By Daniel Walker Guido. Manufactured housing continues to buckle under the glut of repossessions caused by the easy credit terms that finance companies offered thousands of manufactured home buyers in the mid 1990s.
Currently, about 2 percent of all manufactured housing loans are in repossession proceedings, according to the Manufactured Housing Institute (MHI). Many economists expect that figure to grow as more blue-collar workers swell the unemployment rolls as companies cut employees to weather the economic slump.
The industry expects another 90,000 manufactured homes will be repossessed by finance companies this year. The repossessed units compete with new-home sales, depressing prices and forcing manufactured housing companies to scale back production. About 20,000 homes repossessed a year is considered normal by MHI.
At Michigan-based manufactured home builder Champion Enterprises, sales were down 41 percent in the first quarter of this year and down another 21 percent in the second quarter. "Repossessions are hurting the entire industry, and unfortunately, there is no light at the end of the tunnel yet," says Colleen Bauman, assistant vice president for investor relations at Champion.
Declining sales have forced many manufacturers to close production facilities. Champion has recently closed 19 locations with 49 remaining. Bauman says the company anticipates no further closures unless the anemic economy now infecting some sectors of the economy continues to spread into a full-scale recession.
While manufacturers close factories, finance companies are being buffeted by the rising tide of bad loans engulfing them. Indiana-based Conseco, an insurance and finance company, recently reported a second-quarter loss of $30 million as the delinquency rates rose on its manufactured housing loans. Bank of America recently reported it would leave the sub-prime credit business altogether and would take a $1.25 billion charge against earnings. (Sub-prime credit lending are loans offered to those with poor credit ratings, typically at higher rates than more traditional loans. The likelihood of foreclosure with these riskier loans is higher than with traditional mortgages.)
Until recent years, most manufactured homes were bought and placed on rental lots, financed with sub-prime loans rather than traditional mortgages.
But as sub-prime loan rates increased (about 14 percent at this writing), many home buyers bought land to put their homes on and applied for land/home mortgages. By doing this, they were able to take advantage of the traditional loan rates (currently less than 8 percent).
Last year, 22 percent of the manufactured homes sold were financed by mortgages, compared to only 9 percent in 1994, according to MHI figures.
"We are seeing a definite trend toward land/home financing," Bauman says. "In fact, we are estimating that as much as half of the industry's current sales will be financed by land/home mortgages in the next few years."
This shift to "safer" mortgages means things could start looking up for this beleaguered sector of the building industry. Although the industry expects to see another 70,000 repossessions next year, that number will drop to 60,000 in 2003 and about 50,000 in 2004, Bauman says. MHI concurs with the improvement trend. "We expect an increase in sales and a decline in repossessions starting in the second quarter of next year," says Kami Watson, MHI's spokeswoman.