[Senate Hearing 109-994]
[From the U.S. Government Publishing Office]
S. Hrg. 109-994
REFORM OF FHA'S TITLE I
MANUFACTURED HOUSING LOAN
=======================================================================
HEARING
before the
SUBCOMMITTEE ON HOUSING AND TRANSPORTATION
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
ON
EXAMINATION OF S. 2123, TO MODERNIZE THE MANUFACTURED HOUSING LOAN
INSURANCE PROGRAM UNDER TITLE I OF THE NATIONAL HOUSING ACT
__________
APRIL 4, 2006
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
ROBERT F. BENNETT, Utah PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky EVAN BAYH, Indiana
MIKE CRAPO, Idaho THOMAS R. CARPER, Delaware
JOHN E. SUNUNU, New Hampshire DEBBIE STABENOW, Michigan
ELIZABETH DOLE, North Carolina ROBERT MENENDEZ, New Jersey
MEL MARTINEZ, Florida
Kathleen L. Casey, Staff Director and Counsel
Steven B. Harris, Democratic Staff Director and Chief Counsel
Mark Calabria, Senior Professional Staff Member
Jonathan Miller, Democratic Professional Staff
Sarah Garrett, Democratic Legislative Assistant
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
______
Subcommittee on Housing and Transportation
WAYNE ALLARD, Colorado, Chairman
JACK REED, Rhode Island, Ranking Member
RICK SANTORUM, Pennsylvania DEBBIE STABENOW, Michigan
ELIZABETH DOLE, North Carolina ROBERT MENENDEZ, New Jersey
MICHAEL B. ENZI, Wyoming CHRISTOPHER J. DODD, Connecticut
ROBERT F. BENNETT, Utah THOMAS R. CARPER, Delaware
MEL MARTINEZ, Florida CHARLES E. SCHUMER, New York
RICHARD C. SHELBY, Alabama
Tewana Wilkerson, Staff Director
(ii)
?
C O N T E N T S
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TUESDAY, APRIL 4, 2006
Page
Opening statement of Senator Allard.............................. 1
Opening statements, comments, or prepared statements of:
Senator Reed................................................. 3
WITNESSES
Brian D. Montgomery, Assistant Secretary for Housing-Federal
Housing Commissioner, U.S. Department of Housing and Urban
Development.................................................... 4
Prepared statement........................................... 20
Response to written questions of Senator Reed................ 29
Michael J. Frenz, Executive Vice President and Chief Operating
Officer, Government National Mortgage Association, U.S.
Department of Housing and Urban Development.................... 7
Prepared statement........................................... 21
Kevin Clayton, President and Chief Executive Officer, Clayton
Homes, Inc., on behalf of Manufactured Housing Institute and
Manufactured Housing Association for Regulatory Reform......... 8?
Prepared statement........................................... 23
Kevin Jewell, Consultant, Manufactured Housing Project, on behalf
of Consumers Union............................................. 10
Prepared statement........................................... 27
Response to written questions of Senator Reed................ 29
(iii)
REFORM OF FHA'S TITLE I
MANUFACTURED HOUSING LOAN PROGRAMS
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TUESDAY, APRIL 4, 2006
U.S. Senate,
Subcommittee on Housing and Transportation,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Subcommittee met, at 3 p.m., in room SD-538, Dirksen
Senate Office Building, Senator Wayne Allard (Chairman of the
Subcommittee) presiding.
OPENING STATEMENT OF SENATOR WAYNE ALLARD
Senator Allard. I will call the Subcommittee on Housing and
Transportation to order. We have a pretty tight schedule for
most Members today, including my Ranking Member, Senator Reed,
and so we are going to move the hearing along fairly quickly,
and I want to get started on time so we can get as much covered
as we can. When we hit 4 o'clock, we will probably draw the
hearing to a close, and then if there are any questions that
remains--and there likely will be--we will submit those to you
and ask that you get them back to us within 10 days, if you
would.
Homeownership has many benefits for communities and
families, and both Congress and the President have pursued
policies designed to support and promote homeownership. We have
been successful, as evidenced by the current record high
homeownership rates. Manufactured housing represents an
important component of our homeownership gains.
According to Harvard's Joint Center for Housing Studies, in
collaboration with the Neighborhood Reinvestment Corporation
and the Ford Foundation, manufactured housing represents two-
thirds of affordable housing added to the stock in recent
years, and it is a growing portion of all new housing. In fact,
buyers of manufactured housing contributed to a substantial
share of the growth in low-income homeownership.
Manufactured housing can also be a particularly critical
source of homeownership in areas where site-built construction
can be more difficult or costly, such as in rural areas.
Similarly, the difficult building conditions and the short
construction season in many mountain communities can make
manufactured housing an attractive alternative.
The manufactured housing industry has evolved from the
trailers of the past. Consumers can choose from a vast spectrum
of prebuilt homes, from very affordable mobile homes up to
multimillion-dollar homes, completely indistinguishable from
site-built homes. Some manufactured housing is placed on land
owned by the homeowner; whereas, other homes are placed on lots
rented or leased by the homeowner. While land ownership can
offer greater economic benefits and control, home-only
purchases are often much more affordable.
Different financing models have evolved for different types
of manufactured housing. Homebuyers with a real property title
permanently sited on owned land are often able to access FHA's
Title II program. To accommodate other homebuyers who have had
personal property titles, in 1969 FHA's Title I program began
insuring manufactured housing loans made by private lenders.
While the Title I program has been important in promoting
financing of manufactured housing, its usage has significantly
declined due to key structural flaws. In 1992, the program
insured 30,000 loans, but in recent years have seen fewer than
2,000 loans. We must find a way to fix these limitations and
reinvigorate the program, a recommendation echoed by the Ford
Foundation, the Neighborhood Reinvestment Corporation,
Harvard's Joint Center for Housing Studies, the Millennial
Housing Commission Report, and Frontline Systems in a HUD-
commissioned report.
I have introduced legislation, Senate bill 2123, the FHA
Manufactured Housing Loan Modernization Act, to reform the
Title I program. My legislation patterns the Title I program on
the successful Title II single-family program and incorporates
many of the suggestions from the HUD-commissioned report. I am
pleased to have Senators Bayh, Martinez, Dole, Johnson,
Chambliss, and Lincoln join me in this strong bipartisan
effort.
The bill would move the Title I program from a portfolio-
based system to loan-by-loan insurance. This change would
remove a significant barrier to lender participation. This
would be balanced against lender accountability measures,
including tighter underwriting standards by FHA, increased
monitoring of FHA lenders, continued co-insurance and increased
capital requirements for participating lenders.
My bill will also raise the loan limits, which have not
changed since 1992. Updating the loan limits to reflect the
current market price will make the Title I programs useful to
more families. These changes will benefit homebuyers. A
revitalized Title I program will better insure that families
are able to access one of the most affordable sources of
homeownership. As additional lenders come into the program,
increased competition will lead to lower rates and costs.
Title I reform will also benefit the industry. The
manufactured housing industry is currently in the midst of a 5-
year downturn, partly stemming from over-tight credit
conditions. The absence of Title I activity has inhibited the
manufactured housing industry's recovery. More securitization
will add liquidity to the market. Finally, my bill will benefit
taxpayers, in part because it explicitly states that the
program must become financially self-sufficient and actuarially
sound. Also, the current structure of the Title I program
leaves Ginnie Mae highly vulnerable to losses. In the late
1980's and early 1990's, Ginnie Mae lost millions. While they
have since taken steps to stem the losses, some of the measures
have inhibited the program. In some regards, losses have been
minimized because the program is barely functioning. By setting
insurance on a loan-by-loan basis, Ginnie Mae will be better
able to recoup losses, as it does under the Title II program.
Reform of FHA's Title I manufactured housing program will
help promote one of the most affordable sources of
homeownership. We have an excellent lineup of witnesses here
today to discuss the issue.
First, we will hear from Brian Montgomery, Assistant
Secretary for Housing and the Federal Housing Commissioner at
HUD. I know that HUD is working on a broader FHA reform
package, and we will be interested to hear how Title I may fit
into HUD's proposal.
Next, we will hear from Michael Frenz, Executive Vice
President of Ginnie Mae. At this point Ginnie Mae is no longer
accepting new lenders into the program. We will be interested
to hear about the circumstances that led to this point, as well
as your reform suggestions.
Kevin Clayton of Clayton Homes will testify on behalf of
the manufactured housing industry. As the President and CEO of
a company that manufactures, sells, finances, and insures
manufactured homes, he will be able to provide a valuable
perspective.
Finally, we will hear from Kevin Jewell, a Consultant for
Consumers Union. Mr. Jewell has written a number of reports on
the manufactured housing industry.
I would like to thank all of the witnesses for appearing
before the Subcommittee today. We appreciate your time, and
your testimony will be helpful as the Committee continues to
work on this issue.
Next, I would like to call on my colleague, Senator Reed,
for any comments he may have.
STATEMENT OF SENATOR JACK REED
Senator Reed. Thank you very much, Mr. Chairman. Thank you
for holding this hearing on the FHA Title I program, and I
thank all the witnesses for your testimony and participation
today.
Affordable housing is rare in today's market. The average
cost of a home in the country today has topped $200,000. Back
in Rhode Island, the average home price is now $265,000. And
for this reason, I have been working with the Chairman on an
amendment to the GSE reform bill that hopefully will create
some affordable housing funds and help lower the price of it
and make access to affordable housing more consistent
throughout the country.
Manufactured housing is one of the means that low-income
households can afford to own their own home. It plays an
important role in augmenting affordable homeownership
throughout this country. For example, for households with very
low incomes, 23 percent of new homeowners purchase manufactured
homes, and that is a significant benefit for these low-income
households.
Despite these opportunities for low-income families to
become homeowners, manufactured housing also has experienced
some shortcomings that we will look at today, I hope, and
discuss in some detail.
Particularly when it comes to manufactured homes situated
on leased land. These homes tend to depreciate. Loans for these
types of housing arrangements tend to have high interest rates,
resulting in a larger loan payment, than payments for
manufactured homes on owned land. As a result of these interest
rate peculiarities, default rates on loans for these homes tend
to be considerably higher than conventional loans, in fact, as
much as 4 times as high. And because these homes are considered
personal property, buyers tend to be subject to fewer
protections than homebuyers experiencing foreclosure. And
depending on the State in which they live, consumers also tend
to face less stable living situations, and they may have month-
to-month leases that do not guarantee that they will be able to
maintain their home on the land that they have leased.
And, finally, there is at least some circumstantial
evidence of predatory lending practices involved in the
purchase of these homes. That is something we want to look at.
Again, I think this is a wonderful opportunity to look
seriously at these issues and try to advance a reform agenda,
and I thank the Chairman for his efforts.
Thank you, Mr. Chairman.
Senator Allard. Thank you very much, and now we will go to
the panel.
First of all, I would like to call upon Brian Montgomery,
Assistant Secretary for Housing and the Federal Housing
Commissioner, Department of HUD.
Mr. Montgomery.
STATEMENT OF BRIAN D. MONTGOMERY
ASSISTANT SECRETARY FOR
HOUSING-FEDERAL HOUSING COMMISSIONER,
U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Mr. Montgomery. Thank you very much. Chairman Allard,
Ranking Member Reed, and distinguished Members of the
Subcommittee, thank you for the opportunity to testify on S.
2123, the FHA Manufactured Housing Loan Modernization Act of
2005. At your pleasure, I would like to submit my statement for
the record.
Senator Allard. They will be made a part of the record.
Mr. Montgomery. Thank you, sir.
In 1969, Congress expanded Title I insurance to cover loans
on manufactured housing. Under Title I, FHA insures loans on
manufactured housing that does not qualify as real estate.
Title I borrowers may finance the purchase of a manufactured
home and a land lot, or they may finance the manufactured home
only or the land lot only. FHA-approved lenders make Title I
loans eligible to borrowers from their own funds, and FHA
insures the lenders against loss.
Secretary Jackson and I support the concepts presented in
the bill introduced by Chairman Allard and agree that the Title
I program is in need of reform. In fact, the Administration's
FHA reform bill includes provisions very similar to those
proposed by the Chairman. Certainly, both bills are intended to
expand affordable housing opportunities and drive down consumer
costs, while limiting risks to the Federal Government. HUD
officials have discussed the proposed changes with industry
leaders and manufactured home lenders, and I think we are all
in agreement that the changes will accomplish these objectives.
The need for a viable Title I program is very clear. Nearly
22 million Americans, or roughly 8 percent of the population,
live in manufactured housing. If enacted, this legislation will
expand the financing options for families seeking to purchase
these types of affordable homes. In many areas of the country,
particularly rural areas, manufactured housing is the only form
of quality affordable housing available, so it is sensible to
have a strong FHA program to help families buy these homes at a
fair price.
At an average cost of $58,100--that is a 2004 figure--a
manufactured home is typically more affordable than bricks and
mortar homes, which cost on average $201,000, excluding the
price of the land, I might add. In addition to value, today's
manufactured homes offer new homebuyers many of the property
features they desire. They can choose walk-in closets,
fireplaces, or even ``Energy Star'' appliances.
If enacted, the program changes proposed by the Allard bill
and the Administration's FHA reform legislation will modernize
the Title I manufactured home program in a manner that we
believe will encourage more lenders to participate in the
program. Additional competition will drive down the financing
costs for prospective homebuyers while improving the programs
long-term financial soundness.
Both bills remove the key impediments that drove lenders
away from Title I for the last several years, and both propose
to increase the loan limits to levels that reflect today's
manufactured housing prices. Both bills also propose that the
limits be indexed to permit annual adjustments to keep them in
line with actual home costs.
The most important change proposed in both bills is the
conversion of Title I from a portfolio insurance program to an
individual loan insurance program, similar to our current Title
II program. This change will eliminate the most problematic
statutory limitation of the program today, and that is the
restriction on insurance claim payments to 10 percent of the
value of a lender's loan portfolio.
This outdated portfolio insurance structure, which results
in uncertainty and higher costs, was the primary reason Ginnie
Mae curtailed securitization of Title I manufactured home loans
in 1989. With portfolio insurance, lenders are not guaranteed
coverage against loss and subsequently price their loans for
additional risk. The higher loan costs, in turn, increase the
likelihood of borrower default.
With additional default risk, but insufficient coverage,
the losses grew to unsustainable levels in the 1990's, and
Ginnie Mae pulled out of the program. The elimination of this
outdated insurance model will encourage Ginnie Mae to
reconsider participation in the secondary Title I securities
market.
HUD's proposal is also consistent with S. 2123 in that it
retains the 90-percent co-insurance feature of the Title I
program, whereby FHA covers only 90 percent of the lender's
loss. Co-insurance provides lenders with additional incentive
to perform high-quality
underwriting to protect themselves from loss. As such, the co-
insurance feature will help ensure only responsible lenders
participate in the program.
Finally, HUD agrees with and offers in its own legislation
a
provision stating that the insurance coverage should include a
guarantee to lenders that their claims will be paid. We believe
a loan-level insurance model that includes such an
``incontestability clause,'' guaranteeing insurance coverage,
will help drive down the price of these loans, again by
reducing the risk of loss to lenders.
This risk will be transferred to FHA. To address this,
should either the Allard or larger FHA reform bill be enacted,
FHA plans to implement additional risk control measures.
I mentioned at the outset of this testimony that HUD's bill
is slightly different from S. 2123. One of the differences is
the provision regarding insurance premiums. The Senate bill
mimics the existing Title II coverage, with a 2.25-percent up-
front premium cap, and retains the existing Title I annual
insurance premium with a 1-percent cap. Our version, however,
allows FHA flexibility in setting premiums at a level
appropriate to ensure adequate cashflows and to cover potential
losses.
For both the Title I and Title II programs, HUD is
proposing a risk-based insurance premium structure. Combining a
risk-based premium charge with the appropriate up-front
underwriting standards, HUD will be able to operate the program
in a more financially sound manner and, over time, at a
negative credit subsidy rate, as proposed in the Allard bill.
Although both bills propose that FHA operate the program in a
self-sustaining manner, without the risk-based premium
structure, it is unlikely FHA could operate the program at a
break-even. FHA needs flexibility to set the premiums at
appropriate levels to assure adequate cashflow to cover these
costs.
This flexibility is particularly important because nonreal
estate manufactured housing does not always appreciate in
value. Defaults are more likely and recoveries are lower with
this type of property. FHA will bear this additional risk and
must have the ability to set premiums at levels commensurate
with the risk.
While we look forward to working with the Subcommittee to
find common ground on these issues, I want to make clear that
HUD supports the underlying reforms in this legislation. As FHA
Commissioner, I believe that modernization of the Title I
program is long overdue and that the FHA Manufactured Housing
Loan Modernization Act proposes appropriate modifications to
make Title I a viable, affordable financing option once again.
In closing, I want to thank you, Mr. Chairman, Ranking
Member Reed, and Senator Bayh for introducing legislation to
improve Title I and for holding this important hearing. I
appreciate the interest of the Subcommittee in the program and
in expanding access to a critical form of affordable housing.
Thank you, sir.
Senator Allard. Thank you.
Now, we will call on Mr. Frenz, Executive Vice President of
Ginnie Mae.
Mr. Frenz.
STATEMENT OF MICHAEL J. FRENZ
EXECUTIVE VICE PRESIDENT AND
CHIEF OPERATING OFFICER,
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION,
U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
Mr. Frenz. Thank you, Chairman Allard and Ranking Member
Reed. I appreciate the opportunity to testify before you on
efforts to modernize FHA's Title I manufactured housing loan
program. At your pleasure, I would like my written statement
entered into the official record.
Senator Allard. It will be entered in the record.
Mr. Frenz. Ginnie Mae promotes affordable housing by
linking local housing markets to global capital markets. We do
this by guaranteeing payments to investors in mortgage-based
securities that carry the full faith and credit of the U.S.
Government.
Ginnie Mae's securities are comprised of loans individually
insured or guaranteed by Federal entities: FHA, VA, Rural
Housing Service--in the case of manufactured housing, FHA. Most
types of Federal mortgage insurance reimburse lenders for most
of the costs of delinquency and foreclosure, including
principal and interest payments to investors that had not been
collected from borrowers.
Ginnie Mae is called upon to honor its guarantee only when
the financial institution that issued the security is unable to
make payments to investors. Because the loans are individually
insured, this generally happens when the financial institution
fails.
When an issuer defaults on its obligation to pay Ginnie Mae
security holders, Ginnie Mae assumes responsibility for
servicing the portfolio and making payments to investors. At
that point, Ginnie Mae's risk is dependent on the nature of the
insurance or guarantee provided at the loan level.
Ginnie Mae began securitizing manufactured housing loans in
the early 1970's. At the program's peak, approximately $3
billion of securities were outstanding and 30 to 40 issuers
were active at a given time. Between 1986 and 1988, however, 12
issuers with $1.8 billion of securities defaults, resulting in
Ginnie Mae assuming their portfolios and suffering large
losses.
In 1989, due to those losses, Ginnie Mae imposed a
moratorium on the acceptance of new issuers, which helped to
limit subsequent losses. To date, Ginnie Mae has experienced
$514 million of losses on manufactured housing portfolios.
Why were Ginnie Mae's losses on these portfolios so severe?
A number of structural features unique to the Title I program
exposed Ginnie Mae to risks that could not be mitigated. For
the sake of brevity, I will focus on the two most important in
terms of losses to Ginnie Mae.
The most important feature is the limit on insurance per
lender. FHA limits its exposure by capping lender insurance
coverage at 10 percent of all originations and purchases. Once
claims reach 10 percent of the outstanding portfolio, the loans
are effectively no longer insured, leaving issuers with little
economic incentive to continue servicing loans and making
payments to security holders. Ginnie Mae suffered large losses
when assuming the portfolios of lenders that had exhausted FHA
insurance coverage.
The second feature is that Title I loans are registered for
insurance, but not reviewed by FHA for insurance eligibility at
origination. Instead, FHA reserves the right to contest a claim
for up to 2 years after claims are paid. This increases the
risk to the issuer, or Ginnie Mae upon a default, that loans
are not insured and raises costs for borrowers.
Today, the manufactured housing program at Ginnie Mae has
almost completely wound down. There are four approved issuers
in the program, with only one issuing new securities. During
2005, only $9 million in new securities were issued, and as of
December 31, 2005, approximately $187 million were outstanding.
In summary, the structural features of the Title I program
caused significant losses and made it impossible for Ginnie Mae
to maintain a viable securitization program. To the extent that
the Title I program is restructured to address those features,
Ginnie Mae would consider lifting its current moratorium and
working with FHA to support this important loan product that
can help many Americans achieve their dreams of homeownership.
Thank you for this opportunity to discuss Ginnie Mae's
experience with its manufactured housing securitization
program. I will be pleased to answer any questions you have.
Senator Allard. Mr. Clayton of Clayton Homes.
STATEMENT OF KEVIN CLAYTON
PRESIDENT AND CHIEF EXECUTIVE OFFICER,
CLAYTON HOMES, INC. ON BEHALF OF
MANUFACTURED HOUSING INSTITUTE AND MANUFACTURED
HOUSING ASSOCIATION FOR REGULATORY REFORM
Mr. Clayton. Chairman Allard, Ranking Member Reed, thank
you for the opportunity to comment, and I ask that my written
statement be part of the offical hearing record.
Senator Allard. They will be made a part of the full
record.
Mr. Clayton. Thank you. Clayton Homes is a vertically
integrated modular and manufactured housing company owned by
Berkshire Hathaway. We began 50 years ago and have been lending
on manufactured housing for the past 35 years. Both of our
lending affiliates--Vanderbilt Mortgage and 21st Mortgage--
specialize in the origination and serving of $17 billion in
manufactured home loans, including FHA Title I. I appear before
you representing both the Manufactured Housing Institute and
the Manufactured Housing Association for Regulatory Reform.
The manufactured housing industry today is in the midst of
a severe economic downturn with production levels down 60
percent since 1998. The primary cause for this market
contraction has been the loss of available financing for
potential homeowners who apply for manufactured housing loans.
Manufactured housing has changed dramatically in recent
years. The pictures that I shared with you indicate the
positive and significant exterior and interior aesthetic
enhancements. As material prices have skyrocketed, developers
are now rushing to use manufactured housing as a more efficient
means to build beautiful subdivisions.
Lending on manufactured housing has also changed. Today,
the industry serves two distinct markets. First, over 80
percent of
current industry mortgages include real estate as part of the
transaction. The other small segment, 20 percent or less, is
the home-only market which is also a much needed and very
important segment. The home-only segment serves families who
want to enjoy homeownership without the additional burden of
purchasing land. The majority of these owners are placing the
home on family land. The common example is the grandparents
allowing the kids to place a home on their property, but they
are not about to let the kids require them to subdivide the
land and encumber it with a lien.
During past industry recessions, the FHA Title I program
provided much needed capital. However, in recent years, it has
not functioned as Congress or FHA intended. Unfortunately, the
current FHA Title I program is burdened with nonvalue-added
processes causing it to serve less than 2,000 homeowners
annually. This compares to 1992, when the program was insuring
over 30,000 loans annually.
Unchanged since 1992, the loan limits are too low for
today's manufactured home. The home-only program has a current
loan limit of just $48,600 resulting in less than 1,000 square
feet of living space, typically--too small for families today
or to accommodate the aesthetic improvements of today's
manufactured housing.
The Title I program has certain structural problems which
make it very difficult for Ginnie Mae to recoup losses when
lenders leave the program or go out of business. This has
caused Ginnie Mae to severely limit the number of lenders for
which it will guarantee loan securitizations. Thus, the
advantages of the secondary market are greatly curtailed,
particularly given Fannie Mae and Freddie Mac's limited
participation. The end result is tens of thousands of low- to
moderate-income homebuyers have been denied access to credit in
this Federal Government program for several years.
S. 2123 will provide the necessary reforms to revive and
stabilize this program. It would raise the loan limits and
index them to inflation, and the legislation would also require
that each loan be separately insured, like FHA Title II today.
To ensure that the Federal taxpayer is protected, the
legislation requires the program to be actuarially sound by:
Allowing HUD to increase the up-front insurance premium;
directing HUD to address underwriting standards as market
conditions dictate; strengthening the downpayment requirement;
and maintaining the current requirement that lenders co-insure
10 percent of each insurance loss.
Each of these reforms was recommended in four independent
studies which examined this program over the past 4 years.
While the industry strongly supports these recommendations, we
are open to other suggestions that might also improve and
strengthen this program.
In closing, Mr. Chairman, we respectfully urge you to move
S. 2123 through the legislative process as quickly as possible.
Thank you for your time and attention to this important
program, and I appreciate the opportunity to answer your
questions.
Senator Allard. Mr. Jewell with the Consumers Union.
STATEMENT OF KEVIN JEWELL
CONSULTANT, MANUFACTURED HOUSING PROJECT,
ON BEHALF OF THE CONSUMERS UNION
Mr. Jewell. Thank you, Senator Allard and Ranking Member
Reed.
I am Kevin Jewell. I am with Consumers Union, and I request
that my written comments be submitted for the record.
Senator Allard. Without objection.
Mr. Jewell. In 2001, Consumers Union launched the
Manufactured Housing Project with one goal, one question. And
that question was: Does ownership of a manufactured home offer
the same benefits as ownership of a conventional home?
The answer is, all too often, it does not. Market failures
in the lending marketplace mean that consumers often end up
owing more than they wish and end up underwater on a loan
months or years after their purchase. Problems with warranty
service and durability contribute to these failures.
The question is: What are the benefits of conventional
homeownership? You mentioned that there are subsidies for
homeownership: Why do we subsidize homeownership? I submit to
you the two major factors discussed in the academic literature
are stability and investment value. Stability allows people to
build ties with their community, and payment on an asset that
appreciates allows families to invest to build an asset.
The home-only product that is the focus of this legislation
offers neither stability nor investment for the family. The
question is: Can we add language to this bill to restore those
benefits to the product? In terms of stability, we can. We can
require that homeowners that buy under this product demonstrate
long-term control of the land upon which that home is going to
sit. That control could be land ownership, although if the
consumer owns the land, we would encourage them to go with a
real estate product. But as Mr. Clayton discussed, if they are
placing the home on family land, and they are able to
demostrate that the landowner is willing to issue them a long-
term guarantee for the placement of that home, that would
demonstrate control.
Freddie Mac, a few years ago, began a program called a
leasehold program, where they offered personal property loans
that required that the homeowner have a lease that was 5 years
longer than the term of the loan. With the high loan-to-value
that we see in this product, a consumer might have merely
hundreds of dollars of equity for the first 5 to 10 years. If
they are on a month-to-month lease, and the landowner decides
they want to close the park or evict the homeowner, it may be
in that consumers best interest to send that home back to the
bank. The cost of moving a home--and remember, we do not call
these mobile homes any more because they are not particularly
mobile--the cost of moving a home easily runs into thousands of
dollars and can damage the home, decreasing its value.
Requiring demonstration of stability and long-term control
of the land is one needed change to this bill.
The other is, can we do anything about the fact that a
home-only manufactured home loan is a depreciating asset? No,
we cannot. Generally, manufactured homes that are not on owned
land depreciate. We can ensure that the purchase occurs at a
reasonable price. That is where the appraisal standard in the
bill helps. It prevents what we have seen in the past in this
industry, where consumers end up paying too much for a home in
the beginning. The creation of liquidity in the resale market,
by providing loans for used homes, is a potential benefit of
this bill. In fact, I would submit that it may be worthwhile
limiting this program only to used homes. The new home market
has private participants. The used home market does not have
many active participants, and without a Government policy
interest in creating investment opportunity or a Government
policy interest in stability, we question the underlying
interest in this legislation.
Thank you.
Senator Allard. I want to thank the panel for their
testimony. Senator Reed and I will take 5 minutes apiece and
ask questions. That will get close to 4:00 o'clock, Senator
Reed. I know you have to get going and so do I, so we will pull
the hearing to a close.
On this issue of choices for families, most of the families
that choose to purchase manufactured housing that is not placed
on owned land, actually, what choices do they have? And with
these choices, are there reasonable alternatives out there that
perhaps would fit one family but may not fit another? I am
wondering if perhaps individually the members on the panel
might want to comment on the choices that families have when
they do not have the choice of putting a manufactured home on
land. You want to comment on that, Mr. Montgomery?
Mr. Montgomery. Yes, thank you, Mr. Chairman. Certainly
speaking for my home State of Texas and many parts of that
State, manufactured housing is about their only option that is
reasonably priced. You go to a lot of parts of East Texas, that
is about all you see for miles on end. For these families who
are lower income, their options are limited, and one of the
primary reasons we are looking at reforming Title I, just as we
are Title II, in the case of Title I, just the interest rates
are so onerous. And here we are at the U.S. Department of
Housing and Urban Development, and we are only participating in
1,700, 1,600 loans throughout the whole country. Tells us right
away that the program needs to be reformed, needs to be
modernized.
We think by making some of the changes, Mr. Chairman, that
are in your bill, certainly eliminating the 10 percent
portfolio cap, doing some stricter underwriting on the front
end, so that we can do a preendorsement review and guarantee
that we can put FHA insurance on it, will certainly, we think,
drive down interest rates and much more affordable to even more
lower-income families, especially those who have very limited
options, especially, again, in the rural communities where
sticks and bricks construction is just so cost prohibitive.
Senator Allard. Any other comments?
Mr. Clayton. If I may?
Senator Allard. Yes, Mr. Clayton.
Mr. Clayton. The current industry data does show that 80
percent of these homes go on land where the land is part of the
mortgage, so we are only talking about 20 percent of the
overall market, and of that 20 percent, only 25 percent of that
20 percent are in the land-lease community environment where
they do have exposure to a landlord raising rents. It is not
likely that grandparents are going to kick the kids off the
land, and the common situation is that these homes are going on
family land out there.
I hate to really wreak havoc on this program, the positive
change we have made, based on that small population of homes
that go into communities. And, of course, the good news is that
in most States out there now there are laws that--and we are
working with State associations across the Nation--address this
land-lease issue. So the consumers have a lot of options on
using this home-only product, and they are finding good uses
for that.
Senator Allard. So we have rural areas where electricians
are not necessarily readily available, or plumbers, the skilled
trades that you need to build a home. I have tried building a
home in a remote area and it is not easy because those people
will not leave the more profitable urban areas to go into those
areas. But you are saying these are family farms or family
ranches or some family owned property, and they take a section
of it and decide they want a home on it. They keep it within
the family, but allow one of the kids, for example, to just
purchase a home and take, in this case it would be a consumer
loan on that one home, and that is something that you do not
frequently run into?
Mr. Clayton. That is the most common loan--a home-only loan
that does not have land. As you said, it is almost impossible
to get an affordable site-built home out in a rural America, so
manufactured housing is also great form of housing, and
provides employment and labor for those people.
Senator Allard. Any other comments?
Mr. Jewell.
Mr. Jewell. What we find is that in rural areas people tend
to own the land or a relative owns the land because the land is
inexpensive. It is in the urban areas that we find the majority
of the park placements, and that is where the tenure problem is
going to lead to a lack of stability.
Requiring an affidavit or a lease demonstrating long-term
control of the land, a lease from the aunt or from the parent
saying, ``The owner of the home has a right to leave this home
here for 5 to 10 years,'' is not going to impact those
transactions. However, it will protect the consumer who buys a
home on a month-to-month lease in a city, or in a year-to-year
lease, and find out that the park owner was not willing to give
them a 5-year lease. The homeowner may have planned on staying
in that park for 10 years, for 20 years, but if they do not
have stability of tenure, they should know that up front. The
FHA should know that, because that is going to increase the
risk of default.
Mr. Clayton. Could I make a comment?
Senator Allard. Mr. Clayton.
Mr. Clayton. With all due respect, since lending money
beginning in 1972, we found that the grandparents do not look
favorably on giving the kids guaranteed access to leave the
home there for an extended period of time. I am afraid that you
are suggesting a hindrance to this program that will stifle
homeownership.
Senator Allard. I guess this a question I have. You may
have some families where it is a good choice, some families
where it is a bad choice, and why would you exclude everybody,
including those families for which it is a good choice? I guess
that is the question that comes up at this particular point in
time.
Mr. Jewell.
Mr. Jewell. Thank you, Senator. We want them to be able to
demonstrate that it is a good choice for them, and if FHA's
loan is at the whim of the grandparents, the FHA should know
that. Because the way that these loans are structured with the
high loan to value, the equity builds very slowly, and it may
be that the equity in the home will not cover the cost of
moving that home to another location for 5 to 10 years. In that
case, the consumer may be better off saying, ``Repossess the
home, because it is going to cost me $5,000 to move it, but I
only have $100 in it or I only have $500 in it.''
Senator Allard. Mr. Clayton.
Mr. Clayton. May I address that?
Senator Allard. Yes.
Mr. Clayton. This bill has the financial management belts
and suspenders that if HUD finds a lender where the loans are
not performing well--they can cut that lender off, they can
raise the insurance premiums. This bill is absolutely crafted
so that it will ensure reasonable loan performance.
Senator Allard. My time has expired. Go ahead, Senator
Reed.
Senator Reed. Thank you very much, Mr. Chairman.
Secretary Montgomery, just as a point of departure, FHA
does not collect data on defaults on this title, do they?
Mr. Montgomery. That is correct, Senator. We do not at this
point. Right now, we only pay a claim on the back end, and even
then, sometimes the lender has to jump through hoops for us to
even approve paying a claim.
Senator Reed. Does that point to a more aggressive review
by FHA of this program in terms of getting the data on
defaults?
Mr. Montgomery. Yes, Senator. There are some parts of the
Title I that could better mirror Title II, again, with the
ultimate goal we think of having tighter underwriting, and a
guarantee payment of a claim, which you do not have right now,
we can drive down the cost of the loan.
Senator Reed. Historically, there is a higher rate of
default on these types of arrangements than on the usual real
estate transaction, and I think we have all, again, returned
consistently to this notion that leased land is a factor that
might prompt this. Repossessions seem to be higher. Has any one
at GAO or anyone else done an actuarial study about the likely
effects of the reform proposals in terms of the FHA insurance
fund?
Mr. Montgomery. Senator, I am not aware of a GAO study
looking at that, but you are absolutely right. As referenced
earlier, the claim rate on these types of loans has been higher
than it has been on a traditional Title II program. But I would
say though, certainly as the volume has diminished through the
years, so has the claim rate, and it is at its lowest level in
many years.
Senator Reed. But I presume from these efforts to reform
the legislation, and also the huge demand for affordable
housing, that the hope is that if this legislation is done
properly, that the volume of FHA Title I loans on manufactured
homes will increase dramatically. And if there are structural
problems already or actuarial problems already embedded in the
program, we should know about those. So, I think it might be
helpful if your Department would look actuarially at the impact
of the reforms, so we start off with what we are going to put
in place and grow is sound.
Let me ask a question to the whole panel, and that is the
Ford Foundation sponsored a report by Harvard's Joint Center in
2002. One of the conclusions about manufactured homes, unless
sited on owned-land, manufactured housing will have little or
no potential to increase in value faster than the rate of
inflation.
What mechanisms in the reform proposal will there be to
protect a consumer from owing more than the value of the home?
Why don't I start with Mr. Jewell and work my way down here.
Mr. Jewell. One benefit that is in the bill is the language
requiring appraisal, if properly implemented. One of the major
historical problems with personal property loans was that
consumers were buying the home for more than it was worth.
There was no appraisal standard. There was an invoice standard.
That meant from day one the consumer was under water. So that
is a positive.
A danger especially for new homes, is that new manufactured
homes have an unwrapping effect. It is a new manufactured home.
A consumer signs a contract and it becomes a used manufactured
home, and a used manufactured home is worth a lot less than a
new manufactured home. Why would a consumer buy a used one when
there is a new one just like it on the dealers' lot?
This drop in value, makes a high loan-to-value product,
especially dangerous for new homes. My calculations show that
if you are allowing 95 percent loan to value, and 2.2 percent
of the insurance fees to be financed into the principal, and
another 2 percent to come from outside sources, a consumer
might have as little as three-quarters of 1 percent equity at
the time of signing. If that transition from a new home to a
used home drops the value more than three-quarters of a
percent, that consumer is going to start out under water.
Senator Reed. Let me ask a follow up on the appraisal.
Would that appraisal include not just the structure itself, but
the land, the lease, the value of the lease? Is that what this
appraisal will look at?
Mr. Jewell. That is what we would ask to be implemented. It
is very important that the appraisal looks at the installed
location value, not the value on the dealer's lot. The value
after it has been installed on someone's land and inspected,
including looking at its location and rent. But the
implentation is something you would have to ask Mr. Montgomery.
Senator Reed. Can you respond? Then I will finish up.
Mr. Clayton. Certainly. The premium being paid up front
that Mr. Jewell referenced is exactly how FHA Title II, as I
understand it, does that today as well. One way to control the
equity, of course, is by limiting the loan term, so home-only
loans are limited to 240 months, which is a good idea. These
homes, mostly we are talking about now, costs $40, $50, $60
thousand. So that helps.
And the Harvard Study talked about, which is something the
industry supports and is becoming very common, where the
homeowners actually take over ownership of their land-lease
community, and that is something that we support
wholeheartedly.
We are here today because in the 1990's lending from Wall
Street came too easy, and now the rating agencies have
basically just cut off all capital to this industry, and thus
the need for why we are here today.
And just exactly as you said, an important part of this is
the resale market. That is the one component, as this program
gets some traction, that will be helped the most--the financing
of used homes out there so the consumer can sell the home
rather than defaulting.
Senator Reed. Thank you.
Mr. Frenz, a quick comment, and then Secretary Montgomery,
then I think the Chairman.
Mr. Frenz. Sure. We believe that FHA's more stringent
underwriting standards would help prevent certain abuses. We
would significantly increase net worth requirements for lenders
in our program to increase the likelihood that we would attract
more reputable lenders. We would also monitor relationships
between lenders and dealers to minimize abuses. We would
require lenders, for example, to track delinquencies by dealer.
We would also plan to develop more rigorous field review
procedures, and we would conduct extensive due diligence on the
officers and directors of companies applying to be in our
program to minimize those types of abuses.
Senator Reed. Thank you.
Mr. Secretary, quickly.
Mr. Montgomery. Yes. I would just agree absolutely with
Michael's observation. Also, FHA is one of the most transparent
loan processes around. As you know, we have a punitive side to
us as well with our Inspector General and GAO. By providing the
mortgage insurance premium, we can drive the cost of loans, and
certainly, the ironclad guarantee on the front end, which you
do not have today, that will pay a claim, we are just saying
everything would line up to make it more affordable, and we
think decrease the likelihood that you would have a family
getting upside down on a loan that you see today.
Senator Reed. Thank you, Mr. Chairman.
Senator Allard. I have a question now for you, Mr.
Montgomery. In your testimony, you testified that HUD proposes
increasing the premiums, and then removing the premium caps,
rather than just increasing the caps. Why do you suggest
removing the caps entirely? This is a concern with the
industry, and can we come to a point where you would accept
caps at a certain level that would be acceptable maybe to HUD,
somewhere along the line, is my question?
Mr. Montgomery. Yes. Thank you, Chairman Allard, and that
is certainly something we could discuss more at length on the
surface. We are not opposed to setting some cap, whatever that
cap may be, but we are, at FHA, on both the Title I and Title
II side, looking to do what the conventional market has done
for some time, and that is price a product more commensurate
with a particular borrower's risk. Right now, the one-size-
fits-all does not fit all any more. You have some lower risk
borrowers paying more of a premium, they should be. And the
worse side of that, sir, is we have many families who are
unable to use FHA because their FICO scores are lower.
And we think by being able to make the risk more flexible,
if you will, sir, we can price it to the risk and also avoid
some of the problems we may have had in the last 15 or 20
years.
Senator Allard. Do you think the 2.25 percent cap is
insufficient in the bill?
Mr. Montgomery. Mr. Chairman, I would like to go back and
crunch the numbers, but what we are looking at on the Title II
side is somewhere around 3 percent, but bear in mind, sir,
these are caps. Under the risk-based pricing structure, other
families could pay lower as well.
Senator Allard. Thank you.
This is for Mr. Frenz. In your testimony you mentioned that
the current portfolio based system provides a moral hazard for
lenders. Can you, please, elaborate on this, and do you believe
that the proposed change to a loan-by-loan insurance system
will eliminate the moral hazard?
Mr. Frenz. Thank you, Mr. Chairman. It does create a moral
hazard up until the point that the cap is reached, because as
lenders have losses in portfolios and claims against the FHA
fund, they can increase that 10 percent by adding loans at the
margin. So up until the point where the cap is reached, it
creates incentives for lenders to add more loans, which results
in more risk to FHA and ultimately to Ginnie Mae.
I believe that a loan-by-loan insurance program and the
elimination of a cap would largely eliminate that problem.
Senator Allard. So you support eliminating the cap?
Mr. Frenz. I do.
Senator Allard. In our negotiations, I mean the industry
has a problem in eliminating the cap. If there was to be a
certain cap level in the bill, is there a level there where you
think would be acceptable to you?
Mr. Montgomery. Mr. Chairman, I could give you a number
today, but----
Senator Allard. You suggested 3 percent.
Mr. Montgomery. Three percent is what we are looking at on
the Title II side, but we will certainly continue talking with
the industry. I think they have been very open in their
discussions of that matter.
Senator Allard. Mr. Frenz.
Mr. Frenz. I would not be able to give you an answer today.
I would have to discuss it with other people at Ginnie Mae and
with Mr. Montgomery.
Senator Allard. Very good. Okay. Mr. Clayton, in your
testimony you described the manufactured housing that a family
could purchase under the existing loan limits. What kind of
home would a family be able to purchase under the proposed loan
limits in the bill? And for those who might think that the
increases are too high, would you not agree that even under the
new limits the home would still be reasonably modest?
Mr. Clayton. Yes, it would be. I suggest that the proposed
limits are far from being too high, with material prices over
the last 5 years having increased north of 30 percent for home
builders. And so the limits that are proposed will work, and
tying them to inflation is a necessary ingredient. But it would
be a home that, obviously, if it has smaller square footage,
then it could include some of the very nice aesthetic changes,
which also help in the resale value, which is a very important
component. It would also allow us to start financing homes with
steeper-pitch roofs, things like that which would serve the
consumer very, very well. I hope I addressed your question.
Senator Allard. I think you did. You are saying over what
period of time was there a 30 percent increase in construction?
Mr. Clayton. Over 5 years.
Senator Allard. Over 5 years?
Mr. Clayton. We have seen them increased by 30 percent.
Senator Allard. So you think about 6 percent a year then on
the average over 5 years, you end up with a 30 percent
increase.
Mr. Clayton. Correct.
Senator Allard. And is this for manufactured housing, or is
it just housing in general?
Mr. Clayton. I suspect that it is all housing in general. I
speak to manufactured housing only.
Senator Allard. Okay. In manufactured housing though, there
are certain advantages to manufacturers as opposed to
construction that would help keep the cost of the product down.
Do you still think that is as high as for the overall industry?
Mr. Clayton. I do because the material prices I am
referring to are lumber, gypsum, steel.
Senator Allard. That is before you can start construction?
Mr. Clayton. Correct.
Senator Allard. Senator Reed.
Senator Reed. Thank you very much, Mr. Chairman.
One of the other issues that has come up is the
arrangements between the dealers and the financiers, and
sometimes these arrangements are too close for comfort. I think
that Mr. Frenz referred to this in his comments. But could the
panel respond to what steps you think should be taken to ensure
that there is an appropriate relationship, and that these
lending arrangements are not abusive or predatory?
Some of the things that I have heard about are requirements
for either large downpayments or some type of arrangements on
what the dealer sells the property, that locks the person in.
Mr. Clayton, why don't you start?
Mr. Clayton. Thank you for the opportunity, because there
have been major changes in the manufactured housing industry,
particularly over the last 3 years, starting really with the
law change that you supported, I assume, the law change in
2000, which mandated that all of our homes, by last year, have
to be inspected at the set-up and delivery. So we are insuring
a proper installation of homes. I might add that there is not a
single manufactured home built after 1994, in any of the past
hurricanes in the last 3 years, that was severely damaged. So
it is a very sound, strong product that we are building today.
Lenders' best practices is something, as an industry
association, that we enacted. Homebuyers will be able to choose
those lenders, if they so desire, that follow the lenders' best
practices--those which do all the verifications of the customer
data and the retailer information that has been provided to
them.
Another industry program is, truth in invoicing--we call
this TIPS. Every manufacturer has to stamp the invoice, saying
that it as reflected, and there is total transparency as to
what is in the invoice.
There is a community attributes program now that is out
there, that gives the lender the ability to see what kind of
community it is lending into--looking at rent increases, and
other kinds of things, and rate each community before they lend
into it.
So we think all these major initiatives really address some
of the negatives that were brought up in manufactured housing
in the late 1990's.
Senator Reed. There are some other issues you might comment
on, nonrefundable deposits in certain cases, and also a fee
structure that discourages buyers from looking around for other
lenders, rather than the approved lender. Is that commonplace
now?
Mr. Clayton. It is not commonplace at all in the industry
today. And we continue to work with State associations to
address issues like that.
Senator Reed. Mr. Jewell, any comments on these issues or
the lending arrangements underlying the transaction?
Mr. Jewell. Our experience in Texas: In 2001, 2002, and
2003, Consumers Union reviewed complaints at the Attorney
General's Office, and at the Texas Department of Housing and
Community Affairs, which regulates the manufactured housing
community in Texas. We uncovered a pattern of nonrefundable
deposits, difficulty for consumers to shop around for lending
products. Unfortunately, the tying between lenders and
manufacturers means that a consumer often does not have the
bank on their side.
In a conventional home where you have a bank going into a
real estate transaction, the bank does not want that loan to
fail. With the manufactured homes--no one is saying that the
manufactured home lender wants that loan to fail, but they are
going to make money off of both the loan and the home. There is
additional incentive for them to sell that home even if the
financing in the transaction is a little questionable.
Senator Reed. Mr. Frenz, and then Secretary Montgomery, and
then I will relinquish my time. Any comments further?
Mr. Frenz. My only further comment in addition to what I
said earlier was that we would work with FHA to see what they
are doing to monitor those relationships, and we would augment
our field review efforts to help them out.
Senator Reed. Thank you.
Secretary Montgomery, final word.
Mr. Montgomery. Yes, sir. If this goes forward, we would
certainly establish new and tighter underwriting guidelines for
lenders to follow, including a preendorsement of review,
similar to what we do on Title II. And I would also say again
that FHA is one of the most transparent loan products out
there.
Senator Reed. Thank you.
Thank you, Mr. Chairman.
Senator Allard. I guess I am the bottom-line guy, so we
will get to the ultimate question. If Senate bill 2123 or
similar legislation is enacted into law, does Ginnie Mae intend
to lift the current moratorium on the program and new lenders?
Mr. Frenz. If the bill in its current form were to pass,
Mr. Chairman, I believe we would.
Senator Allard. Thank you.
We are running out of time here. I think there will be more
questions I think I want to present to the panelists, and I
think maybe Senator Reed might have a few more questions he
would like to send out. If you could respond within 10 days,
the Committee would appreciate that.
I want to thank you for taking time to come to testify
before the Committee. I know it is not easy to get away from
your personal schedules to be here, but your testimony is
important. It is important for us to understand the impacts of
legislation and the impacts of what is happening in the current
program. So, I thank you all for being here to help inform us.
With that, I will go ahead and adjourn the hearing. Thank
you.
[Whereupon, at 4 p.m., the hearing was adjourned.]
[Prepared statements and response to written questions
supplied for the record follows:]