Issue link: https://read.dmtmag.com/i/684297
JUNE 2016 24 THE JOURNAL Is FHFA Chattel Headed for GNMA-Type Exclusionary Rules? MHARR VIEWPOINT BY MARK WEISS At a highly unusual meeting – following the close of the public comment period in a pending rulemaking – officials of the Federal Housing Fi- nance Agency (FHFA) conferred in late-April 2 016 with selected groups (including MHARR) which had submitted comments on FHFA's latest proposed rule to implement the Duty to Serve Un- d erserved Markets (DTS) provision of the Hous- ing and Economic Recovery Act of 2008 (HERA). The fact that this meeting was held at all – and for the majority of its two hours addressed manufactured home chattel loans -- is evidence: (1) that FHFA has been hit with a barrage of op- position to the exclusion of chattel loans from its latest proposed DTS implementation rule; (2) that FHFA recognizes the legal vulnerability of the DTS rulemaking as a result of undocumented closed-door meetings with MHI representatives in 2015; and (3) that FHFA is under mounting pres- sure to correct a rulemaking that – for the vast majority of manufactured housing consumers -- has "gone off the tracks." Most likely, the meet- ing was little more than a cosmetic device to de- flect that pressure. But even in the improbable event that FHFA is actually willing to consider the inclusion of chattel loans in a final DTS rule, the meeting made it clear that the industry's dominant lenders may seek to nullify any such program with the same sort of unduly-restrictive lender "quali- fication" rules that have undermined the Federal Housing Administration's (FHA) Title I manu- factured housing program. To fully appreciate the self-interest driving this -- and other -- actions by the industry-dominant lenders (and their representatives), requires some historical perspective. At the root of the matter, is the fact that for nearly two decades, the manufactured housing chattel finance market – comprising upwards of 80% of all manufactured housing loans -- has been fundamentally distorted in terms of loan availabil- ity and cost (i.e., interest charged to the con- sumer). That distortion results from two interrelated factors. One is a lack of normal free- market competition that is most acute at the lower-end of the spectrum of chattel loan appli- cants -- among minimally or marginally-qualified purchasers -- who may have no option but to fi- nance with one of the industry's dominant lenders (i.e. , Vanderbilt Mortgage and Finance, Inc. or 21 st Mortgage Corporation) at higher-cost inter- est rates, or face exclusion from the market. This absence of free-market competition is, in turn, a byproduct of government policies that dis- criminate against manufactured housing con- sumers. For nearly two decades, the Government Sponsored Enterprises (GSEs) have denied feder- ally-based securitization and secondary market support for manufactured housing chattel loans, placing the industry at a distinct competitive dis- advantage with other types of housing, despite the inherent affordability of HUD Code homes. That policy has excluded large numbers of potential lenders (and consumers) from the HUD code market by effectively allowing only lenders with the capital necessary to carry such loans on their own books – i.e. , the two current industry-dom- inant lenders – to participate in the market to any significant degree, and by enabling those lenders to charge consumers higher-cost interest rates than would otherwise be sustainable in a fully- competitive, GSE-supported market. At the same time, artificially low loan limits and a post- 2000 Government National Mortgage Association (GNMA) moratorium on lender approvals for the Federal Housing Administration's (FHA) Title I manufactured housing chattel loan insurance pro- gram helped to drastically limit lender participa- tion and loan originations in that program as well. The ultimate victims of this government-cre- ated and sustained pseudo-monopoly are, of course, consumers, insofar as unnecessarily high- cost interest rates in the HUD Code chattel mar- ket: (1) exclude marginal borrowers who might otherwise qualify for financing; and (2) force those who do qualify to pay more of their limited income for higher-cost interest rates than would be the case in a normally-functioning, competitive mar- ket. But it also hurts the industry – and especially smaller industry businesses – by artificially limiting the size of the HUD Code market, notwithstand- ing strong demand for affordable sources of home ownership. Thus, it's not surprising that the HUD Code market, post-recession, although re- covering, has never returned to production levels even close to the norm for the industry through most of its modern history – typically in excess of 100,000 homes annually. As a remedy, Congress included legislation in the HERA law to address both the GSE and FHA components of this policy failure. First, Congress adopted the FHA Manufactured Housing Loan Modernization Act of 2008, which, among other things, increased FHA Title I loan limits to more realistic levels and revised underwriting criteria for those loans. Second, Congress passed the DTS provision, which designated manufactured hous- ing as a market that had been "underserved" by the GSEs, and directed the GSEs to remedy that failure. When it was pointed out, moreover, that the original DTS provision did not specifically ad- dress manufactured home chattel loans and could be misconstrued to exclude such loans, Congress, through an amendment offered by the late-Rep. Julia Carson (D-IN), added language to specifi- cally authorize the inclusion of manufactured home chattel loans in DTS. It did not take long, though, for both of these provisions to be undermined. In the case of FHA reform, GNMA, in 2010, adopted its highly-re- strictive "10-10" rule, requiring lenders to have a net worth of at least $10 million and maintain a reserve of 10% of all outstanding manufactured housing loans to qualify and, according to GNMA, ensure that they had "skin in the game." As a result, all but the industry-dominant lenders have been excluded from participation, and orig- inations have remained at negligible levels. More importantly, when GNMA indicated that it could reconsider that rule based on modern loan-perfor- mance information – and MHARR called on in- dustry lenders to respond -- that information was not forthcoming from the industry-dominant lenders. On the DTS side, aggressive opposition from the GSEs led to the blanket exclusion of manufac- tured home chattel loans from FHFA's first pro- posed DTS implementation rule in 2010. When new FHFA Director Melvin Watt was appointed in 2014 and the Agency publicly committed to "revisiting" DTS, it finally appeared that DTS- chattel would become a reality. But that was be- fore previously undisclosed 2015 meetings between FHFA officials, MHI and representatives of the