Manufactured Housing: An Overlooked Lending Opportunity

U.S. homebuyers purchased manufactured houses in record numbers in 2005. Loans for these purchases are attracting A and B paper candidates – and credit unions have many reasons to offer the product.

 
 

Gone are the days when a manufactured house was synonymous with a trailer on wheels. In fact, U.S. homebuyers purchased 122,774 manufactured houses for an average price of $62,300 in 2005, according to the Census Bureau. The average price has steadily risen each year from $37,200 in 1996.

“These homes are beautiful and are more cosmetically designed than several constructed houses in the area,” said Cheryl Sisk, vice president of lending at USA Federal Credit Union ($711 million in San Diego, CA).

There are several types of factory-built houses:

  • Manufactured house — a manufactured house is built entirely in the factory according to HUD guidelines and then transported to the site and installed. These houses can have either single or multiple sections, even though consumers prefer multi-section houses on a 3:1 basis.
  • Modular house— a modular house is built in the factory according to local/state regulations and is transported to the site and installed on a foundation.
  • Panelized house— a panelized house is where panels are transported to the site and assembled according to local/state standards.
  • Pre -cut house— a pre-cut house has building materials that are factory cut to specifications and transported to the site and assembled according to local/state standards.

Members can choose to purchase the manufactured house by itself, or they can bundle it in with a land purchase as well. “Most of our transactions do not include the land purchase,” said Steve Hennigan, president of CU Factory Built Lending, L.P., a wholly-owned CUSO of SACU ($1.9 billion in San Antonio, TX). “One of the more common options is to place the house in a manufactured housing community and pay lot rent.” In fact, according to Census data, 34% of 2005 placements were located in manufactured housing communities (24% in parks or courts and 10% in subdivisions), and 66% were placed outside of those communities.

Why Offer Manufactured Housing Loans?

Manufactured houses are an affordable housing solution geared toward low- to moderate-income borrowers. The median income of a borrower who lives in a manufactured house was $28,900 according to a 2002 Foremost Insurance Company study. First-time homebuyers and the elderly are the predominant target market for the loan product.

“The housing market in San Diego along with member demand from our primarily military field of membership, persuaded us to explore offering the product eight years ago,” said Sisk. “Now we have 903 outstanding manufactured housing loans in our portfolio for $60 million.”

Hope Community ($38 million in Jackson, MS) had a similar experience. “Approximately 30,000 people in Mississippi have purchased a manufactured house in the last couple of years,” said Phillip Dode, vice president of housing. “We began to offer the product to satisfy a member need, particularly after Hurricane Katrina, even though we offered the product prior to the natural disaster.”

What are Key Underwriting Criteria to Consider?

Several credit union executives have indicated that these borrowers are high A and B paper candidates. “This is primarily an A paper product,” said Hennigan. “The CUSO has made a commitment to develop our community partnerships so that we can ultimately expand the product to a broader audience once we have established the product in the market.”

Most credit unions will set the maximum loan length of a manufactured house at 20 years. “There is a perception in the market that the collateral will not last beyond that window,” said Hennigan. “However, that may not be a valid assumption anymore, as the quality has dramatically improved recently due to HUD regulations.”

“We look at similar criteria to what we would consider on a constructed house,” said Sisk. “For example, we consider the FICO score, amount of outstanding credit, length of employment, debt/income ratio, and size of the house among other factors.” USA Federal Credit Union recently increased its loan limit on manufactured houses from $125,000 to $250,000 to address the rising cost of housing in San Diego.

Where is Manufacturing Housing a Popular Option?

Although all 50 states reported activity in 2005, manufactured housing is most popular in the Southern and Western portions of the United States. Below is a list of the top 10 states by number of placements in 2005.

 

# of

# of

Average

Price/

State

Placements

Shipments

Square Feet

Square Foot

Florida

16,387

17,750

1,510

$42

California

9,920

10,783

1,610

$57

Texas

8,813

10,273

1,515

$34

Arizona

5,373

6,056

1,700

$43

Louisiana

5,000

8,950

1,515

$30

North Carolina

4,793

5,008

1,580

$37

Tennessee

4,563

4,510

1,580

$32

Pennsylvania

3,433

3,678

1,480

$40

Mississippi

2,973

5,528

1,605

$29

South Carolina

2,860

2,930

1,795

$35

Total

122,774

146,881

1,575

$44

Source: 2005 Census Bureau study

Factories report the number of shipments they send to third parties while a placement refers to when the title is transferred. Manufactured housing can be classified as either a consumer finance transaction (typically done through the indirect lending department) or a conforming property deal (that would involve the real estate department) based on how the loan is structured. Credit unions looking for a sound, member-focused product should consider various business models to begin offering these loans to their membership or explore options to purchase participations loans from established market players.

 

 

 

Oct. 9, 2006


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