GSEs have eyes on chattel loans

The Scotsman Guide - Victor Whitman - 12 May 2017

Fannie Mae and Freddie Mac have signaled that they are ready to test the market for chattel loans.

The government-sponsored enterprises (GSEs) have been exploring the viability of purchasing and securitizing these loans, which are dominant financing in manufactured-home sales.

Chattel loans, which are secured by the asset itself with no underlying property, comprise about 80 percent of all mobile-home financed purchases. The GSEs haven’t been involved in this market for nearly 20 years, when Fannie stopped purchasing them.

The absence of a secondary market has limited access to credit for buyers and driven up the costs, according to advocates. As it stands, companies owned by billionaire investor Warren Buffett control a huge slice of the sales, manufacturing and financing ends of the manufactured-housing industry. The two dominant chattel lenders, 21st Mortgage and Vanderbilt, are both subsidiaries of Buffett’s Berkshire Hathaway. Several other lenders also are in the space, but their scale is limited because of the lack of a secondary market for chattel loans.

Fannie and Freddie are seen as a key to boosting the availability of chattel loans by infusing liquidity, and also standardizing the loan products and terms. As part of their federally mandated duty-to-serve requirements, the GSE’s draft plans include proposals for a chattel pilot over three years. The programs mostly involve outreach and market studies; however, Fannie has specifically proposed purchasing a small number of chattel loans in the third year of its program.

The draft plans are still pending approval by the GSE regulator, the Federal Housing Finance Agency, which has sought public comment through May 21. The GSE exploratory efforts have been praised by special interest groups that say a mainstream chattel loan market is needed to bring down the high cost of these loans for lower-income borrowers, who most typically purchase manufactured homes.

“Realistically, they really couldn’t in my view meaningfully meet the duty-to-serve manufactured housing [requirement] without addressing chattel because it is two thirds of the market,” said Doug Ryan, director of affordable homeownership for the Corporation for Enterprise Development (CFED).

“That being said, the challenge for Fannie and Freddie to get data on loan performance and other issues related to the design of a pilot — an effective pilot that meets the safety and soundness requirements [and] other requirements of their regulator — is a challenge,” Ryan said. “That really underscores the need for Fannie and Freddie to be in here.”

Ryan said that GSEs have already sought input from the CFED and other interested groups. The manufactured housing industry has given the draft plans only mixed reviews, however.

“What we are saying is that we are pleased that they are looking at chattel, but that they need to accelerate the pace of getting to the point where they could actually securitize it,” said Lesli Gooch, senior vice president of government affairs for the Manufactured Housing Institute.

“Fannie does say that, subject to internal approval, they will start purchasing chattel loans in the final year of the three-year plan, but they are only talking about between 350 and 425 loans,” Gooch said. “So, that’s pretty minor. We want to see a major impact. We understand that setting up a securitization structure takes some time, but what we want to see in these plans is that they are going to get there. We don’t see that right now, and three years is a long time.”