Federal Housing Administration
Agency Should Assess the Effects of Proposed Changes to the Manufactured Home Loan Program Gao ID: GAO-07-879 August 24, 2007Pending legislation to the Federal Housing Administration's (FHA) Title I Manufactured Home Loan program would increase loan limits, insure each loan, incorporate stricter underwriting requirements, and set up-front premiums. GAO was asked to review (1) selected characteristics of manufactured housing and the demographics of the owners; (2) federal and state consumer protections for owners of manufactured homes; and (3) the potential benefits and costs of the proposed changes for borrowers and the federal government. In addressing these objectives, GAO analyzed select Census data; researched federal laws and laws in eight states; interviewed local, state, and federal officials; and analyzed various scenarios that might affect Title I program costs.
According to 2005 American Housing Survey data, most manufactured homes (factory-built housing designed to meet the national building code) were located in rural areas in southern states, and most were occupied by lower-income owners rather than renters. Although the market for new manufactured homes declined substantially from 1996 to 2005, buyers increasingly bought larger homes and placed them on private property rather than in manufactured home parks. In addition, some states are experiencing park closures, with the properties being converted to other uses. Overall, manufactured homes can be an affordable housing option, with monthly housing costs lower than for other housing types. Owners of manufactured homes generally have more consumer protections if their homes are considered real rather than personal property, but protections provided by laws in the states GAO examined vary. Consumer protections extending to lending and settlement processes for personal property loans are not as broad as those for real property loans (mortgages). Also, delinquent Title I borrowers can be subject to repossession or foreclosure, but the consumer protections for repossession are often less extensive than those for foreclosure. State laws give owners of manufactured homes on leased land varying levels of notice, protection, and compensation related to length of leases, rent increases, evictions, and park closures. According to some FHA and lending officials, potential benefits of the proposed changes for borrowers include loans big enough to buy larger homes and more financing as more lenders participate in the program. The program insured about 24,000 loans in 1990 but only about 1,400 loans representing $54 million in mortgage insurance in 2006. While the changes could benefit borrowers, according to FHA and the Congressional Budget Office, the potential costs could expand the government's liability. To gain an understanding of the effects of the proposed changes, GAO presented various scenarios. Although risk factors unique to manufactured home lending (such as placement on leased land) as well as commonly used predictors of loan performance (such as credit scores) are associated with default risk, these data were not available. Instead, GAO modeled different variations of borrower default risk and other factors (such as premiums and lender recovery) that were based on the experience of FHA loans to illustrate how variations in these key factors could affect potential gains and losses to FHA's General Insurance Fund. The analysis suggests that in all instances where borrowers had medium or high default risk, the fund would experience a loss. However FHA has not articulated which borrowers would be served, how the loans would be underwritten and priced under a risk-based structure, or collected data on credit scores and land ownership type. FHA explained that among other reasons, it had not done so because the Title I program was currently a low-volume program. As a result, the effects of the proposed changes are unclear.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-07-879, Federal Housing Administration: Agency Should Assess the Effects of Proposed Changes to the Manufactured Home Loan Program
This is the accessible text file for GAO report number GAO-07-879
entitled 'Federal Housing Administration: Agency Should Asses the
Effects of Proposed Changes to Manufactured Home Loan Program' which
was released on August 29, 2007.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as part
of a longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
August 2007:
Federal Housing Administration:
Agency Should Assess the Effects of Proposed Changes to the
Manufactured Home Loan Program:
FHA Title I Loan Program:
GAO-07-879:
GAO Highlights:
Highlights of GAO-07-879, a report to congressional requesters
Why GAO Did This Study:
Pending legislation to the Federal Housing Administration‘s (FHA) Title
I Manufactured Home Loan program would increase loan limits, insure
each loan, incorporate stricter underwriting requirements, and set up-
front premiums. GAO was asked to review (1) selected characteristics of
manufactured housing and the demographics of the owners; (2) federal
and state consumer protections for owners of manufactured homes; and
(3) the potential benefits and costs of the proposed changes for
borrowers and the federal government. In addressing these objectives,
GAO analyzed select Census data; researched federal laws and laws in
eight states; interviewed local, state, and federal officials; and
analyzed various scenarios that might affect Title I program costs.
What GAO Found:
According to 2005 American Housing Survey data, most manufactured homes
(factory-built housing designed to meet the national building code)
were located in rural areas in southern states, and most were occupied
by lower-income owners rather than renters. Although the market for new
manufactured homes declined substantially from 1996 to 2005, buyers
increasingly bought larger homes and placed them on private property
rather than in manufactured home parks. In addition, some states are
experiencing park closures, with the properties being converted to
other uses. Overall, manufactured homes can be an affordable housing
option, with monthly housing costs lower than for other housing types.
Owners of manufactured homes generally have more consumer protections
if their homes are considered real rather than personal property, but
protections provided by laws in the states GAO examined vary. Consumer
protections extending to lending and settlement processes for personal
property loans are not as broad as those for real property loans
(mortgages). Also, delinquent Title I borrowers can be subject to
repossession or foreclosure, but the consumer protections for
repossession are often less extensive than those for foreclosure. State
laws give owners of manufactured homes on leased land varying levels of
notice, protection, and compensation related to length of leases, rent
increases, evictions, and park closures.
According to some FHA and lending officials, potential benefits of the
proposed changes for borrowers include loans big enough to buy larger
homes and more financing as more lenders participate in the program.
The program insured about 24,000 loans in 1990 but only about 1,400
loans representing $54 million in mortgage insurance in 2006. While the
changes could benefit borrowers, according to FHA and the Congressional
Budget Office, the potential costs could expand the government‘s
liability. To gain an understanding of the effects of the proposed
changes, GAO presented various scenarios. Although risk factors unique
to manufactured home lending (such as placement on leased land) as well
as commonly used predictors of loan performance (such as credit scores)
are associated with default risk, these data were not available.
Instead, GAO modeled different variations of borrower default risk and
other factors (such as premiums and lender recovery) that were based on
the experience of FHA loans to illustrate how variations in these key
factors could affect potential gains and losses to FHA‘s General
Insurance Fund. The analysis suggests that in all instances where
borrowers had medium or high default risk, the fund would experience a
loss. However FHA has not articulated which borrowers would be served,
how the loans would be underwritten and priced under a risk-based
structure, or collected data on credit scores and land ownership type.
FHA explained that among other reasons, it had not done so because the
Title I program was currently a low-volume program. As a result, the
effects of the proposed changes are unclear.
What GAO Recommends:
GAO recommends that the Secretary of Housing and Urban Development
(HUD) direct FHA to assess the effects of the proposed changes to the
Title I program and develop an approach for collecting the information
needed to effectively manage the program. HUD agreed with these
recommendations.
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-879].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact William B. Shear at (202)
512-8678 or shearw@gao.gov
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Manufactured Homes Were More Likely to Be Located in Rural Areas in the
South, Owned by Lower-Income Individuals, and Cost Less Than Other
Types of Housing:
Owners of Manufactured Homes Have More Consumer Protections If Homes
Are Considered Real Rather Than Personal Property, and Protections
Provided by States Vary:
More Information Is Needed to Determine the Impact of Proposed Changes
to the Title I Program:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Scenario Analysis Methodology:
Appendix III: Comments from the Department of Housing and Urban
Development:
Appendix IV: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Differences between Manufactured, Modular, and Site-Built
Homes:
Table 2: Characteristics of Eight States Selected for Semistructured
Interviews:
Figures:
Figure 1: Examples of Manufactured Homes, Single-Wide and Double-Wide:
Figure 2: FHA Title I Loans Received by Top 20 States, 1990-2005:
Figure 3: Concentration of Manufactured Housing, by Census Tract, 2000:
Figure 4: Manufactured Housing as a Percentage of All Occupied Housing,
by Region, 2005:
Figure 5: Percentages of Manufactured Home Occupants Who Were Owners
and Renters, 2005:
Figure 6: Income Characteristics of Owners of Manufactured and Site-
Built Homes and Apartment Renters, 2005:
Figure 7: Percentage of Owners of Manufactured and Site-Built Homes and
Apartment Renters in Selected Income Categories, 2005:
Figure 8: Number of Manufactured Homes Purchased and Placed, by Size,
1996 and 2005:
Figure 9: New Manufactured Home Placements, Owned versus Leased Land,
1996-2005:
Figure 10: Examples of Affordable Manufactured Homes in New
Subdivisions That Look Similar to Site-Built Homes:
Figure 11: Definition of How Many Homes Constitute a Manufactured Home
Park and Presence of Licensing Requirements, for the States We
Reviewed, 2007:
Figure 12: Monthly Housing Costs of Owners of Manufactured and Site-
Built Homes, 2005:
Figure 13: Requirements for Written Leases and Notices of Rent
Increases in the States We Reviewed, 2007:
Figure 14: State Provisions for Displaced Occupants of Manufactured
Homes in the States We Reviewed, 2007:
Figure 15: Comparison of Installation Inspection Programs in the States
We Reviewed, 2007:
Figure 16: Number of FHA Title I Loans and Percentage of Loans in
Default, 1990-2006:
Figure 17: Results of Scenarios Based on Variations in Default Risk,
Lender Recovery Costs, and Premiums Paid by Borrowers:
Figure 18: Number of FHA Loans and Percentage of Loans in Default, 1990-
2006:
Figure 19: Assumptions of Default Risk Used in Our Analysis:
Abbreviations:
AHS: American Housing Survey:
CBO: Congressional Budget Office:
FHA: Federal Housing Administration:
HUD: Department of Housing and Urban Development:
MHS: Manufactured Homes Survey:
RESPA: Real Estate Settlement Procedures Act:
TILA: Truth in Lending Act:
United States Government Accountability Office:
Washington, DC 20548:
August 24, 2007:
The Honorable Christopher J. Dodd:
Chairman:
Committee on Banking, Housing, and Urban Affairs:
United State Senate:
The Honorable Charles E. Schumer:
Chairman:
Subcommittee on Housing, Transportation, and Community Development:
Committee on Banking, Housing, and Urban Affairs:
United State Senate:
The Honorable Jack Reed:
United States Senate:
Manufactured housing (factory-built housing designed to meet the
Department of Housing and Urban Development's (HUD) national building
code) provides affordable housing for approximately 17 million
Americans. Relative to other forms of housing (generally referred to as
site-built housing), a manufactured home can be more affordable,
particularly when a home is purchased without the cost of the land. In
such a purchase, the home generally is not titled as real property, but
is considered personal property or chattel, which denotes property that
is movable and personal, such as an automobile or furniture.
Consequently, lending for manufactured homes differs from other home
lending because prospective buyers can receive either a real estate or
a personal property loan.
Currently, the Federal Housing Administration (FHA) of HUD offers the
only active federal loan guarantee program that includes an option for
a "home-only" product; that is, a personal property loan for the
purchase of a manufactured home without the land on which the home will
be located. However, FHA officials explained that the purpose of the
Title I Manufactured Home Loan Program (Title I)--to protect mortgage
lenders against the risk of default through insurance or a guarantee--
is not currently being met because the current design of the program
passes the majority of the insurance risk to the lenders who in turn
charge borrowers higher interest rates. In addition, the lending market
associated with manufactured homes has undergone significant changes
over the last 15 years. Market growth in the 1990s was followed by a
large number of repossessions from 2000 to 2002. Because of the amount
of origination fees manufactured home lenders received, some lenders
focused on increasing sales volume to the detriment of assessing
borrowers' creditworthiness. As a result, officials and literature
suggest that the quality of the manufactured home loan pool began to
deteriorate and less creditworthy borrowers began to default on their
loans, causing a high number of repossessions (personal property is
repossessed rather than foreclosed). Subsequently, many lenders exited
this market, resulting in a decrease in the availability of private
financing for manufactured homes. Furthermore, loan volume generated
through Title I declined by 94 percent from 1990 to 2006, with 1,438
loans insured in 2006 representing $54 million in mortgage insurance.
In addition to the relative scarcity of financing for manufactured
homes, the owners of manufactured homes are in a unique position
relative to other homeowners in terms of the federal and state consumer
protections applicable when they buy, finance, and occupy the housing.
That is, whether the manufactured home is considered real or personal
property affects what consumer protections apply and what recourse is
available. For example, consumer and tenant protections, particularly
at the state level, are especially pertinent for owners of manufactured
homes who lose leases to their underlying ground because they lived on
land sold for commercial or other residential development. Some owners
of manufactured homes found that their homes lost most or all of their
value in such situations. And, according to state and local officials,
the loss of manufactured housing parks, particularly in growing
metropolitan areas, has exacerbated the shortage of affordable housing.
Legislation has been introduced to make changes to the Title I program
that may increase the demand for and availability of loans for
manufactured homes.[Footnote 1] With the potential expansion of the
program, you asked us to review the proposed legislation and consumer
protections available for owners of manufactured homes. Specifically,
this report (1) describes selected characteristics of manufactured
housing and the demographics of the owners, (2) compares federal and
state consumer and tenant protections for owners of manufactured homes,
and (3) describes the proposed changes to FHA's Title I Manufactured
Home Loan program and assesses potential benefits and costs to
borrowers and the federal government.
To determine selected characteristics of manufactured housing and the
demographics of the owners, we analyzed Census data from the
Manufactured Housing and American Housing Surveys. Specifically, we
used Manufactured Housing Survey data from 1996 through 2005 to examine
changes in the manufactured housing industry, such as the number of
homes placed and the size of these homes. We relied on 2005 American
Housing Survey data to provide information on the demographics of the
manufactured homeowner. We did not use earlier years of American
Housing Survey data because the sample of manufactured homes in the
survey changed in 2005.[Footnote 2] However, in both the Manufactured
Housing and American Housing Surveys, data about the ownership of the
land (that is, owned or leased) on which the home is placed are
limited. We assessed the reliability of the Manufactured Housing and
American Housing Surveys by reviewing information about the data,
performing electronic data testing to detect errors in completeness and
reasonableness, and interviewing knowledgeable officials regarding the
quality of the data. We determined that the data were sufficiently
reliable for the purposes of this report. To compare federal and state
consumer and tenant protections available for owners of manufactured
homes, we researched relevant federal laws and laws in the eight states
(Arizona, Florida, Georgia, Missouri, New Hampshire, North Carolina,
Oregon, and Texas) that we selected for our review. The eight states
were selected based on a combination of factors including the volume of
FHA Title I loans in the state from 1990 through the first quarter of
2007; the concentration of manufactured housing as a percentage of
housing units in the state; information from our interviews of industry
and consumer officials; and previous studies conducted on manufactured
housing. In each state, we conducted semistructured phone interviews
with the state regulator, representatives of the manufactured housing
industry, and a consumer group, such as the state manufactured
homeowners association.[Footnote 3] To assess the potential costs and
benefits of the proposed changes to the Title I program, we conducted a
literature review; interviewed FHA officials, FHA lenders, Ginnie Mae
officials, and officials from federal and other lending programs, such
as Fannie Mae, Freddie Mac, U.S. Department of Agriculture Rural
Housing Service, and the Department of Veterans Affairs; and reviewed
policies and procedures from programs that provide financing for
manufactured homes to determine what additional factors, such as
default risk and the location of the manufactured home, could be
considered to mitigate risk for lending for manufactured housing. To
illustrate potential costs and other effects of the proposed
legislation, we conducted an analysis of different scenarios of
potential loan performance that incorporated these additional factors.
We used this approach because we did not have sufficient data on the
credit scores of FHA borrowers or the location of the homes to perform
a more in-depth analysis. Appendixes I and II contain additional
information about our methodology. We conducted our work in Washington,
D.C., Atlanta, and Chicago, from October 2006 through June 2007 in
accordance with generally accepted government auditing standards.
Results in Brief:
Available data on selected characteristics of manufactured homes and
their owners in 2005 indicate that most manufactured homes were located
in rural areas, more were located in southern states than in other
regions, and most were occupied by lower-income owners rather than
renters. For example, according to data from the American Housing
Survey, almost 50 percent of all owners of manufactured homes earned
less than $30,000 compared with 23 percent of owners of site-built
homes in 2005. Although the market for new manufactured homes declined
significantly, from about 332,000 manufactured homes sold in 1996 to
about 118,000 homes in 2005, buyers increasingly bought larger homes
and placed them on private property rather than in manufactured home
parks. According to local officials we interviewed, few new
manufactured home parks have been built since the early 1980s, largely
as a result of local zoning issues, and some states are experiencing
park closures with the properties being converted to other uses. But
overall, manufactured homes can be an affordable housing option, with
monthly housing costs considerably lower than other housing types. For
example, according to 2005 American Housing Survey data, more than 50
percent of the owners of manufactured homes had monthly housing costs
of $100 to $499.[Footnote 4] In comparison, a little more than 25
percent of owners of site-built homes paid $100 to $499 in monthly
housing costs in 2005. However, while manufactured homes can be more
affordable than other housing types and are often thought to be mobile,
few placement opportunities and the high cost of moving the homes
limits their mobility.
Owners of manufactured homes generally have more consumer protections
if their homes are considered real rather than personal property, but
the laws in the states we visited provide varying protections. Consumer
protections that extend to the lending and settlement process for Title
I personal property loans are not as broad as those for real property
loans (mortgages). For example, Title I borrowers who obtain a home-
only loan (that is, a personal property loan) are not entitled to the
settlement cost disclosures of the Real Estate Settlement Procedures
Act. Further, delinquent borrowers can be subject to repossession (if
the loan was for personal property) or foreclosure (if for real
property), but the consumer protections for repossession are often less
extensive than those for foreclosure. In addition, state laws give
owners of manufactured homes on leased land varying levels of notice,
protection, and compensation related to length of leases, rent
increases, evictions, and park closures. For example, in the states we
reviewed, notice requirements for rent increases range from 60 to 90
days, but not all the states have provisions on rent increases.
Further, states vary in what programs or tools are available to help or
compensate tenants displaced because of park closures. For instance,
the states of Arizona, Florida and Oregon offer financial help through
relocation funds or tax credits, but the remaining five states we
reviewed do not offer such aid. As a result, purchasers of manufactured
homes who do not own the land underneath their home and experience
adverse conditions over which they have no control, such as rent
increases or park closures, have differing degrees of recourse
depending on the state in which they live.
Legislative proposals to change FHA's Title I program would increase
loan limits, insure each loan made, incorporate stricter underwriting
requirements, establish up-front insurance premiums, and adjust the
annual premium; however, the effects of the proposed changes remain
unclear. For instance, limits for a home-only loan would rise from
$48,600 to $69,678, loan guarantees would apply to individual loans
rather than be capped at 10 percent of the value of a lender's
portfolio, and underwriting requirements would be revised with the
stated intent of strengthening the financial soundness of the program.
According to some FHA and industry officials, the potential benefits of
proposed changes for borrowers include obtaining loan amounts
sufficient to buy larger homes, additional financing as more lenders
likely would participate in a program where a greater portion of their
portfolios could be insured, and an expansion of the secondary market
that could provide more liquidity for lenders to make more loans.
However, the ability of the owner of a manufactured home to build
equity may be limited when the land is leased, which also often
increases the risks associated with the loan. For instance, if a
borrower with a home on leased land were to default, lenders could face
higher costs and lower recoveries (relative to site-built homes) in
trying to repossess, move, and resell the personal property. To gain an
understanding of the effects of the proposed changes, we developed
various scenarios. Although risk factors unique to manufactured home
lending (such as placement on leased land) as well as commonly used
predictors of loan performance (such as credit scores) are associated
with default risk, these data were not available. Instead, we modeled
different variations of borrower default risk and other factors (such
as premiums and lender recovery) that were based on the experience of
FHA loans to illustrate how variations in these key factors affect
potential gains and losses to FHA's General Insurance Fund.[Footnote 5]
The results of our analysis show that in all cases when borrowers had
medium or high default risk, the fund experienced a loss. But FHA has
not yet articulated which borrowers would be served if the program were
expanded, specified changes in its underwriting requirements, developed
a risk-based pricing structure for the proposed legislation, estimated
costs to the General Insurance Fund, or collected data on credit scores
and land ownership type. Our internal control standards for the federal
government require that an agency identify risks that may be posed by
new legislation.[Footnote 6] FHA officials have stated that they have
not made those risk assessments because the current volume of the Title
I program is low and they did not know if the legislation would pass.
They said they devoted their resources to making changes to the much
larger Title II program, which guarantees loans for single-family home
mortgages. As a result, the effects the proposed legislation may have
on the volume of lending and claims and the overall financial soundness
of the program are unclear.
GAO recommends that the Secretary of Housing and Urban Development
direct FHA to assess the effects of the proposed changes to the Title I
program and develop an approach for collecting the information needed
to effectively manage the program.
We provided HUD with a draft of this report for review and comment. HUD
provided comments in a letter from the Assistant Secretary for Housing-
-Federal Housing Commissioner (see app. III). HUD agreed with the
recommendations in our report and described plans for implementing the
recommendations.
Background:
Manufactured homes differ from site-built homes based on how they are
constructed, classified, financed, and appraised, with many differences
resulting from the home's status as either real or personal property.
Manufactured home parks have a variety of ownership models, ranging
from sole to corporate ownership and including cooperative and
nonprofit ownership as well. FHA's Title I program dates to 1969, where
it has served primarily low-income individuals and the majority of the
lending has been geographically concentrated.[Footnote 7]
Differences between Manufactured, Modular, and Site-Built Homes:
The National Manufactured Housing Construction and Safety Standards Act
of 1974 set a national building code for the construction of
manufactured homes, known as the HUD Code, which became effective on
June 15, 1976.[Footnote 8] For the purposes of this report, we define
manufactured homes as factory-built housing units designed to meet the
HUD Code. Manufactured homes can be single-wide, double-wide, or multi-
wide (see fig. 1). The federal standards regulate manufactured housing
design and construction, strength and durability, transportability,
fire safety, and energy efficiency.[Footnote 9] Units constructed and
completed prior to June 15, 1976, are not considered HUD-approved and
generally are considered mobile homes.
Figure 1: Examples of Manufactured Homes, Single-Wide and Double-Wide:
[See PDF for image]
Source: GAO.
[End of figure]
Every home built to the HUD Code is identified with a red metal tag,
known as the HUD certification label.[Footnote 10] This distinguishes
manufactured homes from modular homes. Both types of homes are factory-
built, but modular home "modules" are then assembled on a site. And,
unlike manufactured homes that are federally regulated under a national
building code, modular homes must meet the state, local, or regional
building codes where the home is to be sited. Finally, site-built
housing is constructed on a lot and must meet local building codes (see
table 1).
Table 1: Differences between Manufactured, Modular, and Site-Built
Homes:
Manufactured home;
Type of building code: HUD Code (1976);
Production method: Factory built. Single/multiple sections transported
to site for installation;
Qualifies as: Personal property: [Check];
Qualifies as: Real property: [Check].
Mobile home;
Type of building code: Pre-HUD Code (built prior to June 15, 1976);
Production method: Factory built, to voluntary industry standards later
enforced by most states;
Qualifies as: Personal property: [Check];
Qualifies as: Real property: [Check].
Modular home;
Type of building code: State, local or regional codes;
Production method: Factory built. Modules are transported to site for
assembly;
Qualifies as: Personal property: [Empty];
Qualifies as: Real property: [Check].
Site-built home;
Type of building code: Local codes;
Production method: Built on-site;
Qualifies as: Personal property: [Empty];
Qualifies as: Real property: [Check].
Source: GAO.
[End of table]
Manufactured Homes Can Be Considered Personal or Real Property, with
Corresponding Differences in Financing and Appraisals:
Unlike site-built homes, which are titled as real property and usually
financed through a mortgage, a manufactured home may be financed as
personal property or as real property. When a homebuyer purchases a
manufactured home without tying the purchase to land and does not title
the home as real property, the home is generally considered personal
property, or chattel, which denotes property that is movable and
personal, such as an automobile or furniture. Private sources--such as
national consumer-finance companies and manufactured home lending
specialists who work directly with manufactured home dealers and also
through FHA Title I approved lenders--provide home-only or personal
property financing, which is more akin to a consumer loan such as an
automobile loan than a mortgage. Typically, these loans have higher
interest rates than mortgages due to factors such as quick credit
approval and their availability to those with marginal credit
histories. To begin the process, a customer submits a credit
application to the manufactured home lending specialist, who may or may
not be affiliated with the dealership. The credit application also may
be sent to a local bank. The lender reviews the applicant's credit and
makes a decision on whether to approve a loan. Manufactured homes not
considered real property do not undergo market-based appraisals.
Instead, they undergo a loan-to-invoice appraisal, where the
manufacturer's certified invoice, in effect, substitutes for an
appraisal.
In contrast, when a manufactured home is attached to the underlying
land by a permanent foundation and the home and the land are treated as
a single real estate package under state law, the home is generally
considered real property and borrowers can obtain conventional real
estate mortgages, which include conventional and government-assisted
mortgage financing obtained through traditional mortgage lenders. Home
and land financing for manufactured homes is similar to conventional
mortgage lending for site-built housing. Manufactured homes that are
financed using a conventional real estate mortgage undergo an appraisal
that factors the location into the appraised value and also includes
comparable prices of manufactured homes.
Ownership Types of Manufactured Home Parks:
Manufactured homes can be placed on either private property where the
homeowner typically owns the land or in a manufactured home park. In a
manufactured home park, also known as a mobile home park or a land-
lease community, owners of manufactured homes pay rent for the land
underneath the homes in addition to the loan payments they make for the
units (the homes).[Footnote 11] The park owner typically provides
sewer, water, electrical systems, landscaping, and maintains the roads
and other common areas.
Manufactured home parks have a variety of ownership models. Investors,
ranging in size from small family operations to large conglomerates
that own several properties across the country, own most of the
manufactured home parks. Tenants of these parks may or may not have a
lease and have no control over rent increases. According to officials
we interviewed, in states such as Florida, California, and New
Hampshire, resident-owned communities are more prevalent; that is, park
tenants collectively purchased their community by forming either a for-
profit or nonprofit cooperative corporation.[Footnote 12] Cooperative
ownership allows residents to control the land by buying memberships or
shares in the corporation and have more control over membership dues
increases. Another ownership model involves a land trust, typically run
through a nonprofit organization, in which the nonprofit owns the land
and ensures against the possibility of sale or foreclosure of the land.
Title I Manufactured Home Loan Program:
FHA first insured loans for manufactured housing in 1969, under a
program that came to be known as the Title I Manufactured Home Loan
Program. The program was created to reduce the risk to lenders through
insurance or a guarantee and encourage lenders to finance manufactured
homes, which had traditionally been financed as personal property
through comparatively high-interest, short-term consumer installment
loans. Under Title I, FHA can guarantee loans for manufactured homes,
for manufactured homes and the property on which they are located, or
for the purchase of a manufactured home lot. FHA insures Title I
manufactured home loans under the General Insurance Fund, which is
supported by lenders' insurance premiums (currently an annual premium
of 1 percent, based on the initial loan amount). Since 1998, three
lenders have originated the majority of Title I loans.
Almost all of Title I loans are for the manufactured home-only loans
rather than for home-and-land or land-only loans. In 2005, FHA Title I
Manufactured Home lending accounted for only 2.8 percent of the
personal property loan market; conventional lending accounted for the
remainder. According to data from FHA, from 2004 to mid-2007, 66
percent of FHA Title I borrowers were 34 years or younger compared with
2.7 percent who were 65 years or older.[Footnote 13] From 2004 to mid-
2007, the majority (73 percent) of the borrowers had a monthly income
from $1,000 to $3,000 (or approximately $12,000-$36,000 annually). From
1990 to 2005, the majority of FHA Title I lending has been in southern
states. Twenty states, primarily in the South, Southwest, and the
Midwest, received more than 85 percent of the FHA Title I loans (see
fig. 2).
Figure 2: FHA Title I Loans Received by Top 20 States, 1990-2005:
[See PDF for image]
Source: GAO analysis of FHA data; Art Explosion (map).
[End of figure]
FHA's Insurance Operations Division administers the Title I program, as
well as a property improvement program.[Footnote 14] The majority of
the staff and budget allocations are for the property improvement
program. In fiscal year 2006, the division had a staff of nine and a
total budget of $1.1 million, approximately $350,000 of which supported
the manufactured home loan program.
Manufactured Homes Were More Likely to Be Located in Rural Areas in the
South, Owned by Lower-Income Individuals, and Cost Less Than Other
Types of Housing:
Available data on geographic and demographic characteristics of
manufactured homes and their owners indicate that most manufactured
homes were located in rural areas of the South and were occupied by
lower-income earners who owned, rather than rented, the homes. The
market for new manufactured homes declined significantly from 1996 to
2005, but homes that were purchased were larger in size and more often
placed on private property. Although limited data were available on the
number of manufactured home parks, regulatory, industry, and consumer
officials from seven of the eight states in which we conducted
interviews told us that manufactured home parks were closing because
rising land values were driving redevelopment. Housing costs for
manufactured homes were lower than costs for other housing types;
however, the costs of moving manufactured homes were relatively high
and options for placing homes in new locations were few, which affected
owners' mobility.
The Majority of Manufactured Homes Were Found in Rural Areas, Mainly in
the South, and Owned by Low-Income Earners:
Manufactured homes were located in every state, but were most often
located in rural areas. According to 2000 Census data, manufactured
homes were more concentrated in rural areas, particularly in the South
and desert Southwest, as a share of total housing units (see fig. 3).
In 2005, according to data from the American Housing Survey,
approximately 6 percent of occupied homes in the U.S. are manufactured
homes. The majority of the occupied manufactured homes (68.5 percent)
were located in rural areas, while 31.5 percent were found in suburban
areas and central cities. State, industry, and consumer officials in
more than half of the states we reviewed also told us that manufactured
homes were more likely to be located in either rural or suburban parts
of their states.
Figure 3: Concentration of Manufactured Housing, by Census Tract, 2000:
[See PDF for image]
Source: 2000 Census (data); MapInfo (map).
[End of figure]
Compared regionally, manufactured homes represented a larger share of
occupied homes in the South than in other areas of the nation. For
instance, 10 percent of occupied housing in the South consisted of
manufactured homes, compared with 6 percent in the West, 5 percent in
the Midwest, and 2 percent in the Northeast (see fig. 4). Overall, in
2005, 57 percent of occupied manufactured homes were located in the
South, 19 percent in the West, 17 percent in the Midwest, and 7 percent
in the Northeast.[Footnote 15]
Figure 4: Manufactured Housing as a Percentage of All Occupied Housing,
by Region, 2005:
[See PDF for image]
Source: GAO analysis of AHS 2005 data; Art Explosion (map).
[End of figure]
Our analysis of 2005 American Housing Survey data showed that more
occupants of manufactured homes were owners than renters (see fig. 5).
A majority (79.5 percent) of those living in manufactured homes owned
their homes, compared with 17.4 percent who rented their manufactured
homes.[Footnote 16]
Figure 5: Percentages of Manufactured Home Occupants Who Were Owners
and Renters, 2005:
[See PDF for image]
Source: GAO analysis of AHS 2005 data.
[End of figure]
Although those who lived in manufactured housing were more likely to
own their homes, they tended to have lower annual incomes (see fig. 6).
More owners of single-wide and double-wide homes earned less than
$49,999 compared with owners of site-built homes, who were more likely
to earn $50,000 or more. For example, in 2005, of all owners of single-
wide homes, 15.1 percent earned $10,000 or less annually and 23.6
percent earned from $10,000 to $19,999. In comparison, 6 percent of
owners of site-built homes earned $10,000 or less and 8.3 percent
earned from $10,000 to $19,999.
Figure 6: Income Characteristics of Owners of Manufactured and Site-
Built Homes and Apartment Renters, 2005:
[See PDF for image]
Source: GAO analysis of AHS 2005 data.
[End of figure]
Almost half of all owners of manufactured homes earned less than
$30,000 in 2005 (see fig. 7). More specifically, 49.4 percent of owners
of manufactured homes earned this amount compared with 23.4 percent of
owners of site-built homes. Officials we interviewed from six states
told us that owners of manufactured homes were more likely to be low-
income individuals. Apartment renters also were proportionally lower-
income than owners of site-built homes, with 56.8 percent earning less
than $30,000.
Figure 7: Percentage of Owners of Manufactured and Site-Built Homes and
Apartment Renters in Selected Income Categories, 2005:
[See PDF for image]
Source: GAO analysis of AHS 2005 data.
[End of figure]
Fewer, but Larger, Homes Were Sold and Placed on Private Property, but
the Number of Manufactured Home Parks Is Unknown:
The total number of new manufactured homes sold decreased from 1996 to
2005. According to Census data from the Manufactured Housing Survey,
332,000 new manufactured homes were sold in 1996 compared with 118,000
sold in 2005, a net decrease of 64.5 percent. California and Florida
had the highest number of new manufactured home units sold in 2005, a
change from 1996 when North Carolina and Texas reported the highest
number sold. According to officials that we interviewed, several
factors may have contributed to the decrease in manufactured home
sales, such as lower interest rates available for site-built homes, the
decrease in available financing for manufactured homes due to
consolidation experienced in the industry, and a large number of
repossessions that flooded the market with units and increased the
supply of manufactured homes. For example, as a result of the decrease
in financing options for manufactured homes, industry officials
explained that manufacturers lowered production of manufactured homes
and instead built more modular homes, because more financing options
were available. Modular homes can often be built in the same factory as
manufactured housing but are not required to meet the HUD Code.
Although consumers purchased fewer new manufactured homes in 2005 than
in 1996, according to the Census data from the Manufactured Housing
Survey, they bought more double-wide or multisection homes. In 2005, 76
percent of the manufactured homes purchased were double-wides or
larger, compared with 51 percent in 1996 (see fig. 8). However, FHA
data shows 82 percent of the loans originated through FHA's Title I
Manufactured Home Loan program for fiscal years 2005 and 2006 were for
the purchase of single-wide homes. Officials we interviewed attributed
this trend to FHA loan limits that were too low to enable borrowers to
purchase larger, multisection homes using guaranteed loans.
Figure 8: Number of Manufactured Homes Purchased and Placed, by Size,
1996 and 2005:
[See PDF for image]
Source: GAO analysis of Census MHS data.
[End of figure]
Manufactured homes were more likely to be placed on private property.
From 1996 to 2005, more new manufactured homes were placed on private
property than in manufactured home parks, even though placements
overall (in both parks and private property) decreased since 1996.
According to data from the Manufactured Housing Survey, in 1996,
229,790 new manufactured homes were placed on private property compared
with 88,420 homes placed inside a manufactured home park. In 2005,
80,757 manufactured homes were placed on private property and 28,850
were placed inside a manufactured home park (see fig. 9). Because FHA
does not collect placement data, it is unclear where manufactured homes
purchased with FHA Title I loans were located--on owned or leased land.
However, FHA officials told us that, based on their review of lender
insurance claims, most of the Title I loans are for manufactured homes
on leased land.
Figure 9: New Manufactured Home Placements, Owned versus Leased Land,
1996-2005:
[See PDF for image]
Source: GAO analysis of Census MHS data.
[End of figure]
Similarly, officials we interviewed from five states reported that more
placements were occurring on private property than in manufactured home
parks. The officials cited a variety of reasons why new manufactured
homes were more likely to be placed on private property. First, the
lack of financing available for manufactured homes to be placed on
leased land decreased the likelihood of units being placed in a
manufactured home park. For example, one official stated that the lack
of manufactured home financing resulted in more manufactured homes
being placed on private land because of the increased availability of
financing for homes that are considered real property. Second, the
increase in the size of manufactured homes to double-wides or
multisection could prevent the homes from fitting into park spaces
designed for smaller units. Third, both industry and consumer officials
suggested that the quality and style of new manufactured homes had
improved, allowing them to blend in with other site-built homes on
private property. Developers have created affordable housing
opportunities by using manufactured homes in infill lots located in
urban areas or subdivisions. For example, in Seattle, a community
development corporation used manufactured homes to create affordable
single-family and town homes in a development called Noji Gardens. In
Kentucky, Frontier Housing, an affordable non-profit housing developer,
built affordable housing communities using a combination of
manufactured, modular, and site-built homes (see fig. 10).
Figure 10: Examples of Affordable Manufactured Homes in New
Subdivisions That Look Similar to Site-Built Homes:
[See PDF for image]
Source: Frontier Housing and Homesite.
[End of figure]
Variability of State Requirements Makes It Difficult to Use State Data
to Determine the Number of Manufactured Home Parks:
Data were not available on the number of manufactured home parks
because states define and license them differently (see fig.
11).[Footnote 17] For example, the definition of a manufactured home
park in New Hampshire is a parcel of land that accommodates two or more
homes; however, in Florida, certain provisions apply to manufactured
home parks with 10 or more homes. Moreover, most states do not require
manufactured home parks to be licensed; this is typically done at the
local level. As a result, data on the number of manufactured home parks
in each state and at the national level are limited. Anecdotally,
several officials we interviewed suggested that the creation of new
manufactured parks was uncommon, with few parks being developed since
the early 1980s. The officials suggested that local zoning restrictions
prevented manufactured home parks from being built and that localities
often preferred to promote other land use options to attract
development with greater potential to raise the tax base. Officials
from most of the states that we reviewed told us that most manufactured
home park closings were caused by rising land prices and subsequent
pressure to redevelop the site.
Figure 11: Definition of How Many Homes Constitute a Manufactured Home
Park and Presence of Licensing Requirements, for the States We
Reviewed, 2007:
[See PDF for image]
Source: GAO analysis of select state statues or landlord/tenant law.
[A] In Florida, in a park with 26 or more lots, park owners are
required to file a prospectus, which includes the park bylaws and other
information, with the state for its approval.
[B] Georgia and Missouri do not have provisions in place that define
what number of homes or spaces constitute a manufactured home park.
[End of figure]
Although anecdotal data indicate a number of manufactured home parks
have closed, the extent to which closures have occurred is unknown.
Through a database search of national and local newspapers, we found
closures had occurred in 18 states between May 2005 and May 2007. In
some cases, other types of housing (such as condominiums, town homes,
and single-family homes) were built on the former park sites, while in
other cases the parks were converted to commercial use. A few parks
also were converted from investor-owned parks to resident-owned parks.
In some instances, local municipalities tried to curb the number of
closures by placing a moratorium on park owners selling to developers.
Costs of Living in a Manufactured Home Were Lower Than for Other Home
Types, but High Costs of Moving and Few Placement Options Limit
Mobility of Homes:
Manufactured homes can be more affordable than other housing types.
According to 2005 American Housing Survey data, monthly housing costs
for manufactured homes generally were lower than for site-built homes
(see fig. 12).[Footnote 18] More than half of the owners of
manufactured homes (54.7 percent) had monthly housing costs from $100
to $499. In comparison, a little more than a quarter (27.4 percent) of
owners of site-built homes had monthly housing costs from $100 to $499.
Figure 12: Monthly Housing Costs of Owners of Manufactured and Site-
Built Homes, 2005:
[See PDF for image]
Source: GAO analysis of AHS 2005 data.
[End of figure]
The costs of moving manufactured homes can be high, and, according to
state, industry, and consumer officials we interviewed, the cost-
prohibitive nature of moving manufactured homes was one reason why
owners moved them infrequently. Officials explained the price could
range from $3,000 to $25,000. According to officials, a variety of
factors influence moving costs, including distance of the move and the
size of the home. In addition, moves involve set-up and dismantling
costs, such as utility and other work to prepare the land. Several
officials suggested that homeowners, particularly those on fixed
incomes, could not afford the cost of moving their manufactured homes
because they did not have the financial means to do so. As discussed
later, in cases of park closures, some states have a relocation fund
and, sometimes, property owners or developers might provide some funds
for displaced residents to move their manufactured homes, assuming the
displaced residents can find a place to move.
Owners of Manufactured Homes Have More Consumer Protections If Homes
Are Considered Real Rather Than Personal Property, and Protections
Provided by States Vary:
Borrowers with loans for real property are generally entitled to a
broader set of protections under a federal law governing the loan
settlement process than borrowers with personal property loans. For
instance, borrowers taking out loans for real property receive uniform
settlement statements, as well as escrow statements. Additionally,
although state law for situations of foreclosure (real property) and
repossession (personal property) varies, consumer protections for
foreclosure are generally broader than for repossession. Finally,
tenant protections--involving issues such as the length of leases for
land, requirements for notice and frequency of rent increases, notice
of eviction, and park closures--vary across the eight states we
reviewed, as did state aid for displaced residents of parks that
closed.
Fewer Federal Protections Apply to Loan and Settlement of Personal
Property Than Real Property:
Generally, borrowers with personal property loans are entitled to fewer
consumer protections under federal laws than borrowers with real
property loans. Under the Truth in Lending Act (TILA), borrowers
(including Title I borrowers) who purchase homes using personal
property loans receive certain disclosures. For instance, creditors
generally are required to provide the amount financed; the finance
charge and the finance charge expressed as an annual percentage rate;
the number, amount, and due dates or periods of payments; and the
provisions for new payment, late payment, or prepayment. The
disclosures are intended to make borrowers aware of the cost of the
loan and policies for paying the loan, so that lenders cannot charge
arbitrary rates or implement policies that are not disclosed to the
borrower.
Borrowers who take out loans for the purchase of real property are
entitled to additional protections under the Real Estate Settlement
Procedures Act (RESPA), which is intended to ensure that consumers
receive information on the nature and costs of the real estate
settlement process and are protected from unnecessarily high settlement
charges caused by certain abusive practices. RESPA also protects Title
I borrowers or other buyers of manufactured homes if their federally
related mortgage loans are secured by land on which a manufactured home
sits or on which a manufactured home will be placed within 2 years.
Borrowers are entitled to receive a good faith estimate of settlement
costs within 3 days of submitting a loan application. At settlement,
RESPA requires a uniform settlement statement that shows all charges in
connection with the settlement both before and at the time of the
settlement. RESPA also requires an initial escrow statement that
itemizes the estimated taxes, insurance premiums, and other charges
expected to be paid from the escrow account in the first year.[Footnote
19] RESPA generally prohibits kickbacks and unearned fees for
settlement services and charges for the preparation of certain
documents. Additional disclosure requirements--an annual escrow
statement that summarizes deposits and payments and a servicing
transfer statement if the loan is transferred to a different lender--
apply after the loan is settled.
States Generally Provide More Protections for Borrowers in Foreclosure
Than Repossession; However, Federally Insured Borrowers Are Entitled to
Additional Protections:
State law generally provides more consumer protections in connection
with foreclosures of real property than in connection with
repossessions of personal property; however, borrowers in certain
federally insured loan programs receive additional protections.
Depending on state law and the mortgage contract, the two most common
methods of foreclosure are judicial foreclosure and nonjudicial
foreclosure by power of sale.[Footnote 20] The level of protections to
the homeowner in case of a foreclosure varies by state.
All states let the homeowner redeem the mortgage by paying off the
total outstanding debt before the sale. However, only some states let a
homeowner cure a default by paying the installments due and the costs
to reinstate the loan prior to the resale of the home. Some states may
allow the homeowner time to redeem the property from the purchaser,
which often is the lender, after the foreclosure sale by paying the
purchase price for the home, plus related costs and interest. For
example, in North Carolina, a homeowner has 10 days to redeem the
property after the foreclosure sale.
Personal property loans typically are subject to repossession rather
than foreclosure. As with real property, the procedures can be judicial
or nonjudicial. Generally, creditors use judicial action procedures to
repossess manufactured homes. The Uniform Commercial Code, a model code
adopted by states in various forms, also authorizes a secured party,
upon default, to take possession of the collateral without judicial
process--self-help repossession--if that can be done without breach of
the peace. Because it may be difficult to avoid breaching the peace
when repossessing manufactured homes, this process is not likely to be
used often with manufactured homes.[Footnote 21] Time frame and notice
requirements for repossession can be less stringent than the
corresponding requirements for foreclosures. For example, the Uniform
Commercial Code does not prevent a creditor from immediately
accelerating the note and repossessing the collateral; however, some
states do impose restrictions on acceleration of repossession. Of the
eight states we reviewed, five have provisions in place that permit
acceleration of repossession in certain transactions only when the
borrower is in default or in breach of the agreement or when contract
terms permit it under certain conditions. In addition, some state
statutes provide a right to cure a default prior to the acceleration or
repossession of a manufactured home and for other consumer transactions
in certain cases.
However, Title I Manufactured Home Loan borrowers are entitled to
additional protections under FHA regulations. For instance, lenders may
not begin the process of repossession or foreclose on a property
securing a Title I loan in default unless the property has been
serviced in a timely manner and with diligence and reasonable and
prudent measures have been taken to get the borrower to bring the loan
account current.[Footnote 22] Title I borrowers, like borrowers in
certain other federally-insured loan programs, are entitled to receive
written notice of their default. For Title I borrowers, this notice
includes a description of the lender's security interest, a statement
of the nature of the default and the amount due, a demand upon the
borrower to either cure the default or agree to a modification
agreement or a repayment plan, and a statement that if the borrower
fails to either cure the default or agree to a modification or a
repayment plan within 30 days of the notice, the maturity of the loan
is accelerated and full payment is required. Further, for federal home
loans that HUD, the Department of Veterans Affairs, and Rural Housing
Service guarantee, a lender cannot start foreclosure proceedings for a
default in payment until at least three full monthly installments are
past due.
States Give Manufactured Homeowners Varying Levels of Notice,
Protection and Compensation Related to Length of Leases on Land, Rent
Increases, Evictions, and Park Closures:
Tenant protection issues affecting owners of manufactured homes include
the length of the leases for land, rent increases, requirements for
eviction, and park closures. We analyzed state laws in eight states and
found varying written lease requirements (see fig. 13). For instance,
five of eight states have provisions for written lease requirements.
The terms range from any amount of time agreed upon by the landlord and
tenant to a minimum of 2 years. However, officials in some states with
whom we spoke suggested that enforcing this requirement was difficult.
Notice of rent increases range from 60 to 90 days; however, some states
do not have notice requirements on rent increases, such as Georgia,
Missouri, North Carolina, and Texas.[Footnote 23] States also qualify
the rent increase provisions in varied ways. Arizona provides that
rents generally can only increase upon renewal or expiration of the
lease and the owner has to give 90 days notice. New Hampshire requires
60 days notice to raise rents but is silent on the number of times the
rent can increase in a given year. Industry and consumer officials
suggested the lack of ability to control monthly payments created
additional risk for both lenders and borrowers.
Figure 13: Requirements for Written Leases and Notices of Rent
Increases in the States We Reviewed, 2007:
[See PDF for image]
Source: GAO analysis of select state statutes on a landlord/tenant law.
[A] Arizona law provides the landlord is entitled to a rent increase
effective at the expiration or renewal of a lease. However, it also
states that the landlord can increase the rent immediately to account
for the actual costs of certain expenses if the written agreement so
provides.
[B] Missouri and North Carolina do not have requirements for minimum
lease terms or rent increases.
[C] New Hampshire law does not use the term "written rental agreement,"
but requires that landlords disclose in writing all terms and
conditions of the tenancy including rental, utility, and service
charges, prior to entering into a rental agreement with a prospective
tenant.
[End of figure]
Unlike owners of site-built homes, owners of manufactured homes living
on leased land can be subject to eviction for nonpayment of rent or
noncompliance with terms in lease agreements. Additionally, nonpayment
of rent can be a signal that the homeowner is behind on loan payments
as well. All states that we reviewed require good cause for eviction;
however, the amount of time that the affected party has to cure the
cause for the eviction (that is, to bring the late rent payments
current) ranges from 7 to 30 days from receipt of notice.[Footnote 24]
Failure to cure an eviction for an owner of manufactured home on leased
land could require the homeowner to move from the manufactured home
park. However, as mentioned earlier, such a move may be cost-
prohibitive.
Homeowners also can be forced to move because parks close. Notice
requirements for those residents that had to move for this reason vary
from 120 to 545 days in the states we reviewed (see fig. 14). But the
states we reviewed also have a range of tools to aid the displaced
owner of a manufactured home, such as offering the park residents the
right of first refusal (the first opportunity to bid on the purchase of
the park) and also offering relocation funds or tax credits for
displaced residents. For example, one of the eight states we reviewed
offers residents the right of first refusal. However, although Arizona,
New Hampshire, and Oregon do not have a right of first refusal law, the
states do have laws that provide notice of the park sale and time in
which to prepare a bid.[Footnote 25] In New Hampshire, state law
requires both the park tenants and state financing agency receive
notice when a manufactured home park is sold. The New Hampshire
Community Loan Fund then works with the park tenants to form a
nonprofit cooperative in which the tenants would own both the land and
their homes.[Footnote 26] Three states we reviewed have a relocation
fund or tax credit for displaced residents (Arizona, Florida, and
Oregon). Some interviewees suggested that in some park closures,
especially those with a lot of publicity, the developer or buyer of the
land would partially compensate the displaced residents.
Figure 14: State Provisions for Displaced Occupants of Manufactured
Homes in the States We Reviewed, 2007:
[See PDF for image]
Source: GAO analysis of select state statutes on landlord/tenant law.
[A] Georgia has no provision for such a notice.
[B] In Oregon, the notice requirement can be 180 days if the landlord
finds acceptable space for the tenant to move and pays moving expenses,
up to $3,500.
[End of figure]
Although a few states offer relocation funds for displaced manufactured
home residents, officials from all states we reviewed cited potential
barriers in finding a place to relocate the homes, such as a lack of
vacancies in nearby parks, age requirements that park owners or
municipalities place on units, and costs associated with moving and
relocating homes. For instance, many parks will not allow homes built
before 1976, and localities in some states may have laws prohibiting
placement of homes that are more than 5 or 10 years old. Further, in
states such as Florida, wind zone requirements for certain areas may
prevent the relocation of a home not rated (certified) to withstand
winds of certain speeds.[Footnote 27] In addition to costs, officials
also cited potential damage to the home as a barrier to movement.
More Information Is Needed to Determine the Impact of Proposed Changes
to the Title I Program:
Legislative proposals to change the Title I program would increase loan
limits; insure each loan made; incorporate stricter underwriting
requirements; and establish up-front premiums and adjust annual
premiums; but the potential effects of the changes on the program and
the insurance fund are unclear. According to some FHA and industry
officials, the potential benefits for borrowers include larger loans
with lower interest rates to buy larger homes. Also, increased access
to financing for borrowers could occur since more lenders would be more
likely to participate in the program because individual loans could be
insured. Industry officials also identified several factors unique to
manufactured home lending, such as the decreased ability of borrowers
to build equity, the location of the home (owned or leased land), and
the cost of recovery to the lender after defaults that can increase the
risks of manufactured home lending. To illustrate the effects of the
proposed changes, we developed an approach that used variations of
unique risk factors associated with manufactured home lending, as well
as commonly used predictors of loan performance, such as credit scores,
to illustrate default scenarios. Our analysis suggests that loans for
homes on leased land and to borrowers with poor credit have greater
risk of default. And, in all instances where borrowers had medium or
high default risk, we show the fund experiencing a loss. However, FHA
has not yet assessed risks associated with the proposals or detailed
changes to its underwriting requirements. The agency also has not yet
collected data needed to help assess risks such as credit scores and
land type. FHA officials explained that it had not done so because the
Title I program was low-volume and because they were unsure if the
legislation would pass. FHA officials said that they chose to devote
their resources to changing the much larger Title II program. As a
result, the effects of the proposed changes to the Title I program are
unclear.
Proposals to Change the Title I Program Would Increase Loan Limits,
Insure Each Loan Made, Incorporate Stricter Underwriting Requirements,
and Set Premiums:
Several bills introduced in Congress from 2005 to 2007 detailed
proposed changes to the Title I Manufactured Home Loan program, but the
majority of the bills contained similar provisions.[Footnote 28] For
example, all would increase the loan limits of the program and index
them annually. In the latest bill that passed the House in May 2007,
the loan amount for a home-only loan would increase from $48,600 to
$69,678. For the land-only loan, the loan limit would increase from
$16,200 to $23,226 and for combined home and land loans, the loan limit
would increase from $64,800 to $92,904.[Footnote 29]
All but one of the bills would require a change to the mechanism that
FHA uses to insure against its insurance risk.[Footnote 30] Currently,
FHA accounts for its insurance risk by insuring only a portion (10
percent) of a lender's Title I Manufactured Loan portfolio. For
example, if a lender's portfolio in a given year totaled $1,000,000,
FHA's guarantee to the lender would not exceed $100,000. The proposed
legislation removes the portfolio cap and insures each loan on an
individual basis. However, the current risk-sharing mechanism on
individual loans between FHA and lenders (where FHA covers 90 percent
of the loss if there is a claim on a defaulted loan and the lender
absorbs the remaining 10 percent) would not change.
Moreover, FHA would be required to establish specific underwriting
criteria to ensure the financial soundness of the program within 6
months of the passage of the legislation. Currently, Title I
regulations require a lender to exercise prudence and diligence in
underwriting a loan to determine whether the borrower is an acceptable
credit risk, such as requiring lenders to conduct a credit
investigation and obtain a credit report. But the Title I regulations
do not contain provisions that would address other factors specific to
manufactured homes, such as whether the home is placed on owned or
leased land. For Title I, FHA reviews the lender's underwriting only
when a default occurs within the first 2 years of the loan and a lender
submits a claim for insurance. FHA then has 2 years to deny a claim for
insurance even after FHA has certified the claim for payment. The
proposed legislation also would require FHA to provide incontestable
insurance endorsements, meaning that no claim could be denied because
of underwriting issues--absent fraud or misrepresentation.[Footnote 31]
All but one of the bills would establish up-front mortgage insurance
premiums, not to exceed 2.25 percent of the loan amount and adjust the
annual insurance premiums up to 1 percent of the remaining unpaid
principal balance, rather than the original loan amount as stipulated
in current law.[Footnote 32] The remaining bill would give the agency
flexibility to establish premiums through risk-based pricing. If such a
provision were made law, FHA officials told us that they would provide
a range of premiums based on historical analysis of FHA loan data.
Furthermore, all but one of the bills would require operations at
negative subsidies--that is, without cost to the government. Currently,
the Title I program is operated at a positive subsidy-, meaning that
the present value of estimated cash outflows (such as claims) to FHA's
General Insurance Fund exceed the present value of the estimated cash
inflows (such as borrower premiums). According to the Federal Credit
Supplement, FHA's Title I Manufactured Home Loan program is expected to
require a $487,000 subsidy in fiscal year 2007 and a $76,000 subsidy in
2008. FHA officials state it is unlikely the program could generate
negative subsidies because of the proposed premium structure and
potential for depreciation of the assets underlying the loans (the
manufactured homes).
Some of the bills also would require that the claim and disposition of
property for the Title I program be similar to the Title II program,
where FHA disposes of the used homes once the lender receives insurance
benefits. FHA opposes this change to the bill and proposes to continue
having the lenders dispose of the property. As discussed later,
recovery cost for manufactured housing are higher than for other types
of housing and lenders require strong recovery practices, such as a
network for selling homes in place, to recoup more than half the loan
balance after a default.
According to FHA and Industry Officials, Potential Benefits of Proposed
Changes Include Increasing the Number of Borrowers, More Lender
Participation, and Expansion of the Secondary Market:
FHA and lending industry officials with whom we spoke cited benefits
that could accrue to borrowers, the industry, and the Title I program
if the proposed legislation were enacted. These officials suggested
that increasing the loan limits would allow more borrowers to buy
manufactured homes at lower interest rates and also larger homes. As
noted earlier, in recent years buyers have expressed a heavy preference
for purchasing double-wide or multisection units.
FHA, Ginnie Mae, and lending industry officials also suggested that
increasing the limits and eliminating the portfolio cap would increase
lender participation and demand for Title I loans, which in turn could
increase competition and decrease borrower interest rates. In
particular, Ginnie Mae officials stressed that eliminating the
portfolio cap would be central to their decision to expand their
participation in the secondary market for manufactured home
loans.[Footnote 33] This, in turn, could provide more liquidity to
lenders and greater access to credit for borrowers. Ginnie Mae was the
main guarantor of securities backed by FHA Title I loans on the
secondary market up until 1989 when Ginnie Mae placed a moratorium on
new manufactured housing issuers because of the high risks associated
with the product. Currently, Ginnie Mae has four lenders in its
manufactured home program with just one active. According to Ginnie Mae
officials, it imposed the moratorium because structural features of the
Title I program, such as the portfolio cap and the nonspecific
underwriting requirements, exposed Ginnie Mae to greater risk and
losses. According to Ginnie Mae, once claim amounts were reached on
troubled portfolios, lenders had little incentive to continue servicing
the portfolios and make payments to security holders. Ginnie Mae then
sustained substantial losses when it assumed the portfolios of lenders
that reached FHA coverage limits. In addition, one lending official
suggested more stringent underwriting requirements would be beneficial
to the industry, which still is recovering from the defaults and
repossessions of the early 2000s.[Footnote 34] Industry officials
suggested that federal agencies, such as FHA, and the government-
sponsored enterprises could help facilitate changes in the industry,
such as improving underwriting requirements.
However, according to FHA and the Congressional Budget Office (CBO),
the elimination of the portfolio cap could increase significantly the
amount of claims paid and expand the government's liability under the
program since each loan would be insured on an individual basis. FHA
officials also said that they believed risk-based pricing would help
compensate FHA's insurance risk. The extent to which risk reduction
would occur and what borrowers would be excluded would depend on
underwriting requirements, such as the ranges of credit scores allowed.
Lending Officials Identified Factors Unique to Manufactured Home
Lending That Can Affect Loan Performance:
Industry officials identified several risk factors unique to
manufactured home lending, such as the decreased ability of borrowers
to build equity, the lack of consistency and transparency in appraising
and pricing homes, the location of the home (owned or leased land), the
cost of recovery to the lender after defaults, and issues related to
the installation of the home. Based on our review of literature and
interviews with lending industry officials, owners of manufactured
homes generally have less ability to build equity than the owners of
site-built homes. As assets, manufactured home can depreciate in value
after purchase, similar to automobiles. For example, officials
explained that manufactured homes bought with personal property loans
generally depreciated in value if not attached to land. The officials
emphasized that, even after years of making payments, a borrower could
choose to default on a loan if the home was worth less than the loan
balance.
In general, manufactured homes are appraised differently when
considered real property compared to personal property. When a home is
placed on real property, the value of the home is determined based on
comparable homes in the vicinity. When a home is considered personal
property, the value is based on the price that the manufactured home
dealer had determined for the unit. However, lending officials with
whom we spoke suggested prices varied by dealers and that pricing of
manufactured homes was not transparent because dealers are not mandated
to display a manufacturer's suggested retail price. In addition, states
conduct little or no recording of sales data. Further, the officials
suggested that the lack of transparency resulted in some consumers
overpaying for the manufactured home, particularly in instances where
the dealer would present the price in monthly payment terms. One lender
identified California as a model state, because it requires all
manufactured home purchases to go through escrow, whether real or
personal property, which helps to monitor sales prices.[Footnote 35]
This lender's loans performed significantly better in California than
in other states, and the lender suggested that California's transparent
pricing was one of the main reasons.
Furthermore, industry officials suggested that the location of the home
on owned or leased land is a predictor of loan performance. According
to our review of literature and interviews with industry officials,
loans for manufactured homes placed on owned land (titled as real
property) tend to perform better than loans for homes on leased land
(titled as personal property), as they tend to appreciate more. Some
officials suggested appreciation could occur on leased land, but that
appreciation would be dependant on location and amenities available
(such as pools, club houses, or golf courses).
In contrast to other housing types, many lending industry officials
suggested that the cost of recovery for lenders when a loan defaulted
was greater with manufactured homes. For instance, for manufactured
homes the costs to the lender in a foreclosure or repossession (which
may involve the movement of the home) would be proportionately higher
relative to the loan amount than for more expensive site-built housing.
Some states have lien holder statutes in place that may help the lender
protect its collateral in cases of borrower default by requiring
notification of lenders in case of abandonment or eviction. Of the
states we reviewed, Arizona, New Hampshire, Oregon, and Texas have such
a statute.[Footnote 36] Some lending industry officials suggested that
losses and high recovery costs could be mitigated by selling the home
in place. They suggested that lease agreements between lenders and
community owners should ensure that manufactured homes located on
leased land could be sold in place if borrowers defaulted.
According to some of lending officials we interviewed, the size of the
home also was a predictor of performance. Loans for larger manufactured
homes (double-wides or multisection units) tend to perform better than
loans for single-wides. The officials with whom we spoke suggested that
these loans performed better because the income level of those
borrowers tended to be higher. However, the majority of Title I loans
have been for single-wides, which according to FHA and industry
officials was because of the current loan limits.
In addition, many industry officials suggested the type and quality of
installation of the home affects the value of the home and that, in
theory, states with stronger inspection programs help maintain the
value of the home for the consumer. The Manufactured Housing
Improvement Act of 2000 set standards for installation inspections
across the country, but states continue to differ in how they monitor
installation of homes.[Footnote 37] Until recently, many states did not
have a program to inspect the installation of manufactured homes. In
our review of eight state installation programs, we found the level of
inspections varied by state (see fig. 15). For example, five of eight
states require 100 percent inspection (Arizona, Florida, New Hampshire,
North Carolina, and Oregon). All of those that require 100 percent
inspection had installation programs in place prior to the
implementation of the Manufactured Housing Improvement Act, except for
New Hampshire, whose requirement went into effect in July
2006.[Footnote 38] The remaining states relied on state officials
inspecting from at least one manufactured home installer in Georgia or
from 10 to 35 percent of manufactured homes in Missouri and Texas, but
Georgia and Missouri made changes to their installation programs after
the passage of the act. Prior to these changes, the two states
inspected installations on a consumer complaint basis. Further, state
programs differ in how they conduct installation inspections. For
instance, Florida, New Hampshire, and North Carolina rely on local
jurisdictions to conduct the inspections; Arizona and Oregon use a
combination of both state and local officials; while Georgia, Missouri,
and Texas use only state officials.
Figure 15: Comparison of Installation Inspection Programs in the States
We Reviewed, 2007:
[See PDF for image]
Source: GAO analysis of select state MH installation programs.
Note: Georgia does not specify a percentage of manufactured homes to be
inspected. Rather, each installer is inspected once annually. If a
problem is found with a particular manufactured home installer, the
state office conducts multiple inspections of the installer.
[End of figure]
Our Analysis Suggests That Poor Credit and Homes Placed on Leased Land
Are Key Factors Associated with Greater Risk of Defaults of Loans for
Manufactured Homes:
In the absence of available data on the credit of FHA borrowers and the
location of the homes (owned or leased land), we developed scenarios
using assumptions based on various risk factors, such as the default
risk of borrowers and the ability of lenders to recover losses. In
addition, we considered the experience of FHA's Title I program since
1990 and of non-FHA personal property manufactured housing loans. For
example, from 1990 to 2002, FHA's cumulative defaults expressed as a
percentage of originated loans, did not drop below 10 percent and have
exceeded 25 percent in 8 of the 13 years (see fig. 16). However, loans
from 2003 to 2006 may not be reflective of the default experience
because they are recent loans and lending industry officials explained
that the peak default period for these types of loans generally occurs
from the third to the fifth year. Non-FHA manufactured housing loans
also had high cumulative losses, typically above 15 percent for loans
originated between 1997 and 2001, but lower than FHA's cumulative
losses.
Figure 16: Number of FHA Title I Loans and Percentage of Loans in
Default, 1990-2006:
[See PDF for image]
Source: GAO analysis of FHA data.
[End of figure]
Our scenarios incorporate assumptions based on factors such as annual
default rates for different yearly intervals, loan interest rates, and
loan terms.[Footnote 39] Once we established these parameters, we
included additional factors, such as variations on the lenders' ability
to recover their losses in cases of default and the borrowers'
insurance premium schedule (based on the premiums suggested in the
proposed legislation). Our assumptions about default rates reflect an
important characteristic of home-only manufactured housing loans. Even
after years of loan payments, a borrower may not have enough equity in
the home to avoid a default in the face of adverse financial conditions
or may choose not to pay off a loan if the home is worth less than the
loan balance.
Based on discussions with lending industry officials and our review of
available manufactured home lending data, we assumed three variations
of default: a low default experience, a moderate default experience,
and a high default experience. In general, the low default experience
would reflect conditions in which borrowers possessed good credit
quality (credit score), lenders used high-quality underwriting
requirements, and lenders' security interests in the collateral were
well protected in terms of those factors that are associated with the
preservation of value, such as placement of the home (owned versus
leased land) and installation. The high default experience would
reflect conditions in which borrowers had poorer credit quality, and
collateral values and lenders' security interests also were lower.
The following assumptions in our analysis were based on discussions
with lending industry officials on possible recovery outcomes and
possible legislative changes regarding FHA's upfront and annual
premiums:
* If lenders had a strong recovery program (which may include a good
network of dealers who resell manufactured homes) they would achieve a
net recovery of 50 percent per claim. Alternatively, we assumed a
moderate recovery rate would be 33 percent of the claim, and a low
recovery rate would be 25 percent.
* Two different potential up-front premium amounts--a high up-front
premium of 2.25 percent of the original loan amount and a low up-front
premium of 1 percent of the original loan amount.
* Two different annual premiums--a high annual premium of 1 percent of
the declining loan balance and a low annual premium of 0.5 percent of
the declining loan balance.
To determine the potential impact on FHA's General Insurance Fund, we
used the above assumptions to calculate the relationship between the
amount and timing of both expected claims and premiums to FHA. Similar
to a subsidy calculation, we estimated the present value of estimated
cash outflows (such as claims) net of the present value of the
estimated cash inflows (such as premiums) to FHA's General Insurance
Fund.
The results of our analysis show that in all instances where borrowers
had moderate or high default risk, the fund experienced a loss--that
is, the present value of estimated cash outflows exceeded the present
value of cash inflows (see fig. 17). The range of the loss was
determined by the lender's ability to recover its losses and the
premiums the borrower paid. For instance, in cases where the borrower
paid high up-front and annual premiums (2.25 percent and 1 percent,
respectively) and was a moderate default risk, and the lender had a
high net recovery rate (50 percent), the loss to the fund was less than
1 percent. However, if we varied the scenario to lower the recovery
rate for lenders (25 percent), the potential loss to the fund was 4.4
percent. Similarly, when the borrower paid low up-front and annual
premiums (1 percent and 0.5 percent) and had moderate default risk, the
losses ranged from 4.4 percent if the lender had a high net recovery
rate to 8.5 percent if the lender had a low recovery rate. The fund had
the potential to experience gains in instances where the borrower had
low default risk, premiums were higher, and lenders had a higher
probability of high recovery of losses.
Figure 17: Results of Scenarios Based on Variations in Default Risk,
Lender Recovery Costs, and Premiums Paid by Borrowers:
[See PDF for image]
Source: GAO.
[End of figure]
Our analysis also showed that there is potential for FHA's General
Insurance Fund to experience a wide variation in the level of losses
but little potential for gains. The results suggested that there is
greater risk of loss from borrowers who have either moderate or high
default risk. Typically, these are loans where the borrower may not
have a high credit score, and the property is located on leased land--
in which case the lender's security interest may be uncertain because
of the variability associated with rent increases, lease terms, and the
potential for the manufactured home park to be sold. In addition, the
amount of the loss was influenced by the amount of premiums paid. For
instance, where borrowers paid the highest up-front and annual premium,
the loss was 11 percent in cases where the borrower also had high
default risk and the lender had low recovery, compared with a 15
percent loss in instances where the borrower paid a low up-front and
annual premium. However, since FHA does not currently collect data on
credit score or where the property is located--owned or leased land--it
is unclear how these scenarios may actually affect the General
Insurance Fund. See appendix II for a more detailed discussion of our
scenario analysis methodology.
Effects of the Proposed Changes Are Unclear Because FHA Has Not Yet
Articulated Which Borrowers Would Be Served, Assessed Its Insurance
Risks, or Developed Underwriting Requirements:
FHA has not yet assessed the effect of the proposed changes to the
Title I program. More specifically, it has not developed criteria or
models to assess the potential effects of the proposed premiums or risk-
based pricing or developed specific underwriting requirements. Such
assessments and requirements are central to effective operation and
oversight of a revised Title I Manufactured Home Loan program. Our
internal control standards for federal agencies state that effective
management involves comprehensively identifying risk as part of short-
and long-term planning.[Footnote 40] Such planning would encompass the
identification of risks posed by new legislation or regulations. The
results of our scenario analysis also suggest that FHA could use
modeling to illustrate, in a general way, potential gains and losses to
FHA's General Insurance Fund and that premium structures play a key
role in determining these outcomes.
Although the purpose of the Title I program is to serve low-to moderate-
income families, it is unclear which borrowers a revised program would
serve because FHA has not yet shared the specifics as to how it plans
to compensate for risk, including how the premiums would be set.
According to FHA officials, they do not plan to develop criteria for
assessments of proposed premiums or risk-based pricing until the
program is approved by Congress. FHA officials told us that they have
begun to analyze a range of up-front premiums and a maximum premium
amount based on a historical analysis of receipts and claims, but that
they had not yet reached any conclusions. In addition, FHA has not
conducted an analysis to determine under what conditions the program
could operate at a negative subsidy if the proposed changes were
enacted. As mentioned earlier, FHA's Title I Manufactured Home Loan
program is expected to require a $487,000 subsidy in fiscal year 2007
and a $76,000 subsidy in 2008.[Footnote 41] According to HUD officials,
they expect to calculate the new subsidy rate based on projected
defaults, interest and fees, and loan characteristics (such as loan
maturity, default and recovery rates, and up-front and annual fees) for
the 2009 budget. CBO estimated that, if the legislation were enacted,
FHA could achieve a near zero subsidy for the Title I program assuming
default rates would be at 9.5 percent or lower. CBO also acknowledged
that because of the uniqueness of FHA's program and lack of comparative
programs in the private market, the potential costs of the program are
uncertain. The results of our analysis suggest that, in almost all
situations, there is potential for loss except when borrowers have
lower default risk (based on credit scores and other information).
While credit score is one of the key factors used to determine default
risk, FHA does not collect this information (discussed further below).
FHA officials also stated they have not yet developed specific
underwriting requirements for a revised program. Although industry and
FHA officials with whom we spoke discussed the unique risks for
manufactured home loans, the information FHA provided us about any
changes to its underwriting criteria have not addressed the specific
characteristics of manufactured housing. FHA officials did explain they
would like to establish review procedures when a loan is submitted for
insurance, similar to the procedures in FHA's Title II loan program. In
Title II, FHA conducts post-endorsement reviews of 10 percent of its
loans, with FHA staff going over the lender's underwriting decisions
and calculations.
In explaining the agency's limited assessments, FHA officials noted
that the agency is focusing its resources on assessing the impact of
proposed changes to the much larger Title II Mortgage Insurance
program. As of May 2007, FHA's risk-based pricing proposal for the
Title II program established six different risk categories, each with a
different premium rate, for purchase and refinance loans. FHA used data
from its most recent actuarial review to establish six risk categories
and corresponding premiums based on the relative performance of loans
with various combinations of loan-to-value ratio (the ratio of the
amount of the mortgage loan to the value of the home) and credit
score.[Footnote 42] Further, since the current volume of the Title I
program is low, FHA officials did not anticipate large losses for the
fund. However, the programmatic changes in the proposed legislation are
designed to increase the demand for Title I manufactured home loans.
FHA officials told us that once the legislation is passed, it would
take up to a year to implement changes to the program and to work on
developing the risk-based pricing strategy; however, they were unsure
if they would implement the program in stages or all at once.
As a result of FHA not conducting risk assessments or determining
underwriting requirements, potential effects of changes to the Title I
program remain unclear. Without such risk identification, FHA's
planning may be adversely affected. In particular, the agency may lack
timely indications of whether the program could generate positive or
negative subsidies, which in turn would affect decisions about pricing
premiums.
FHA Also Has Not Yet Developed an Approach for Collecting the
Information Needed to Manage the Program:
Currently, FHA does not collect information on the credit scores of
borrowers or the type of land on which manufactured homes are placed.
Our internal control standards for federal agencies state that an
agency must have relevant, timely, and reliable information to run and
control its operations. Of the factors identified as risks affecting
manufactured home lending, FHA maintains data only on the size and
condition (that is, new or existing) of the manufactured home. In 2004,
FHA started to collect information on borrower demographics, such as
gender, address, birth date, and monthly income. And, because FHA
currently monitors a lender only when a claim is filed for insurance
and not before the loan is originated, the information collected is not
as thorough as would be generated if the program required review prior
to the endorsement of the loan.
FHA officials told us it would like lenders to electronically capture
more information about borrowers during the underwriting process, but
that the current information system for the Title I program would need
to be updated to accommodate expanded data fields. FHA officials also
told us that they plan to collect more detailed borrower, property, and
loan-level data to improve tracking and performance measurement, but
did not have specific details as of July 2007. However, our interviews
with lending officials and the results of our scenario analysis both
suggest that credit score and the location of the home (on owned or
leased land) are important predictors of loan performance. Without more
comprehensive data on its borrowers and lenders, FHA may not be able to
successfully estimate default risks in its portfolio, mitigate risks to
the insurance fund, and, thus, effectively manage the program.
Conclusions:
Manufactured homes are an affordable housing option, but they differ
from site-built homes in the way they are financed, sold, and the
consumer protections available. These differences create additional
risks for both the borrowers and lenders of manufactured homes. For
example, the ability for the homeowner to build equity is constrained
if the property is located on leased land and the land ownership also
affects the ability of the lender to recover its losses relative to
other types of lending. These risks are reflected in the performance of
the Title I program, which has a history of high default rates, as does
the manufactured home lending industry. However, the Title I program
also provides a unique product as the only active federal program
offering insurance for home-only (personal property) loans. According
to recent FHA data, the majority of its borrowers are younger and lower-
income, suggesting that Title I helps them achieve homeownership.
But changing and expanding a lending program can introduce new risks
and increase existing risks. FHA only insured slightly more than 1,400
loans in 2006. Changes to the Title I program are expected to increase
loan volume, which could generate the desirable outcome of providing
more lower-priced loans to lower-income individuals desiring to
purchase a home. Yet, both FHA and CBO suggest proposed changes can
increase FHA's insurance risk and expand the government's liability.
The extent of gains or losses to FHA's General Insurance Fund will
depend on a variety of factors, such as the borrower's default risk,
the lender's ability to recover losses, and the amount of premiums
paid. However, FHA has not articulated which borrowers would be served,
how the loans would be priced under a risk-based structure and the
expected increase in risk to the General Insurance Fund, how the loans
would be underwritten, and the additional data it plans to collect to
manage the program. Thus, the agency lacks vital information for
implementing any changes to the program. If FHA were to conduct such
risk identification, it could plan to anticipate changes to the
program, target new borrower populations, and more effectively manage
existing loan portfolios. In particular, with indications of whether
the program could generate positive or negative subsidies, the agency
could make appropriate and well-informed decisions about pricing
premiums. For example, an analysis similar to the one we performed
would provide at least an indication of what scenarios would produce
the highest risks for losses to the fund. Finally, more comprehensive
data on its borrowers and lenders could allow FHA to mitigate the risks
inherent with the manufactured home product.
Recommendations for Executive Action:
In light of the growth that a revised Title I program could spur and
previous experience in the manufactured home loan industry that
included a high number of defaults and repossessions, prior to the
implementation of a revised program, we recommend that the Secretary of
Housing and Urban Development direct the Assistant Secretary for
Housing and Urban Development--Federal Housing Commissioner to assess
the effects of the proposed changes. At a minimum, this action should:
* articulate which borrowers would be served if the program were
expanded, including the financial conditions and creditworthiness of
the served borrowers;
* develop criteria or economic models to assess the potential effect of
the proposed changes including risk-based pricing; that is, determine
what circumstances or pricing structures would most likely result in a
positive or negative subsidy if the proposed changes were enacted; and:
* develop detailed proposed changes to its underwriting requirements
that account for unique attributes of manufactured housing and the
characteristics of FHA's targeted borrower population.
We also recommend that the Secretary of Housing and Urban Development
direct the Assistant Secretary for Housing and Urban Development--
Federal Housing Commissioner to develop an approach for collecting the
information needed to manage the program, including the credit scores
of borrowers and whether the manufactured homes are on owned or leased
land.
Agency Comments and Our Evaluation:
We provided HUD with a draft of this report for review and comment. HUD
provided comments in a letter from the Assistant Secretary for Housing-
-Federal Housing Commissioner (see app. III). HUD agreed with the
recommendations in our report and described plans for implementing
these recommendations. More specifically, HUD agreed with our
recommendation to assess the effects of the proposed changes prior to
the implementation of a revised program. FHA noted that it recently
initiated a review of the credit subsidy calculation for the Title I
Manufactured Home Loan program and that the results of the study will
be used to develop models to test underwriting and premium pricing
options. As we noted in our report, this type of analysis or an
analysis similar to the one we performed could provide an indication of
the risks for losses to FHA's General Insurance Fund.
HUD also agreed with our recommendation to develop an approach for
collecting the information needed to manage the program. As we
mentioned in our report, HUD stated it began collecting additional
data, such as borrower information on age and income in 2004. HUD
stated that it did not collect information on the location of the homes
(owned or leased land) because the program requirements for both types
of homes were essentially the same; however, HUD plans to collect these
data under a revised program to track loan characteristics. HUD also
agreed to collect appropriate credit and application variables such as
credit scores. Finally, the agency noted that it intended procedures
for originating and underwriting Title I loans to mimic those of FHA's
real estate financing programs.
As agreed with your offices, unless you publicly announce the contents
of this report earlier, we plan no further distribution until 30 days
from the report date. At that time, we will send copies of this report
to the Ranking Member, Senate Committee on Banking, Housing, and Urban
Affairs; Ranking Member, Subcommittee on Housing, Transportation, and
Community Development, Senate Committee on Banking, Housing, and Urban
Affairs; Chairman and Ranking Member, House Committee on Financial
Services; and Chairman and Ranking Member, Subcommittee on Housing and
Community Opportunity, House Committee on Financial Services. We will
also send copies to the Secretary of Housing and Urban Development and
will make copies available to other interested parties upon request. In
addition, the report will be made available at no charge on the GAO Web
site at [hyperlink,http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-8678 or shearw@gao.gov. Contact points for our
Offices of Congressional Relations and Public Affairs may be found on
the last page of this report. Key contributors to this report are
listed in appendix IV.
Signed by:
William B. Shear:
Director, Financial Markets and:
Community Investment:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
The Chairmen of the Senate Committee on Banking, Housing, and Urban
Affairs and its Subcommittee on Housing, Transportation, and Community
Development and Senator Jack Reed requested that we evaluate the
Federal Housing Administration's (FHA) Title I Manufactured Home Loan
program. Specifically, the objectives of this report were to (1)
describe selected characteristics of manufactured housing and the
demographics of the owners, (2) compare federal and state consumer and
tenant protections for owners of manufactured homes, and (3) describe
the proposed changes to FHA's Title I Manufactured Home Loan program
and assess potential benefits and costs to borrowers and the federal
government.
In summary, to address our first objective we analyzed Census data from
the Manufactured Housing Survey from 1996 to 2005 and the 2005 American
Housing Survey. To address our second objective, we researched relevant
federal laws and laws in eight states (Arizona, Florida, Georgia,
Missouri, New Hampshire, North Carolina, Oregon, and Texas) and
conducted semistructured phone interviews with state, industry, and
consumer group officials in those eight states.[Footnote 43] We also
used the information gathered in the interviews to inform our
discussion in the first and third objectives. For our third objective,
we interviewed FHA officials and lending officials from programs that
provide financing for manufactured homes. To learn about risk-
mitigation practices, we also reviewed policies and procedures from the
programs mentioned above. Finally, we conducted an analysis using
different scenarios that incorporated assumptions of risk for
manufactured housing lending to illustrate potential costs of the
proposed legislation. We conducted our work in Washington, D.C.,
Atlanta, and Chicago, from October 2006 through June 2007 in accordance
with generally accepted government auditing standards.
Selected Characteristics of Manufactured Housing and the Demographics
of the Owners:
To determine selected characteristics of manufactured housing, we
analyzed Census data from the Manufactured Housing Survey. Census
conducts the Manufactured Housing Survey on a monthly basis and samples
approximately 350 manufactured home dealers or 1 in 40 of the
manufacturers that ship manufactured homes each month. The sample of
manufactured home dealers surveyed fluctuates based on the total number
of manufactured homes shipped. Specifically, we used Manufactured
Housing Survey data from 1996 through 2005 to examine trends in the
manufactured housing industry, such as the number of homes sold,
average sales price, where the homes were placed (owned or leased
land), and the size of these homes (single-wide versus double-wide
units). To determine demographic characteristics of manufactured home
owners, we relied on the 2005 American Housing Survey. Census conducts
the American Housing Survey every 2 years, sampling approximately
55,000 housing units to gather data on apartments; single-family homes;
manufactured or mobile homes; vacant housing units; age, sex, race and
income of householders; housing and neighborhood quality; housing
costs; equipment and fuels; and the size of the housing units. We
choose to use 2005 American Housing Survey data since they were the
latest available. We did not provide information on trends in earlier
years because the sample of manufactured housing used in previous
surveys (through 2003) changed, making it difficult to compare 2005
data with previous data. Data on land ownership for manufactured homes
(that is, owned or leased land) was limited in the Manufactured Housing
and American Housing Surveys; as a result, we could not report
differences in the data for where the manufactured home was
placed.[Footnote 44] We assessed the reliability of the Manufactured
Housing and American Housing Surveys by reviewing information about the
data, performing electronic data testing to detect errors in
completeness and reasonableness, and interviewing knowledgeable
officials regarding the quality of the data. We determined that the
data were sufficiently reliable for the purposes of this report.
Because Census data used in our American Housing Survey analyses are
estimated based on a probability sample, each estimate is based on just
one of a large number of samples that could have been drawn. Since each
sample could have produced different estimates, we express our
confidence in the precision of our particular sample's results as a
confidence interval. For example, the estimated percentage of occupied
manufactured homes located in the South was 56.7 percent, and the
confidence interval for this estimate ranges from 56.6 percent to 56.8
percent, with a percentage point error of 0.1 percent. This is the
interval that would contain the actual population value for 95 percent
of the samples that could have been drawn. As a result, we are 95
percent (or more) confident that each of the confidence intervals in
this report will include the true values in the study population. All
variables from American Housing Survey that are included in this report
have 95 percent confidence intervals of plus or minus 5 percentage
points or less.
We conducted a literature review and examined relevant studies on
manufactured housing. We also conducted a review of newspaper articles
from May 2005 to May 2007 to identify where manufactured home park
closures occurred in the United States. Because states collect
different types of information on manufactured home parks and even
define them differently, the consequent variability of the state data
makes determining the number of manufactured home parks extremely
difficult. Thus, we relied on a database search of national and local
newspapers to provide anecdotal information on park closures. We used
several different search parameters and keyword searches and identified
park closures in 18 states; however, it is possible that other closures
occurred in other states during the period we reviewed, but were not
identified in our searches.[Footnote 45]
Federal and State Consumer and Tenant Protections for Owners of
Manufactured Homes:
To compare federal and state consumer and tenant protections for owners
of manufactured homes, we reviewed federal laws relevant to
manufactured housing, such as the Real Estate Settlement Procedures Act
and the Truth in Lending Act. We reviewed prior work on state laws for
manufactured housing conducted by the National Consumer Law Center and
the American Association of Retired People and also interviewed
officials from these organizations. We then selected eight states and
reviewed statutes related to the consumer protections provided for
foreclosure and repossession and the tenant protections applicable to
contracts or acts, such as written lease requirements, rent increases,
evictions, and park closures.
The eight states were selected based on a combination of factors
including the volume of FHA Title I loans in the state from 1990
through the first quarter of 2007; concentration of manufactured
housing as a percentage of housing units in the state; information from
our interviews of industry and consumer officials; and previous studies
conducted on manufactured housing. The table below indicated the
characteristics of the states we reviewed.
Table 2: Characteristics of Eight States Selected for Semistructured
Interviews:
State: Arizona;
FHA total loan volume from 1990-2007 (1[ST] quarter): 1.7%;
Large concentration of manufactured homes in state: 9% to 13%;
State identified as familiar with manufactured home park issues: Yes;
State identified as active in manufactured housing policy development:
No;
Ownership model of manufactured home park (condo or co-op): [Empty];
Officials interviewed cited policies in place for manufactured home
parks and/or park closures occurring: No;
Geographic representation: West.
State: Florida;
FHA total loan volume from 1990-2007 (1[ST] quarter): 3.3%;
Large concentration of manufactured homes in state: 9% to 13%;
State identified as familiar with manufactured home park issues: Yes;
State identified as active in manufactured housing policy development:
Yes;
Ownership model of manufactured home park (condo or co-op): Condo;
Officials interviewed cited policies in place for manufactured home
parks and/or park closures occurring: Yes;
Geographic representation: South.
State: Georgia;
FHA total loan volume from 1990-2007 (1[ST] quarter): 4.7%;
Large concentration of manufactured homes in state: 9% to 13%;
State identified as familiar with manufactured home park issues: No;
State identified as active in manufactured housing policy development:
No;
Ownership model of manufactured home park (condo or co-op): [Empty];
Officials interviewed cited policies in place for manufactured home
parks and/or park closures occurring: No;
Geographic representation: South.
State: Missouri;
FHA total loan volume from 1990-2007 (1[ST] quarter): 3.6%;
Large concentration of manufactured homes in state: 6% to 9%;
State identified as familiar with manufactured home park issues: No;
State identified as active in manufactured housing policy development:
No;
Ownership model of manufactured home park (condo or co-op): [Empty];
Officials interviewed cited policies in place for manufactured home
parks and/or park closures occurring: No;
Geographic representation: Midwest.
State: New Hampshire;
FHA total loan volume from 1990-2007 (1[ST] quarter): < 1%;
Large concentration of manufactured homes in state: 6% to 9%;
State identified as familiar with manufactured home park issues:
No;
State identified as active in manufactured housing policy development:
No;
Ownership model of manufactured home park (condo or co-op): Co-op;
Officials interviewed cited policies in place for manufactured home
parks and/or park closures occurring: Yes;
Geographic representation: Northeast.
State: North Carolina;
FHA total loan volume from 1990-2007 (1[ST] quarter): 11.2%;
Large concentration of manufactured homes in state: 13% - 20%;
State identified as familiar with manufactured home park issues: No;
State identified as active in manufactured housing policy development:
No;
Ownership model of manufactured home park (condo or co-op): [Empty];
Officials interviewed cited policies in place for manufactured home
parks and/or park closures occurring: Yes;
Geographic representation: South.
State: Oregon;
FHA total loan volume from 1990-2007 (1[ST] quarter): < 1%;
Large concentration of manufactured homes in state: 9% to 13%;
State identified as familiar with manufactured home park issues: Yes;
State identified as active in manufactured housing policy development:
No;
Ownership model of manufactured home park (condo or co-op): [Empty] ;
Officials interviewed cited policies in place for manufactured home
parks and/or park closures occurring: No;
Geographic representation: West.
State: Texas;
FHA total loan volume from 1990-2007 (1[ST] quarter): 15.8%;
Large concentration of manufactured homes in state: 6% to 9%;
State identified as familiar with manufactured home park issues: No;
State identified as active in manufactured housing policy development:
No;
Ownership model of manufactured home park (condo or co-op): [Empty];
Officials interviewed cited policies in place for manufactured home
parks and/or park closures occurring: Yes;
Geographic representation: South.
Source: FHA data and GAO.
Note: Concentration of manufactured homes illustrates the states with a
high percentage of manufactured homes as part of their housing stock.
[End of table]
We also conducted semistructured interviews with regulatory, industry,
and consumer officials in each state. We pretested our interview
questions on-site in Georgia and conducted the remaining interviews by
telephone. We used interview responses on state statutes to check our
interpretation of the state statutes containing consumer and tenant
protections applicable to manufactured home owners. In each of the
states, we interviewed officials who represented (1) the state
regulator for manufactured housing, (2) the state industry group who
are affiliates of the National Manufactured Housing Industry group,
known as the Manufactured Housing Institute, and (3) a consumer
advocacy group, such as the state manufactured homeowner's
association.[Footnote 46] In total, we conducted 25 interviews across
the eight states.
To synthesize interview data, we compiled the responses by interview
question into a document for each state (state summary), which we
reviewed for accuracy and completeness. Next, we identified themes
among the interviews and created categories within a response, noting
the state and type of official interviewed. For example, in our
question on placement options for owners of manufactured homes when the
park in which they live closes, we identified categories, such as a (1)
a neighboring park, (2) private land, and (3) lack of space to move. We
then identified the states that provided a response fitting with each
category and totaled the number of states in each category. We also
used this method to compare installation programs across eight states
based on our interviews with state regulators.
Proposed Changes to Title I Program and Potential Benefits and Costs to
Borrowers and the Federal Government:
To describe the proposed changes to the Title I Manufactured Home Loan
program, we reviewed current and proposed FHA regulations and
legislation. Our review of proposed legislation included Senate Bills
2123 (109th Congress, 2005) and 3535 (109th Congress, 2006) and House
of Representative Bills 2803 (109th Congress, 2005) and 4804 (109th
Congress, 2006), House of Representative Bill 2139 and Senate Bill 1741
from the 110th Congress in 2007.
To assess the potential costs and benefits of the proposed changes to
the Title I program, we interviewed FHA officials, FHA lenders, Ginnie
Mae officials, and officials from federal and other lending programs,
such as Fannie Mae and Freddie Mac, the U.S. Department of Agriculture
Rural Housing Service and the Department of Veterans Affairs, community
banks, industry and consumer groups, and a rating service. In addition,
we interviewed officials from HUD's Inspector General Office. To learn
about risk-mitigation practices, we also reviewed policies and
procedures from programs that provide financing for manufactured homes
at the above agencies and reviewed relevant literature. A few industry
officials also provided information on loan performance for their
manufactured home loan portfolio.
We also conducted an analysis using different scenarios that
incorporated assumptions of risk for manufactured housing lending to
illustrate the potential benefits and costs of the proposed
legislation. We incorporated various risk factors unique to
manufactured home lending (such as site location and loss mitigation
practices of lenders), as well as other commonly used predictors of
loan performance such as credit scores, into a model to illustrate ways
in which these key factors might affect the performance of manufactured
housing loans and, thus, how variation in these key factors might
affect potential gains and losses to FHA's General Insurance
Fund.[Footnote 47] Our estimates relied on assumptions concerning a few
key inputs such as level of default risk, net recovery rate of lenders,
and insurance premiums. See appendix II for a more detailed description
of our scenario analysis methodology.
We also analyzed FHA data, housed in the F-72 database, on the
manufactured home loan program. We used these data to review loan
performance from 1990 to 2005, the size of the units purchased, and the
states in which the loans were originated. We also used the data to
generate demographic information on FHA Title I borrowers. However, FHA
only began collecting demographic data in 2004, so our analysis was
limited to the period from June 2004 through April 2007. In addition,
we could not assess where the manufactured homes were placed and the
credit scores of the borrowers because FHA did not collect these data.
We assessed the reliability of the F-72 database by reviewing
information about the data, performing electronic data testing to
detect errors in completeness and reasonableness, and interviewing
knowledgeable officials regarding the quality of the data. We
determined that the data were sufficiently reliable for the purposes of
this report.
Finally, we reported information provided by HUD using 2005 Home
Mortgage Disclosure Act data on manufactured housing and the number of
personal property loans originated by the FHA Title I program compared
with the rest of the market.[Footnote 48] We also assessed the data
reliability of this output and the computer program used to extract the
information and determined the data were sufficiently reliable for our
purposes.
[End of section]
Appendix II: Scenario Analysis Methodology:
To gain an understanding of the effects of the proposed changes to the
Federal Housing Administration's (FHA) Title I Manufactured Home Loan
program, we developed an approach that could illustrate potential
effects of the changes on the program. Our model of different scenarios
used assumptions to illustrate the importance of various risk factors
unique to manufactured home lending (such as site location and loss
mitigation practices of lenders), as well as other commonly used
predictors of loan performance, such as credit scores. For instance,
the ability of the owner of a manufactured home to build equity may be
limited when the land is leased, which also often increases the risks
associated with the loan. If a borrower with a home on leased land were
to default, lenders could face higher costs and lower recoveries
(relative to site-built homes) in trying to repossess, move, and resell
the personal property.
We developed a model to illustrate some of the ways in which these key
factors may affect the performance of home-only manufactured housing
loans, and, thus, how variation in these key factors may affect
potential gains and losses to the FHA's General Insurance Fund, which
is supported by insurance premiums and used for several FHA insurance
programs, including the Title I program.[Footnote 49] Based on
examining some loan performance data from manufactured home lenders and
discussions with officials with substantial manufactured housing
lending experience, we identified some important characteristics of the
performance of home-only manufactured housing loans.
Our estimates rely on assumptions concerning a few key inputs: annual
prepayment rates, annual default rates (which vary over different time
intervals), and the net recovery rate (which measures the portion of
the loan balance recovered by the lender in cases of default). Further,
because FHA has not yet developed its risk-based pricing criteria for
the proposed legislative changes, we made different assumptions about
the level of up-front mortgage insurance premiums and periodic
insurance premium payments based on the amounts discussed in the
proposed legislation. By varying the default rate, loss recovery, and
premium rate assumptions, we were able to generate a variety of loan
performance and recovery scenarios, and illustrate in a very general
way the potential for gains and losses to FHA General Insurance Fund
that characterize each scenario.
In the absence of available data on the credit of FHA borrowers and the
location of the homes (owned or leased land), we attempted to benchmark
these scenarios based on the experience of FHA's Title I program since
1990 and of non-FHA personal property manufactured housing loans. In
terms of FHA Title I experience since 1990, while the number of loans
originated dropped significantly from the early to mid-1990s,
cumulative defaults expressed as a percentage of originated loans did
not fall below 10 percent from 1990 to 2002 and have exceeded 25
percent in 8 of the 13 years (see fig. 18). However, loans from 2003 to
2006 may not be reflective of the default experience because they are
recent loans and lending industry officials explained that the peak
default period for these types of loans generally occurs from the third
to the fifth year. In terms of non-FHA loan performance, cumulative
losses typically have been above 15 percent for loans originated
between 1997 and 2001.
Figure 18: Number of FHA Loans and Percentage of Loans in Default, 1990-
2006:
[See PDF for image]
Source: GAO analysis of FHA data.
[End of figure]
The scenarios incorporate assumptions based on factors such as annual
default rates for different yearly intervals, loan interest rates, and
loan terms.[Footnote 50] Once we established these parameters, we
factored in additional assumptions and variations for the net recovery
rate of the lender and an insurance premium schedule for the borrower
based on discussions with lending industry officials on possible
default scenarios, recovery outcomes, and possible legislative changes
regarding FHA's upfront and annual premiums. The discussion below
provides more detailed information on our assumptions.
* Assumptions on Annual Default Rates. We characterized the peak period
of default as years 3 through 5, and we described the default
experience in years after this peak period in terms of a percentage of
the default rate assumed to hold during the peak period. In general,
and based on our discussions with lenders and others, we assumed that
default rates in years after the peak period would be 75 percent of
what they were during the peak period. In the high loss scenario, we
assumed that the peak period default rate also held in years 6 through
9 before dropping to 75 percent of the peak value. Our assumptions
about default rates reflect an important characteristic of home-only
manufactured housing loans: Even after years of loan amortization, a
borrower may not have enough equity in the home to avoid a default in
the face of adverse financial conditions.
We present three variations of default: a low default experience, a
moderate default experience, and a high default experience. In general,
the low default experience would reflect conditions in which borrowers
possessed good credit quality, lenders used high quality underwriting
requirements, and lenders' security interests were well protected in
terms of those factors that are associated with the preservation of
value, such the placement of the home (owned land versus leased land)
and installation. The high default experience would reflect conditions
in which borrowers are of poorer credit quality, and collateral values
and lenders' security interests are also poorer (see fig. 19).
Figure 19: Assumptions of Default Risk Used in Our Analysis:
[See PDF for image]
Source: GAO.
[End of figure]
* Assumptions Based on Annual Prepayment Rates. We assumed that
prepayments were constant at 4 percent per year. Modest changes in this
level did not lead to much difference in our results. Based on our
discussions with lenders and others, we believe manufactured home-only
loan borrowers were not as likely as other homeowners to prepay in the
face of favorable refinancing opportunities. As a result, some of these
loans default in later years, but they also continue to generate annual
insurance premiums.
* Additional Scenario Assumptions. Using the prepayment rates and
default rates that we selected, we calculated the value of claims in a
given year as the (unpaid) principal balance due in that year based on
an amortization schedule relating the selected interest rate and loan
term. Based on assumed prepayment and default patterns, we calculated
cumulative defaults and losses, expressed as a percentage of the
original loan balance, losses, and insurance premiums paid by year. We
also calculate the present value of FHA's share of losses and the
present value of annual insurance premiums.[Footnote 51]
* Assumptions on the Net Recovery Rate of Lenders. To provide
variations in our analysis, we make different assumptions on the
lenders' ability to recover losses when a loan defaults. Based on
discussions with industry officials, we assume lenders that have a
strong recovery program (which may include a good network of dealers
who resell manufactured homes) may have a net recovery of 50 percent
per claim. Those lenders who have moderate net recovery are assumed to
receive 33 percent of the claim, and those lenders with a low net
recovery may receive 25 percent of the claim.
* Assumptions on the Insurance Premiums. Insurance premiums may include
an up-front payment and annual payment. FHA has not yet developed its
proposed risk-based pricing for potential FHA Title I Manufactured Home
Loan borrowers. However, several bills introduced in Congress suggests
the up-front annual insurance premiums would not exceed 2.25 percent
and the annual insurance premium would be 1 percent of the annual
unpaid principal balance of the loan. For our analysis, we assumed two
different potential up-front premium amounts: the highest up-front
premium was 2.25 percent of the original loan amount and the lowest up-
front premium was 1 percent of the original loan amount. We also assume
two different annual premiums;
the highest annual premium was defined as 1 percent of the declining
loan balance and lowest annual premium was defined as 0.5 percent of
the declining loan balance.
[End of section]
Appendix III: Comments from the Department of Housing and Urban
Development:
Us. Department Of Housing And Urban Development:
Washington D.C. 20410-8000:
Assistant Secretary:
Federal. Housing Commissioner:
August 10, 2007:
Mr. William B. Shear:
Director:
Financial Markets an Community Investment:
Government Accountability Office:
441. G Street NW:
Washington, DC 20548:
Dear Mr. Shear:
Thank you for the opportunity to comment on the GAO Draft Report
entitled Federal Housing Administration: Agency Should Assess the
Effects of Proposed Changes to the Manufactured Home Loan Program.
While the Department agrees that manufactured housing is one of the
most affordable housing options low- and moderate-income families,
HUD's overarching concern is that the financing options available to
buyers of these homes are limited and costly. Because the Title 1
Manufactured Home Loan program is the only active federal loan
insurance/loan guarantee program for manufactured housing, HUD wants to
not only preserve this source of affordable housing but to also improve
the program, We believe that the changes included in the pending
legislation for this program are critical to this effort.
The Department also agrees that it is important to assess the effects
of the proposed changes and will do so prior to implementing a reformed
program. FHA's Office of Evaluation has recently initiated a study to
determine if the loss recovery rates currently used to calculate credit
subsidy should be increased. The result of this study will provide a
credit subsidy baseline that FHA can use to develop models to test
various underwriting and premium pricing options.
Ginnie Mae is willing to consider securitizing Title I Manufacture Home
loans depending on the elimination of the portfolio cap, tightening
underwriting standards and implementing individual loan insurance.
Ginnie Mac's willingness to consider expanding the secondary market to
include Title I manufactured home loans is key to adding liquidity to
an otherwise tight manufactured home financing market.
As previously recommended by GAO, HUD has been collecting additional
data regarding Title manufactured home loans since 2004 including
borrower information such as age and income. HUD intends to expand data
collection concurrent with programmatic changes so so that the
procedures for originating and underwriting Title I loans will mimic
those of FHA's real estate financing programs. HUD will collect
appropriate credit and application variables including credit scores as
part of its implementation of the proposed revised loan insurance
process.
HUD has not collected data on the placement of the home (i.e, owned vs,
leased) in connection with home-only Title I manufactured home loans
because the current program requirements are essentially the same for
either scenario. HUD will begin collecting this data when it implements
the revised program in order to better track loan characteristics.
Again, we appreciate the opportunity to comment on the Draft Report and
will continue, as recommended by the GAO, to assess the effects of the
proposed changes to the Title I program, and will collect additional
information to effectively manage the program when we implement these
changes.
If you have any questions regarding this letter, please contact
Margaret Burns at 2O2-7O8 2121, extension 3989.
Sincerely:
Signed by:
Brian D. Montgomery:
Assistant Secretary for the Housing:
Federal Housing Commissioner:
Assistant Secretary for Housing - Federal Housing Commissioner:
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
GAO Contact:
William B Shear, (202) 512-8678 or shearw@gao.gov:
Staff Acknowledgments:
In addition to the contact named above, Andy Finkel (Assistant
Director), Steve Brown, Tania Calhoun, Nadine Garrick, Phil Herr,
Alison Martin, John Mingus Jr., Marc Molino, Tina Paek, and Barbara
Roesmann made key contributions to this report.
FOOTNOTES
[1] S.1741, 110th Cong. (2007) and H.R. 2139, 110th Cong. (2007).
[2] The American Housing Survey uses building permit data to draw its
sample and the sample was changed in 2005 since it appeared
manufactured homes were undercounted in previous years.
[3] At one of the states, Georgia, we conducted interviews on-site.
[4] The American Housing Survey definition of monthly housing costs
encompasses electricity, gas, fuel oil, other fuels, garbage and trash,
water and sewer, real estate taxes, property insurance, condominium
fees, homeowner's association fees, mobile home park fees, land or site
rent, other required mobile home fees, rent, mortgage payments, home
equity loan payments, other charges included in mortgage payments, and
routine maintenance.
[5] The General Insurance Fund is used to support several FHA insurance
programs including the Title I Manufactured Home Loan, Property
Improvement, Home Equity Conversion Mortgages, Mortgage Insurance for
Condominium Units, and Rehabilitation Home Mortgage Insurance.
[6] GAO, Standards for Internal Control in the Federal Government, GAO/
AIMD-00-21.3.1 (Washington, D.C.: November 1999); and Internal Control
and Management and Evaluation Tool, GAO-01-1008G (Washington, D.C.:
August 2001).
[7] Housing and Urban Development Act of 1969, Pub. L. No. 91-152,
Title I, Section 103, 83 Stat. 379, 380 (December 24, 1969).
[8] 42 U.S.C. §§ 5401-5426 with implementing regulations at 24 C.F.R.
Parts 3280 and 3282.
[9] In the HUD Code, a manufactured home is defined as a transportable
structure built on a permanent chassis and designed to be used as a
dwelling on a building site. The HUD Code also defines a manufactured
home as being a minimum of 320 square feet; however, the dimensions of
a manufactured home will vary depending on the number of sections that
make up the home and the state laws for transporting the sections.
[10] The label indicates that the manufacturer certifies that the home
meets the HUD Code and has an identification number stamped on it.
[11] Homes placed in rented parks are typically financed as personal
property because conventional single-family mortgage programs usually
require that the land and property be bundled to qualify.
[12] For example, while state laws vary, in a for-profit cooperative,
the manufactured home park returns any profits made, in full, to the
members of the association; or, in a nonprofit cooperative, the
manufactured home park returns any profits to the cooperative and not
to individual members.
[13] FHA began collecting demographic data (such as age, race, and
monthly income) for the Title I Manufactured Home Loan program in 2004.
No demographic data are available prior to this time.
[14] The FHA Title I property improvement program insures loans to
finance the light or moderate rehabilitation of properties, as well as
the construction of nonresidential buildings on the property. This
program may be used to insure loans on either single-or multifamily
properties for up to 20 years. The maximum loan amount is $25,000 for
improving a single-family home or improving or building a
nonresidential structure. For improving a multifamily structure, the
maximum loan amount is $12,000 per family unit, not to exceed a total
of $60,000 for the structure. FHA insures private lenders against the
risk of default for up to 90 percent of any single loan.
[15] Census regions are groupings of states that subdivide the United
States for the presentation of data. There are four Census regions--
Northeast, Midwest, South, and West.
[16] At the time of the survey, the respondents either owned a home or
were in the process of obtaining homeownership.
[17] The American Housing Survey only collects data on structure and
tenure (whether the home itself is owned or rented), but does not ask
survey respondents whether the land on which the home is sited is owned
or leased. Moreover, the American Housing Survey does not ask
respondents whether the manufactured home is located in a manufactured
home park. The Manufactured Housing Survey does collect data on the
location of the home (park, court, subdivision, or private property)
but the data do not indicate whether the land is owned or not. Thus,
data are limited on land ownership.
[18] The American Housing Survey definition of monthly housing costs
encompasses electricity, gas, fuel oil, other fuels, garbage and trash,
water and sewer, real estate taxes, property insurance, condominium
fees, homeowner's association fees, mobile home park fees, land or site
rent, other required mobile home fees, rent, mortgage payments, home
equity loan payments, other charges included in mortgage payments, and
routine maintenance.
[19] Escrow is the holding of funds, documents, securities, or other
property by an impartial third party for the other two participants in
a business transaction. When the transaction is completed, the escrow
agent releases the entrusted property.
[20] Judicial foreclosures are processed through court actions, but
nonjudicial power of sale foreclosures are processed without court
involvement, based on the lender's exercise of the power of sale
contained in the mortgage or deed of trust.
[21] A breach of peace is a generic term that includes violations or
disturbances of public peace or order. Although the use of self-help
repossession is not common, when it is employed it can place the
homeowner at a significant disadvantage because the home can be removed
from the land without much notice and still containing possessions of
the owner.
[22] For FHA Title I loans, before acting to accelerate the maturity of
the loan, the lender generally must contact the borrower in person or
by telephone to discuss the reasons for the default and seek its cure.
Unless the borrower cures the default or agrees to a modification of
the loan terms or a repayment plan, the lender can proceed to take
action by providing written notice to the borrower. During this time,
the borrower is given a second chance to cure the default.
[23] In the states where the law permitted a rent increase during the
lease term, it did not appear that this would override the terms of a
written lease agreement.
[24] Good cause eviction means that eviction must be based upon a
legally sufficient ground, which might include actions such as
noncompliance with a provision of the rental agreement, nonpayment of
rent, or change in use of land.
[25] At the time of our review, North Carolina and Oregon had
introduced legislation to pass similar laws.
[26] Since 1984, the New Hampshire Loan Fund has converted 86
manufactured home parks to nonprofit cooperative ownership.
[27] The HUD Code requires that homes be designed and constructed to
conform to one of three wind load zones. Wind Zone I equates to a 70-
mph fastest-mile wind speed (i.e., the fastest speed in miles per hour
within a specified period, usually 24 hours), Wind Zone II equates to a
100-mph fastest-mile speed, and Wind Zone III to a 110-mph fastest-mile
speed. The appropriate wind zone used in design is dependent on where
the home initially will be installed. Homes designed and constructed
for a higher wind zone can be installed in a lower zone (a zone III
home can be installed in a zone I or II location). However, a zone I
home cannot be installed in a zone II or III location.
[28] Proposed legislation included S. 2123, 109th Cong. (2005), H.R.
2803, 109th Cong. (2005), S. 3535 109th Cong. (2006), H.R. 4804, 109th
Cong. (2006), S.1741, 110th Cong. (2007), and H.R. 2139, 110th Cong.
(2007).
[29] In 2005, the average price of a single-wide was $33,800 and a
double-wide was $68,600.
[30] S.3535 would not change the mechanism that FHA uses to insure
against risk.
[31] In contrast, in the Title II program, FHA endorses a loan if it
meets all applicable regulations and instructions. FHA then issues a
certificate of insurance, which creates a contract of mortgage
insurance subject to the regulations in effect at the time. In Title I,
FHA does not endorse manufactured home loans. That is, it does not
contractually guarantee payment of eligible claims; rather, it
acknowledges the insurance through the issuance of premium billing
statements.
[32] S. 3535 does not specify the premium amount; rather, it states
that the Secretary of HUD can establish a mortgage insurance premium
structure.
[33] Ginnie Mae defines its mission as expanding affordable housing in
America by linking capital markets to the nation's housing markets,
largely by serving as the dominant secondary market vehicle for
government-backed loan programs. Ginnie Mae does not buy or sell loans
or issue mortgage-backed securities. Rather, it provides guarantees
backed by the full faith and credit of the U.S. government that
investors will receive timely payments of principal and interest on
securities supported by pools of government-backed loans, regardless of
whether the borrower makes the underlying mortgage payment or the
issuer makes timely payments on the securities. All mortgages in the
Ginnie Mae pool must be insured or guaranteed by a government agency
and have eligible interest rates and maturities.
[34] As a result of poor performance in the manufactured home
portfolios in the early 2000s, government-sponsored enterprises (GSEs),
such as Fannie Mae and Freddie Mac, changed their underwriting
requirements to only purchase loans located on owned land. In addition,
each of the GSEs put size requirements on the type of homes for which
they would provide guarantees. For example, Fannie Mae underwriting
guidelines require a manufactured home to be 660 square feet or more,
while Freddie Mac requires the home to be a double-wide.
[35] Under California law, when a contract, purchase order, or security
agreement for the retail sale of a new or used manufactured home (one
installed on a nonpermanent foundation) is signed, the dealer must put
the entire down payment or deposit in an escrow account within 5 days
of receipt. The conditions of sale are written into mandatory escrow
instructions and require the buyer's signature. The instructions
specify the conditions of delivery for a manufactured home. For
instance, if the home is located in a manufactured home park, escrow
cannot close until the manufactured home owner has signed the park
rental agreement. Further, the escrow account should not close until
the home has been delivered and passes inspection. These rules only
apply to the retail sale of manufactured homes. Manufactured homes sold
for installation on permanent foundations are subject to escrow
requirements similar to those of site-built homes.
[36] The current Title I formula for calculating FHA's payment of
claims limits the amount of the claim to 90 percent of the loan and is
based on the best price attainable, which is either the net sale price
or appraisal value, whichever is higher, and then includes the
subtraction of the unpaid balance of the loan.
[37] According to HUD officials, a proposed rule is currently under
review to require a consistent installation program across the states.
[38] The Manufactured Housing Improvement Act of 2000 changed methods
for establishing construction, safety, and installation standards for
manufactured housing and created a dispute resolution program
administered by the states. HUD's Manufactured Housing program, which
is administered through state or third-party agencies, such as the
Department of Housing and Community Affairs in Texas, the State Fire
Marshall's office in Georgia, and the Department of Motor Vehicles in
Florida, monitors these standards. Depending on the state, the state or
third-party agencies act as (1) design approval and primary inspection
agencies to check and approve the designs and calculations used in the
construction of manufactured homes; (2) in-plant inspection agencies to
certify and inspect manufactured homes during the manufacturing process
to ensure that the manufacturer is in compliance with the standards and
with approved designs; and (3) state administrative agencies to handle
consumer complaints, conduct inspections, make enforcement
determinations, and conduct hearings.
[39] The annual default rates consisted of different yearly intervals:
years 1 and 2, years 3 through 5, years 6 through 9, and years 10 and
after.
[40] GAO, Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999); and Internal
Control and Management and Evaluation Tool, GAO-01-1008G (Washington,
D.C.: August 2001).
[41] As discussed in previous work, historically, FHA has been known to
underestimate the subsidy rate. GAO, Federal Housing Administration:
Modernization Proposals Would Have Program and Budget Implications and
Require Continued Improvements in Risk Management, GAO-07-708,
(Washington, D.C.: June 29, 2007).
[42] GAO-07-708.
[43] At one of the states, Georgia, we conducted interviews on-site.
[44] The American Housing Survey only collects data on structure and
tenure (whether the home itself is owned or rented), but does not ask
survey respondents whether the land on which the home is sited is owned
or leased. Moreover, the American Housing Survey does not ask
respondents whether the manufactured home is located in a community or
manufactured home park. In contrast, the Manufactured Housing Survey
collects data on the location of the home (park, court, subdivision, or
private property) but the data do not indicate whether the land is
owned or not. Thus, data are limited on land ownership.
[45] To identify the newspaper articles, we used the newspaper
databases in Nexis, which included a search of national newspapers and
wire services, as well as a regional search of newspaper in the
Southeast, West, Northeast, and Midwest. Our search parameters included
terms such as manufactured home, mobile home, mobile home park, park
closure, and conversion.
[46] Arizona and Oregon each had two separate industry groups, one that
represented many industry constituents, such as lenders and insurers,
and another that represented the owners of manufactured home parks.
[47] The General Insurance Fund, which is supported by insurance
premiums, is used for several FHA insurance programs such as, Title I
Manufactured Home Loan, Property Improvement, Home Equity Conversion
Mortgages, Mortgage Insurance for Condominium Units, and Rehabilitation
Home Mortgage Insurance.
[48] The Home Mortgage Disclosure Act requires lending institutions to
collect and publicly disclose information about housing loans and
applications for such loans, including the loan type and amount,
property type, and borrower characteristics (such as ethnicity, race,
gender, and income). These data are the most comprehensive source of
information on mortgage lending. To determine the loans considered
personal property loans, we determined any loan with a rate spread of 4
percent or higher was considered a personal property loan. We discussed
this determination with HUD, which agreed with this threshold.
[49] The General Insurance Fund, which is supported by insurance
premiums, is used for several FHA insurance programs, such as Title I
Manufactured Home Loan, Property Improvement, Home Equity Conversion
Mortgages, Mortgage Insurance for Condominium Units, and Rehabilitation
Home Mortgage Insurance.
[50] The annual default rates consisted of different yearly intervals:
years 1 and 2, years 3 through 5, years 6 through 9, and years 10 and
after.
[51] The present value of a future stream of payments or expenses takes
into account the time value of money. Describing cash flows in present
value terms leads to better evaluations, particularly if they differ
greatly in their timing.
GAO's Mission:
The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities and to help improve the performance
and accountability of the federal government for the American people.
GAO examines the use of public funds; evaluates federal programs and
policies; and provides analyses, recommendations, and other assistance
to help Congress make informed oversight, policy, and funding
decisions. GAO's commitment to good government is reflected in its core
values of accountability, integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through GAO's Web site [hyperlink, http://www.gao.gov]. Each
weekday, GAO posts newly released reports, testimony, and
correspondence on its Web site. To have GAO e-mail you a list of newly
posted products every afternoon, go to [hyperlink, http://www.gao.gov]
and select "Subscribe to Updates."
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. Government Accountability Office:
441 G Street NW, Room LM:
Washington, D.C. 20548:
To order by Phone: Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]:
E-mail: fraudnet@gao.gov:
Automated answering system: (800) 424-5454 or (202) 512-7470:
Congressional Relations:
Gloria Jarmon, Managing Director, JarmonG@gao.gov (202) 512-4400:
U.S. Government Accountability Office, 441 G Street NW, Room 7125:
Washington, D.C. 20548:
Public Affairs:
Susan Becker, Acting Manager, Beckers@gao.gov (202) 512-4800:
U.S. Government Accountability Office, 441 G Street NW, Room 7149:
Washington, D.C. 20548:
