Issue link: https://read.dmtmag.com/i/633345
FEBRUARY 2016 14 THE JOURNAL New Duty to Serve Proposed Rule Raises Serious Questions MHARR VIEWPOINT BY MARK WEISS The latest Federal Housing Finance Agency (FHFA) proposed rule to implement -- suppos- edly – the "duty to serve underserved markets" (DTS) mandate of the Housing and Economic Recovery Act of 2008 (HERA) raises a host of se- rious questions for the industry and its representa- tion in Washington, D.C. That proposal, released to selected "stakeholders" on December 15, 2015, would maintain the blanket exclusion of manufactured home personal property (chattel) loans from DTS credit that first appeared in FHFA's disastrous 2010 proposed DTS "imple- mentation" rule, a rule which MHARR, in writ- ten comments, called "grossly inadequate." After high expectations – based, among other things, on the appointment of new FHFA Direc- tor Melvin Watt (a strong proponent of manufac- tured housing while in Congress) and promising meetings between MHARR and FHFA officials in 2014 -- that an FHFA commitment to "re-visit" the initial 2010 proposed rule would result in DTS credit for manufactured housing chattel loans in any new or revised rule, the "new" proposed im- plementation rule, continuing the total exclusion of manufactured home chattel loans, landed with a thud around most of the industry. That is, with the exception of the Manufactured Housing Insti- tute (MHI), which, following a series of closed- door meetings and contacts with FHFA in late 2015, inexplicably lauded FHFA's perfunctory in- vitation for "public comment" on the possible in- clusion of chattel loan DTS credit in a final rule and a discretionary GSE chattel loan "pilot pro- gram," as a "significant victory." Both points, though, are a distraction to divert the industry and consumers from deeper and more significant issues. First, an invitation for com- ments on a matter purposely not included in a pro- posed rule, and a "promise" to "consider" those comments, is little more than a legal truism, sim- ply re-stating the obligation(s) of any agency con- ducting a rulemaking under the federal Administrative Procedure Act. Second, FHFA's mention of a possible chattel "pilot program" is not the same as "proposing a pilot program for chattel loans," as characterized by MHI. Indeed, FHFA has made it clear that if, in fact, any such program is authorized by FHFA in a final rule (and that is hardly a given with FHFA stating in the proposed rule that there would be "substantial difficulties … to make chattel loans appropriate for Enterprise support"), it would be discretionary, with FHFA officials stating that the Enterprises "could" estab- lish such a program as part of a DTS implementa- tion plan if they "wanted to." Fannie Mae and Freddie Mac would thus have veto power over whether such a program is ever established – and the Enterprises' hostility toward manufactured housing chattel loans (indeed manufactured home loans, period, as shown by Fannie Mae's unused "MH Select" program for HUD Code real estate loans) is well-documented. Beyond these distractions, though, and with the content and substance of the 2015 MHI- FHFA closed-door meetings and contacts -- ac- knowledged by FHFA officials – still shrouded in secrecy, serious questions exist about the nature, content and impact of those meetings on the de- velopment of the "new" (but not really "new") proposed DTS rule. The search for answers to those questions – in the face of wall-to-wall denial -- must focus, then, at least initially, on infor- mation contained in the public record concerning these matters and the interests of those involved. Most fundamentally, it is widely acknowledged -- and MHARR has consistently maintained -- that with HUD Code manufacturers continuing to produce their best homes ever, the lack of high- volume, lower-cost consumer financing, together with a toxic combination of other post-production roadblocks (e.g., placement restrictions and dis- criminatory exclusion, among others) that have never been adequately confronted or addressed, has kept manufactured housing production at ar- tificially low levels for nearly 20 years, has driven numerous lenders out of the market and, most im- portantly, has frozen large numbers of homebuy- ers out of the manufactured housing market and, because of the unequalled affordability of HUD Code homes, the broader housing market alto- gether. As prominent industry figures, a couple of large finance companies, MHI and others have ex- plained, however, higher interest rates for man- ufactured home loans – and particularly chattel loans – are a function of existing market realities, including the absence of a secondary market and GSE support for such loans. Thus, in 2011 tes- timony before a House subcommittee, the Presi- dent of Clayton Homes, Inc. stated: "… the lack of a secondary market means lenders are typically forced to hold manufactured home loans in their portfolios, which makes [the] cost of capital as- sociated with originating manufactured home loans higher for these lenders versus those which are able to securitize real property mortgages through the GSEs…." Similarly, a 2011 MHI Issue Brief states: "… since our cost of capital is higher, man- ufactured home loan interest rates are typically higher. Since Fannie Mae and Freddie Mac do not purchase loans or create a secondary market where manufactured housing lenders can access capital at a discounted rate, lenders need to rely on other sources to make loans. These sources charge a higher interest." Given this long-standing economic reality and the well-documented, decades-long failure of both Fannie Mae and Freddie Mac to properly serve the manufactured housing market and man- ufactured homebuyers, the "Duty to Serve" was designed by Congress to directly address the un- derlying problem identified by the industry's fi- nance sector and: (1) establish a high-volume secondary market and GSE support for all manu- factured home consumer loans, that would help ease the pressures and risks that translate into higher interest rates and constrained credit avail- ability for such loans; and (2) by alleviating those risks, which have largely limited today's manu- factured housing finance market to a small num- ber of deep-pocket portfolio lenders (offering higher-cost products), help encourage more lenders to enter (or re-enter) the manufactured housing market and thereby expand competition, further reducing market pressures driving higher interest rates. In doing so – and cognizant of the fact that chattel loans account for more than 70% of all manufactured housing consumer loans and provide lower and moderate-income Americans with access to the industry's most affordable homes -- Congress specifically authorized DTS program credit for manufactured home chattel loans. And, in fact, the nexus between the full im- plementation of a robust DTS-based secondary market for all manufac- tured home loans, including chattel loans, and expanded competition within the man- \ 15