More on manufactured homes

by Russ Roberts on September 28, 2008

in Government Intervention

In this post, I provided excerpts from an article describing how Congress had leaned on Fannie Mae to encourage loans for mobile homes, known in the industry as manufactured homes. Martin Brock commented:

So what’s the problem with FNMA buying mortgages on manufactured homes?
My sister lived in one for years while she got her veterinary practice
off the ground. The issue is credit worthiness. Can the buyer afford
the home? Are you suggesting that a less costly home is necessarily
less affordable to its buyer? Do you have any evidence that mortgages
written on manufactured homes are more likely to default?

There’s no problem with Fannie Mae buying mortgages that fund mobile home purchases. The problem is Fannie Mae doing it with my money at the encouragement of Congress. And here is what Ed Gramlich says (p. 54) about loans financing mobile homes:

As with subprime loans, manufactured housing loans have been riskier than conventional mortgages, and the normal APR is 3 or 4 points about the prime mortgage rate. Unfortunately, manufactured housing loans are also susceptible to default, with default rates currently on the order of 12%.

The source Gramlich gives for that default stat is a study by Apgar in 2002. I wonder what they are now.

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{ 29 comments }

Rudy September 28, 2008 at 10:55 pm

I do believe that Muir and Martin are twin brothers separated at birth.

Tom Hanna September 28, 2008 at 11:05 pm

In 2002 Fannie Mae still had pretty tight underwriting standards on credit and income. Applying those same standards to manufactured housing, which typically had standards along subprime lines, probably would have presented a lower than 12% default rate. Of course, that didn't happen because 2002-2003 is when Fannie Mae lost its mind and started in earnest down the road to doing things like negative amortization, no-doc, no-down loans for people with a 450-FICO score. Bad credit underwriting on a site built house or a manufactured home? Not much difference really.

Martin Brock September 28, 2008 at 11:15 pm

I don't want any taxpayer bailout of FNMA's bondholders, and I don't want home buyers who can't afford their mortgage payments bailed out either. That's a separate issue. I believe that manufactured homes have a higher default rate, because the buyers are more likely to have lower incomes, but the credit worthiness of these buyers is the issue, not the manner in which a house is manufactured.

I suppose Hyundais are also more likely to be repossessed than BMWs, but people driving Hyundais still require credit.

The problem with FNMA is not that we're bailing out people who bought homes they couldn't afford, because we aren't bailing them out in fact. The problem is that we're bailing out banks, insurance companies, pension funds and sovereign wealth funds that bought FNMA's bonds. Your money is what we're bailing out.

Martin Brock September 28, 2008 at 11:22 pm

I do believe that Muir and Martin are twin brothers separated at birth.

That's because your beliefs are simplistic.

Martin Brock September 28, 2008 at 11:34 pm

These homes are "manufactured homes".

Juan C. de Cardenas September 28, 2008 at 11:35 pm

One problem with manufactured homes is that they have much shorter life spans than regular homes. Most are worthless after 20 years, that is why you cannot get replacement value insurance on mobile homes after I guess 10 years. If you write a 30 year mortgage on those homes borrowers will at one point find out they own more than the thing is worth and we all know what happen after that, many will just walk out of their mortgages. So it is not just creditworthiness but the fact that you cannot treat something that it is more like a car loan as a mortgage on a regular home.

libfree September 28, 2008 at 11:44 pm

I think "manufactured homes" have a better chance of depreciation. There are different types of "manufactured homes". There are trailer homes and then there are home that are shipped in units and put together. The latter are far superior to onsite construction.

Martin Brock September 29, 2008 at 12:23 am

One problem with manufactured homes is that they have much shorter life spans than regular homes.

You're generalizing incredibly here. "Manufactured homes" vary widely. If banks are stupid enough to write 30 year mortgages on properties that are worthless in 20 years, that's a problem for the stupid banks (or should be), but we aren't discussing this problem here. We're discussing people who can't make payments on loans they took out a few years ago on houses selling for 20-30% less than they paid a few years ago.

A few days ago, Don quoted Hillary Clinton asserting, "Two million homeowners carry mortgages worth more than their homes. They hold $3 trillion in mortgage debt." AG then observed that the average price of the homes Clinton describes is $1.5 million.

Maybe Clinton's figures are bogus, but no one has challenged them here. Even if she added a zero somehow, we're still discussing homes averaging $150,000. If the figures are anywhere near accurate, I need to understand how subsidized mortgages or excessively easy credit on mobile homes managed to inflate housing with an average price of $1.5 million. Even $150,000 is an awfully pricey trailer in my neck of the woods.

In fact, the price of my 30 year old, 1400 square foot ranch house in Madison, Alabama (near Russ's hometown) barely kept up with inflation over the last decade. It appraised for less than $100,000 a couple of years ago. I doubt that the price of manufactured housing nearby rose any faster.

I'm extremely skeptical that Russ's theory of this problem actually fits the facts. It's not simply about bleeding heart liberal politicians pressuring banks to lend money to poor people who couldn't afford their houses. That happened, but it's a sideshow. A much more interesting story is unfolding, and the bleeding heart liberal theory simply ignores it.

T L Holaday September 29, 2008 at 12:26 am

Someone who believes in markets would ask whether the mortgages were priced correctly for the expected default rate.

Someone who believes in markets would complain about GSEs doing any mortgage financing with taxpayer money, not just lending to the low-income.

Russ' argument ignores profitability. It's worthless. Fail.

T L Holaday September 29, 2008 at 12:40 am

How about a quantity, Russ? What do you estimate the aggregate value of the manufactured housing stock of the US to be? Do you think it amounts to 90% of the total housing stock? Half? You're making a big deal about it; do you have a big reason to, or do you just like to pick on Barney Frank?

Juan C. de Cardenas September 29, 2008 at 1:11 am

Martin, I made that comment to highlight that lending for manufactures homes is not like lending to a regular home and yes there where banks which did just that and they blew themselves up way before the current crisis. And I agree that I generalized quite a bit. I have a friend in Opelousas, LA that lives in a nice manufactures home which is very well built and yes, he has a mortgage on it but it is a 10 year mortgage and he owns the land outright which was his collateral and also he put the home over a foundation and anchored it properly, so in his case it was justifiable but again generally speaking you cannot treat manufactures homes of any kind as a regular homes in lending or insurance.
Personally I think the root cause of this crisis is Fed policy which is not just the personal misjudgments of Greenspan and company but the result of the Fed mission of keeping the economy growing and unemployment low in addition to keep the money sound. When the former contradict the latter the temptation to inflate given the inevitable political pressure is too much. Guess what, we have been postponing the day of reckoning and instead of smaller "crisis" we have this one big mess.
Regardless I am also convinced that the bipartisan policy to promote homeownership also help greatly to the current mess, creating the wrong incentives and making politicians and regulators more likely to be in denial and blind to the early signs of trouble.
Of course, you and muirgeo will never admit that bad regulation, government created incentives and policy have anything to do with this because you are advocating more of it and naively believe that next time good government will be able to avoid a mess like this.
This is, in Hayek words, a fatal conceit.

Ray September 29, 2008 at 7:58 am

I am an Indian and have become a regular here at cafe hayek.Having seen the disastrous effects of a Government controlled economy in 20th century India,I have been pleasantly surprised at the improvement in the daily lives of the people in my country thanks to a
partial liberalisation launched in 1991 (we still have a long way to go). Thats why its been depressing to hear so many American commentators and politicians clamouring for the government "to do something". Its pretty clear that it wasn't the failure of the market that caused this problem,while it was the market that actually provided the correction by throwing irresponsible players out of business. Why aren't the majority in the mainstream media not getting it?.Here is an Indian commentator who is writing about the government's role in creating this mess (something this blog has been pointing out for the last few days)
http://www.hindustantimes.com/StoryPage/StoryPage.aspx?sectionName=HomePage&id=40d6f914-cfc8-4c3e-8180-666b361a7c02&&Headline=Adam+Smith+isn%E2%80%99t+dead

Cheers,
Ray

Martin Brock September 29, 2008 at 8:02 am

Of course, you and muirgeo will never admit that bad regulation, government created incentives and policy have anything to do with this because you are advocating more of it and naively believe that next time good government will be able to avoid a mess like this.

Simple-minded partisanship doesn't transform me into anyone's ideological twin. Disputing some assertion of your partisan is not equivalent to agreement with your ideological opponent.

I defy you to find a single statement I've ever written in this forum or anywhere else defending state regulation of financial markets generally or this bailout or any dream of "good government" avoiding any mess. Please quote the statement in this thread.

To see me conceding Russ's point about political pressure to make bad loans to poor people, bother to read the post three posts above yours. I only say that this pressure is not the largest part of the problem, citing debts averaging $1.5 million on homes worth less than their mortgages, homes that clearly do not fall into the "trailer" category. You simply ignore this point. Russ apparently ignores it too, because AG made the point a week ago in response to Don's post titled "She Earned an F", yet this forum continues to focus obsessively on loans to poor people.

Russ Nelson September 29, 2008 at 8:53 am

Martin is nothing like muirgeo. muirgeo is stupid and always wrong (except when he's gone so far into wrong that it wraps around and he's right but for a stupid reason). Martin is only sometimes wrong.

Martin Brock September 29, 2008 at 8:55 am

I'm also skeptical of the "keep unemployment low" theory of this problem, because I expect pressure on labor markets at this time. The ratio of the number of people in the U.S. above 65 to the number of people between 20 and 64 is now rising rapidly and is expected to rise 70% between 2000 and 2030, compared with a 12% rise in the preceding 30 years.

So politicians (including central bankers, corporatist executives and others) have been dreaming up rents for all of these would be retirees, and they've sold packaged rents to the increasingly massive and centralized financial service institutions, like AIG, the largest seller of annuities in the world. Various enablers of this rent seeking paid themselves huge salaries and bonuses for moving so much money around.

Financiers at Lehman Brothers sold bonds to lots of other financial institutions representing rent seekers, but the value of rents packaged into these bonds apparently doesn't exceed the price paid for the bonds; however, despite this fact, the financiers at Lehman Brothers will pay themselves billions in bonuses this year based on last year's apparently fictitious accounting, even as shareholders lose their shirts and bondholders soak their shirts with sweat waiting for the verdict on this bailout. These facts are widely reported.

A relatively shrinking class of workers must pay these rents in the form of higher mortgage payments or higher rents on homes or otherwise, but they're resisting, just as we've resisted tax increases in recent decades. So the same politicians who promised us lower tax rates now want to substitute a trillion dollars in taxpayer obligations for bonds that "private sector" buyers, like Russ Roberts' state employee pension fund, will not purchase at the price politicians will pay.

The same politicians tell us (correctly) that the Social Security Trust Fund is only an illusion concocted by politicians (the same ones) spending tax revenue now and promising to raise even more tax revenue later.

muirgeo September 29, 2008 at 8:57 am

"The problem is Fannie Mae doing it with my money at the encouragement of Congress."

Yeah but of course it bothers ME that the government is using MY money to build YOUR roads, to insure YOUR bank deposits and to insure YOUR FHA home loan.

This is not a problem about trying to get poor people into homes. The Wall Street and the goverment is using everyone's money to concentrate wealth in the hands of a very few individuals. That's the problem that is bringing down this country. And the fear of being called a class warrior, of being called jealous and the fear that keeps people from calling these Wall Street Terrorist the thieves that they are and instead choosing to defend them is a blow to liberty of your own doing.

Martin Brock September 29, 2008 at 9:08 am

Martin is only sometimes wrong.

I won't deny this assertion, but I will ask you to be more specific.

Martin Brock September 29, 2008 at 9:31 am

Yeah but of course it bothers ME that the government is using MY money to build YOUR roads, to insure YOUR bank deposits and to insure YOUR FHA home loan.

I'm still a road socialist and won't deny it, but you're presumably sarcastic and don't mean what you say here. That a state builds my roads is no excuse for a state insuring my bank deposits, and I don't want a state insuring my bank deposits. I don't want to pay tolls every time I make a left turn, but I do want bank depositors to lose their savings on a fairly regular basis, because these losses are part and parcel of the continual, dynamic reorganization I expect in a free capital market.

I also support some sort of safety net for the elderly and the disabled without other resources, resources including able children, who are real means of production and thus real investments. I won't deny this limited welfare statism either, but I don't want the "safety net" implemented through the banking system and extending to an established class of financiers supporting an incredible variety of statist agendas, from the military-industrial complex to dubious "home ownership" schemes and certainly not excluding the massively statist education-research-industrial complex.

Hammer September 29, 2008 at 10:29 am

"Yeah but of course it bothers ME that the government is using MY money to build YOUR roads, to insure YOUR bank deposits and to insure YOUR FHA home loan." – Muir

Assuming you are serious, that is pretty much why most libertarians suggest that government not be allowed to take your money and spend on whatever: it bothers everyone sooner or later,and pretty much necessitates inefficiency as people are not allowed to allocate all their resources as they see fit.

Of course, you are not serious, but you don't seem to understand that your joke falls flat given your posting history. As you have established that you are all for government spending so long as it is for things you like, it really shouldn't bother you that other people are for government spending for things they like. They are, after all, just like you in principle, but a little different in taste.

Perhaps some diversity training would help you to value the beauty of the differences? ;)

Martin Brock September 29, 2008 at 10:37 am

Real market capitalism is risky, and diversification doesn't avoid this risk, unless by "diversification" we mean a statutory redistribution scheme.

More conventional "diversification" doesn't avoid the risk, because the distribution of real capital yields is fat tailed; therefore, the central limit theorem doesn't apply to these yields, i.e. a large portfolio combining many yields doesn't necessarily have a smaller expected variance than a small portfolio combining only a few yields. A diversified portfolio of real investments in a free capital market (where the efficient market hypothesis applies) is like a random sample from the Cauchy distribution.

The packagers of CDOs simply don't understand this fact. They believe, incorrectly, that the central limit theorem applies generally, but it doesn't. The theorem is only a simplifying assumption. It's interesting mathematically and often useful, but it's not a law of nature.

The fat tailed yield distribution is not political either. It is more nearly a law of nature, and it's essentially consistent with the Hayekian critique of central planning. We can't solve the problem of central planning by labeling our central planners "private sector capitalists".

vidyohs September 29, 2008 at 11:18 am

muirduck,

You spout such formulistic ghibberish that it only proves the generally recognized viewpoint here on this Cafe that, on most levels, you are insane.

There is the next muirpidity (#27) contained in this:

"This is not a problem about trying to get poor people into homes. The Wall Street and the goverment is using everyone's money to concentrate wealth in the hands of a very few individuals. That's the problem that is bringing down this country. And the fear of being called a class warrior, of being called jealous and the fear that keeps people from calling these Wall Street Terrorist the thieves that they are and instead choosing to defend them is a blow to liberty of your own doing.
Posted by: muirgeo | Sep 29, 2008 8:57:36 AM"

It is always instructive and entertaining to see an idiot argue against himself, doing the daily turn-about.

So, it's not about getting poor people into housing? Then why involve them? If the purpose is to concentrate wealth in the hands of the few why is the government using (in support of Wall Street) stealh methods to do so when they can just wave the magic wand of men and guns and simply take it? "The people" have shown repeatedly that they will lie down and take it.

Then there is the delicious irony of seeing you castigate the government for raping you and knowing that you have no answer for a cure to your pain but more government. Thi is the kind of insanity that is peculiar to socialist nut cases such as yourself.

Being blatantly insane does not ennoble or qualify you as a "class warrior", nor does being blatantly jealous, nor does exercising your right to write really stupid things. It just proves your insanity and your stupidity.

Thanks for muirpidity #27:

"This is not a problem about trying to get poor people into homes. The Wall Street and the goverment is using everyone's money to concentrate wealth in the hands of a very few individuals.
Posted by: muirgeo | Sep 29, 2008 8:57:36 AM"

Remember, muirduck, no context is needed to understand how muirpid you are, all of your listed muirpidities are stands alone and contain all that is necessary for the intelligent and aware to see you for what you are.

Sam Grove September 29, 2008 at 12:28 pm

What we are witnessing in the current financial mess and proposed bailouts is the approach to the endpoint of the goal of the past 70-80 years of progressive government, to render virtually nil, the citizens' input on the management of the corporate state.

Through constant control of the message, the blaming of markets for all economic ills, the people are being inexorably into total dependence on the corporate state.

This year it's the finance industry, next up is health care.

muirgeo September 29, 2008 at 1:31 pm

"I don't want to pay tolls every time I make a left turn, but I do want bank depositors to lose their savings on a fairly regular basis, because these losses are part and parcel of the continual, dynamic reorganization I expect in a free capital market."

No they are part and parcel to regular Depressions occuring every 8-10 years in unregulated economies.

You need to read some more history to realize that there really is no advantage to unregulated markets. It sounds good but in reality such markets have no evidence of improved productivity. Between 1890 and 1930 there were at leadt 4 depressions. Why in the heck would you want to return to those days.

I really think we'll need to go through another depression to instill into the modern neoliberal that they really aren't something to wax nostalgic about.

So you don't use FDIC insured banks or have a FHA assured home loan? That's impressive. Who are your lenders?

Art Angelo September 29, 2008 at 1:34 pm

The reason manufactured homes did not last beyond 20 years is because they were sold like used cars and installed without foundations. When HUD investigated they found that 85% of the problems causing such wide spread failure was due to the poor set up and lack of foundation.
As of October 20, 2008, the Manufactured Housing Improvement Act will require these homes to be installed on site, soil and model specific engineered foundations. As of February 8, 2008 (now law) all manufacturers, home sellers and contractors will be subjected to Dispute Resolution should defects occur one year from the date of installation. To invoke Dispute Resolution, all the homeowner has to do is pick up the phone and call HUD and the process will begin .
It should be noted that manufactured homes properly installed will outperform stick built homes, and with the new Manufactured Housing Improvement Act in force officially by October 20, 2008, what was once known to be a depreciating asset will now be known as quality, durable affordable housing.
Who wouldn’t want to finance a home like that?

Martin Brock September 29, 2008 at 2:50 pm

No they are part and parcel to regular Depressions occuring every 8-10 years in unregulated economies.

Nonsense. People lose money in capital markets every day, not in "regular Depressions occuring every 8-10 years in unregulated economies."

You need to read some more history to realize that there really is no advantage to unregulated markets.

All markets are regulated. The whole idea of an "unregulated market" is more nonsense.

It sounds good but in reality such markets have no evidence of improved productivity. Between 1890 and 1930 there were at leadt 4 depressions. Why in the heck would you want to return to those days.

When in the heck did you stop beating your wife? That I dispute a particular regulation you like, one taxing people generally to prevent your bank account balance from falling nominally, is no evidence either that I want any bad old days or that your favorite regulation is an improvement.

So you don't use FDIC insured banks or have a FHA assured home loan? That's impressive. Who are your lenders?

I use a credit union and had no mortgage until recently, because I own a house without a mortgage. My current mortgage is not an FHA loan, and I'll pay it off next year when I sell the unmortgaged house. I earn decent living, but I'm not rich. I live very happily, well beneath my means, in a home worth roughly one year of my current income, so even if the price of my property falls in the next year, I'll be fine. I also support three children well.

I avoid credit problems this way, and that's why I wondered aloud why Russ has a problem with low cost housing. I know housing costs are higher elsewhere, but I have no idea why anyone wants to live in all the half million dollar homes springing up lately in my neck of the woods. It's not a speculative mania? I don't believe it. It looks a lot like Misean malinvestment to me, and I strongly resent any obligation to bail out either the home debtors or their creditors.

I also pay payroll taxes and expect to receive Social Security benefits, because I was born in the United States, and participation in the system is not voluntary as a practical matter. This fact hardly makes me an advocate of the Social Security system.

We can discuss these regulations intelligently, or we can exchange these facile, political parries.

maximus September 29, 2008 at 5:00 pm

"Between 1890 and 1930 there were at leadt 4 depressions. Why in the heck would you want to return to those days."

The word "recession" to describe a downturn was not introduced to economics until after the great depression, (which by the way was in the 1930's just in case that history book you read doesn't mention it). So calling 4 downturns from 1890-1930 depressions is disingenuous at best. All downturns were called depressions. Of course given your ability to revise and lie about history comes as no surprise you wouldn't know this.

Juan C. de Cardenas September 29, 2008 at 6:58 pm

Martin, I offer you my sincere apology. You and muirgeo are clearly not in the same bunch.

Sam Grove September 29, 2008 at 10:07 pm
Martin Brock September 29, 2008 at 10:24 pm

Juan,

Accepted. No sweat. I've tried to meet muir halfway, but he doesn't seem interested.

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