    Federal Housing Administration: Agency Should Assess the Effects
    of Proposed Changes to the Manufactured Home Loan Program
    (24-AUG-07, GAO-07-879).

    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.
    -------------------------Indexing Terms-------------------------
    REPORTNUM:   GAO-07-879
        ACCNO:   A75068
      TITLE:     Federal Housing Administration: Agency Should Assess
    the Effects of Proposed Changes to the Manufactured Home Loan
    Program
         DATE:   08/24/2007
      SUBJECT:   Cost analysis
                 Comparative analysis
                 Government guaranteed loans
                 Homeowners loans
                 Housing
                 Housing programs
                 HUD Title I Property Improvement and Manufactured Home
                   Loan Program
                 Lending institutions
                 Program evaluation
                 State programs

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    GAO-07-879

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    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.

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