The Financing of Manufactured Housing
The Commission for Affordable Housing
and Health Facility Needs for Seniors in the 21st Century
Dr. James A. Clifton
Vice President, Economics and Housing Finance
Manufactured Housing Institute
September 24, 2001
THE FINANCING OF MANUFACTURED HOUSING FOR SENIORS
COMMISSION ON AFFORDABLE HOUSING AND HEALTH FACILITY
NEEDS FOR SENIORS IN THE 21ST CENTURY
Dr. James A. Clifton
September 24, 2001
My name is James A. Clifton. I am Vice President of Economics and Housing Finance at the Manufactured Housing Institute (MHI), on whose behalf I am appearing today. MHI is the national trade association representing all sectors of the manufactured housing industry: manufacturers of HUD-code and modular homes, component suppliers to those factories, independent retailers, community owners, developers, lenders and insurers. As an industry trade association, MHI is somewhat unique in this scope of representation and operation. In addition, MHI represents our industry in association with over 49 state and regional bodies. On behalf of our members and associates, we welcome this opportunity to testify on the financing of manufactured housing for our nation's growing population of senior citizens.
About two-thirds of seniors finance their manufactured home purchases with cash, leaving a nest-egg of savings from the sale of their previous home.
This creates an important fourth leg of retirement savings augmenting the traditional pension, Social Security and personal savings model. It is a sound policy goal to expand this trend for the baby boomers as a way of improving the quality of life for many more Americans in their retirement years.
For seniors financing their manufactured homes, the approval rates for credit are higher than for the general population and the personal property loan rates lower.
Almost fifty percent of the seniors in manufactured housing moved from single family site built housing to their new factory built homes, and are very satisfied with them, indicating that resource allocation in the direction of more manufactured housing for this segment of the population is coming and is desirable. However, current percentages are not available.
"Proximity to health care" is important to age 55-64 seniors in our age restricted communities, but "wellness" attributes such as indoor pools are more important as are several other community features such as proximity to shopping and attributes of the home itself.
MHI believes financing for manufactured housing should be treated no differently than other forms of housing, whereas at present it is the only form of housing without any direct subsidy in the capital markets.
Our policy proposals in the financial arena for manufactured housing are general in nature, and would benefit seniors as well as other purchasers of our homes.
The Commission on Affordable Housing has asked us to comment on four aspects of affordable housing for seniors: (1) financial "market factors and forces" affecting seniors; (2) the current and future trends for the number of seniors who choose to live in manufactured housing; (3) regulatory and legislative impediments in the financing of manufactured housing for seniors, and suggestions for changes; (4) "home and community based services, including health related services" that are being provided to seniors in manufactured housing, and suggestions for regulatory or legislative change.
I will address each of these questions in turn.
HOW SENIOR CITIZENS FINANCE THEIR PURCHASES OF MANUFACTURED HOUSING: THE FOURTH LEG OF RETIREMENT SAVINGS
Last year, MHI completed a survey of recent purchasers of manufactured homes in age-restricted communities. While the detailed results of this survey remain confidential, I can share certain findings which should be very useful for the record in these proceedings. Two caveats are in order. About three fifths of those surveyed were between 55 and 64 while very few were over 75. About two-thirds of the respondents were married. These are important points for two reasons. First, manufactured housing communities for those seniors choosing to live in them tend to be a "first stop" in the golden years, not necessarily the final stop. These seniors remain active in life style and are still relatively healthy. Part of their health and sense of well-being no doubt resides with the fact that they are still married couples, not widows and widowers.
The single outstanding financial fact about this group of seniors' purchases of manufactured homes is that over two-thirds pay cash for their homes. Of those financing their manufactured homes, almost twenty percent pay between 11% and 20% as a down-payment. A little less than 10% make down payments of fifty percent or more. The affordability of manufactured housing makes this possible, as does the equity that these buyers have built up with their previous homes during their primary working years.
In fact, MHI's survey reveals that purchasers of manufactured homes in age- restricted communities typically emerge with comfortable "nest eggs" of savings from their buying decision; namely, the difference between the selling prices of their previous homes and the purchase prices of their new manufactured home. While the MHI survey results do not enable any precise estimate of the size of this nest egg, a substantial plurality of these buyers emerge with a nest egg of several thousand dollars. Very few do worse than break-even. More than twenty percent emerge with a nest egg of over $50,000. This is an important retirement savings phenomenon that manufactured housing provides, in essence an additional leg to the traditional three-legged-stool model of retirement income from personal savings, Social Security and pensions.
In particular, as this Commission struggles with all the important issues surrounding the retirement of the baby-boomers, it is critical to remember that manufactured housing could become the fourth leg of savings for many more, even most, retired Americans because of the nature of these financial transactions and the associated movement from primary working-age residency to first "golden years" residency.
What are the financing options for the twenty five percent of senior Americans who make the type of down-payment on a manufactured home that we observe on homes in general. There are two basic types of financing available depending upon the circumstance: (1) personal property financing of the home and a monthly lease within the community; (2) land/home financing. Beyond this, there are emerging products which come closer to being a real estate mortgage such as Freddie Mac's new leasehold program for MH communities. And, in a growing number of instances, real estate mortgages are being used to finance manufactured housing.
Personal property or chattel finance has been and remains the traditional method of financing manufactured housing - for all age groups. Few understand the nature of this type of loan and as a result much mis-information is conveyed, especially when rates are as far above real estate mortgage rates as they have been for several quarters. These loans are not secured as real estate, have a greater frequency of loan delinquency than do real estate mortgages, are made against what has traditionally been viewed as a depreciating asset in many circumstances, and otherwise carry significant risk factors which preclude the rates from ever being equal to a commodity product like a real estate mortgage.
This having been said, senior citizens benefit from some of the features of chattel finance, especially in today's market environment. Compared to the credit profiles of all purchasers of manufactured homes, those of seniors are far above the average. As the lending community has moved towards risk-based pricing in recent years, senior citizens financing their purchases of a manufactured home with a personal property loan have received a lower rate than they would have in a one-size-fits-all pricing environment.
I asked a major lender within our industry to examine loan applications and approvals by age group, using "over 55" as the demarcation for seniors. The average FICO credit score for those 55 and under applying for a loan in recent years was 614 compared to 661 for seniors. For the loans approved, the average FICO score was 666 for those 55 and under while it was 702 for seniors. While I am not aware of any "special" financing programs for seniors, these differences in credit scores indicate that in today's market environment of risk-based pricing, on average, seniors purchasing a manufactured home with financing should be receiving a lower rate than those 55 and under.
The mix of loan applications and approvals by age group also indicates that the availability of chattel finance for seniors is favorable. In the sample taken, while only 13% of loan applications were for seniors, 20% of the loans approved were for seniors. [For those 55 and under, applications made constituted 85% of the total whereas loans approved constituted 79% of the total.] Another way to view these statistics is that for seniors, 58% of the loan applications made were approved, whereas for those 55 and under only one third were approved.
The relative ease of qualifying for this type of loan and moving into a brand new home in a matter of a few weeks for both processes to be completed tends to be an extremely gratifying experience for seniors compared to dealing with developers, real estate agents, mortgage loan departments in banks and settlement attorneys. A friend and long-time client of mine financed a second home in retirement in North Carolina's lake country. He had purchased some land high in the mountains and did not want to face the prospect of delay and difficulty in dealing with a builder, with a construction loan, with subcontractors and inspectors. He bought a manufactured home and financed it with a personal property loan from a large lender. Did he make a smart decision? He certainly thinks so. What I can say is that this gentleman graduated at the top of his class at Harvard Law School, was a corporate attorney at GE and Raytheon, and became the general counsel of another major high technology firm for many years before retirement.
THE PERCENTAGE OF SENIORS IN MANUFACTURED HOUSING NOW AND IN THE FUTURE
To the best of my knowledge, neither the U. S. Census Bureau nor HUD collect housing data by age group that would enable us to answer what percentage of seniors purchase manufactured housing. Overall, the data indicate that while the homeownership rate for the entire population was 67.4% in 2000, for seniors the rate was between 80.3 and 80.4 percent. The homeownership rate is higher for seniors than any other age group.
While MHI also does not have data on this question, I can present some figures that bear on your question. Forty nine percent of the seniors purchasing a manufactured home in our survey of age-restricted communities lived in a site-built, single-family, detached home previously. Seventeen percent lived in other manufactured housing, twelve percent in apartments, ten percent in condos, and the remainder in either town homes or duplexes.
HOME AND COMMUNITY BASED SERVICES INCLUDING HEALTH CARE FOR SENIORS IN MANUFACTURED HOUSING
Most seniors want to live in communities that offer a sense of security, privacy in the sense of not having common walls, and a degree of ownership. At the reduced incomes that accompany the retirement years, only manufactured housing meets these three criteria. In our survey of age restricted communities, thirty seven percent of the respondents had annual gross household incomes less than $35,000 per year while another forty percent had annual incomes of between $35,000 and $50,000.
As indicated earlier in my testimony, age restricted manufactured housing communities tend to be a "first stop" in retirement living for seniors. In our survey of age restricted MH communities, one finding helps to summarize what I believe the Commission is asking for in this regard. A majority of respondents do not want grab bars in their showers (i.e. they are active retirees and relatively healthy), but they do want provision in the shower walls for later installation of grab bars when or if it becomes necessary (i.e. they are projecting a health-related need at some point in their future).
The grab bar finding is suggestive of what seniors need and want by way of health related facilities and other amenities in their MH facilities. Of fourteen community amenities surveyed, "proximity to medical services" ranked only number five and was close in importance to number six and seven priorities, a clubhouse, and land-lease rent arrangements, respectively. Ahead of proximity to medical services in desired amenities was, in order, (1) price of the home, (2) 55+ age restriction, (3) floor plan, and (4) proximity to shopping.
Anecdotally, my discussions with owners of age restricted communities indicates that "wellness" facilities such as indoor swimming pools and exercise rooms appear to suit the needs and wants of this 55-64 age group better than on-site medical facilities per se. So long as medical care is not a long drive from the community, these respondents are satisfied.
REGULATORY AND LEGISLATIVE IMPEDIMENTS IN THE PROVISION OF FINANCE FOR SENIORS TO BUY MANUFACTURED HOUSING
As indicated earlier, there is no direct, specific lending program designed by major lenders in this industry for seniors. Indeed, that would constitute price discrimination for other potential purchasers of manufactured housing. However, current market trends toward risk-based pricing end up providing lower financing rates for seniors indirectly because their FICO scores are higher and because for this and other reasons a somewhat higher percentage of their loan applications are approved than for other segments of the population.
MHI supports a variety of policy changes in the lending environment in general for manufactured housing, which would increase the supply of funds available and have the effect of lowering rates by lowering the cost of funds to the industry and improving the supply of secondary market sources. Manufactured housing is the only major component of America's housing, let alone affordable housing, that does not receive any financial subsidy in the home lending marketplace. Having been explicitly identified in law as part of America's affordable housing in the Manufactured Housing Improvement Act of 2000 (P. L. 106-569), our general policy position is that manufactured housing should receive the same treatment in he capital markets as other forms of housing. As to some specific suggestions for regulatory or legislative change, I have appended MHI's policy statement.
Manufactured Housing Institute
Recommendations for Reinvigorating FHA Title I
And Ginnie Mae Programs for
- Appoint before the end of 2001, a special assistant to accelerate reinvigorating the FHA Title I program with emphasis on administrative actions.
- Lift the Ginnie Mae moratorium on new issuers. End the practice of lifting the GNMA Moratorium only to lenders who are active in other FHA lending besides Title I. End the practice wherein only a loan that cannot be placed with a conventional lender will be placed with a Title I lender. GNMA Should establish higher capitalization standards for Approval. Many of the issuers who defaulted in recent years were thinly capitalized.
- Make insurance coverage a certainty, rather than an uncertainty until a lender actually makes a claim. A lender using the program is never sure it has actual insurance coverage until it makes a claim. Loss reserves are another cause of coverage uncertainty. Finite loss reserves make it impossible to predict whether coverage will be available when needed. FHA should commit to pay Claims filed by GNMA or its Contract servicer in the event of issuer default. Since FHA and GNMA are part of the same agency, denying claims does not prevent a loss; it only changes the heading under which the loss is reported.
- Dependable Claims payment would remove a major impediment to lifting the moratorium. FHA should not limit payments from lender reserves to GNMA to the 10% an individual lender contributes as a reserve. Reserves should be pooled for all lenders. The reserve is an insurance premium and if a loss occurs the claim should be paid by FHA, not limited to the individual's "policy premium".
- Link Title I Loan Limit Ceilings to Title II Loan Limit Ceilings. Title II loan limits have been increased by 8.8% in 2001 and down payments have been reduced to 1.5%, without any need for cash, but corresponding changes were not made to Title I.
- Remove or amend program requirements that cause retailers to resist the program, for example the FHA Title I requirement for verification of site suitability
- Survey and report the amount of Title II lending for manufactured homes qualifying as real estate so that the need for Title I lending can be more clearly established over the business cycle. At present, neither HUD nor FHA can assume that manufactured housing financing needs are being addressed by liberalization of Title II lending only.