Manufacturing the dream: until recently, the manufactured-housing business was looking pretty bleak. But new interest by some lenders and the secondary market has spurred hopes. A legacy of shoddy underwriting and oversupply has left defaults and much blame to overcome before a rebound can take root.

Author:Morse, Neil J.
Position:Industry Trends

ADVOCATES OF NEIGHBORHOOD REVIVAL SAY IF YOU PAY attention to small problems like a broken window, it energizes others in the neighborhood to pitch in and help renew a whole community in disrepair.

Take care of the little things, they contend, and the big picture will improve. Of course, it also helps to have a cop visibly walking the streets on the affected block.

In manufactured housing (MF), there is a similar move afoot. New lenders have begun to address some long-neglected problems while the role of enforcer is being played by the muscular mortgage concern, Fannie Mae.

The government-sponsored enterprise (GSE) announced this year it will serve as the rallying point for a new group of responsible lenders eager to clean up manufactured housing, which has fallen on hard times in recent years.

This represents something of a change of heart for Fannie Mae, which had signaled intentions to pull back from its involvement because of losses it had incurred. Fannie Mae has reported an estimated $206 million in write-downs on securities backed by mobile homes--a figure that likely will continue to grow.

According to the Manufactured Housing Institute (MHI), Arlington, Virginia, a manufactured home is a "single-family house constructed entirely in a controlled factory environment, built to the federal Manufactured Home Construction and Safety Standards (better known as the HUD Code)." MHI is a trade group representing several hundred manufacturers, suppliers, lenders and retailers.

According to MHI, factory-built homes fall under various subcategories, including:

* Modular Homes -- homes built to the state, local or regional code where the home will be located. Modules are transported to the site and installed.

* Panelized Homes -- homes in which panels (a whole wall with windows, doors, wiring and outside siding) are transported to the site and assembled. The homes must meet state or local building codes where they are sited.

* Pre-Cut Homes -- housing that contains building materials that are factory-cut to design specifications, transported to the site and assembled. Pre-cut homes include kit, log and dome homes. These homes must meet local, state or regional building codes.

* Mobile Homes -- factory-built homes produced prior to June 15, 1976, when the HUD Code went into effect. By 1970, these homes were built to voluntary industry standards that were eventually enforced by 45 of the 48 contiguous states.

The shorthand term, according to Chuck Rumfola, Fannie Mae's vice president of manufactured housing, is "anything with a permanent chassis."

By any name, these site-assembled or delivered dwellings have been the wayward child in the robust 21st-century housing boom. Dogged by too much supply and too few scruples, the "MH" sector has experienced a rash of mortgage delinquencies and property foreclosures.

Fingers point to an overly aggressive push to attract first-time borrowers, many with poor credit histories and often with little or no down payments. As a result, this segment of the industry produced an alarming 100,000 defaults in 2003, depressing production of new units to a 40-year low.

MHI estimates the number of shipments in 2003 fell to its lowest level in 41 years at 131,000 units. By comparison, in its peak year of 1998, shipments totaled 373,000. (This year, the number is expected to rise 9 percent over 2003, to 143,000 shipments.)

So, what happened?

"It's pretty simple," offers John Pollis, a self-described MH industry expert based in LaQuinta, California. In sum, it was "poor underwriting standards," declares Pollis.

His withering indictment charges all parties in the process. "I'm putting blame on everybody involved: the manufacturer, lender, retailer and customer," Pollis says candidly.

Current problems can be traced back to the peak production years of the late 1990s, when production began to outstrip market demand. With production at nearly 375,000 new units annually, market demand was, at best, only two-thirds of that--and some say less.

Do the math, and one readily sees why it did not take long for the market to become awash in unsold homes.


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