreadsheet attached to this article on my web site. In addition, ask local owners for
recommendations, ask installers for references, and make sure they are insured.
Arrange your own financing: The dealer will try to package financing into the deal. He
can get you approved fast and easy, which is an attractive lure. If you can qualify for
mainstream financing, however, you will do better to find your own loan. If you don't
qualify, it might not matter.
Jack Guttentag is Professor of Finance Emeritus
at the Wharton School of the University of Pennsylvania.
Visit the Mortgage Professor's
web site
for more answers to commonly asked questions.
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