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Updated on Monday, March 16, 2015
An estimated 20 million people live in mobile homes, otherwise known as Manufactured Housing. The states with the highest share of mobile homes include South Carolina, New Mexico, West Virginia, Mississippi and Alabama. Guidelines, written by the Consumer Financial Protection Bureau, went into effect in January 2014 and have significantly reduced the availability of mortgages for people looking to purchase mobile homes. In a rare sign of bipartisanship, two Republican (from Pennsylvania and Arkansas) and two Democratic (from Indiana and West Virginia) Senators have teamed up to introduce legislation that will relax the rules and increase the flow of credit.
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High-Cost Mortgage Rules
The rules that went into effect in January 2014 were targeted at high cost mortgages. The definition of high cost mortgages includes any loan that is less than $50,000 and has an interest rate that is greater than Prime by more than 8.5%.
According to the CFPB rules, which are outlined on their website, high cost mortgages require that the lender must:
- Provide documentation to the borrower explaining that the mortgage is high cost.
- Receive certification from a housing counselor that the borrower has received counseling about the high-cost mortgage that is being offered.
- Refrain from charging pre-payment penalties. In addition, there are limitations on a number of other fees as well.
- Use a certified appraiser, who visits the inside of the home.
The increased disclosure and reduced fees have resulted in a significant reduction of manufactured housing loans. Both mortgage companies and consumers have been complaining.
According to a press release, the Senators want to relax the definition of high-cost mortgages. The bill would change the threshold and allow the interest rate to exceed Prime by 10% for loans up to $75,000. The documentation and counseling would no longer be required on products that meet these thresholds.
Senator Cotton, a Republican from Arkansas, said that “manufactured housing plays an important role in homeownership options, which have unfortunately been constrained by excessive regulations by the CFPB. As we’ve seen, unintended consequences of these regulations have limited the housing and mortgage choices of hard-working Americans in many rural areas.”
Do Consumers Really Win?
Manufactured housing loan portfolios typically have very high delinquency and loss rates. With a traditional residential mortgage, the bank is protected by an appreciating asset (with the exception of 2008), and the ability to repossess and resell properties when consumers default.
Manufactured housing is much more difficult. Unlike traditional homes, manufactured homes regularly lose value. Although you can easily find articles online that talk about the ability of mobile homes to gain market value when properly cared for, the loss experience of banks tells a different story. When people stop paying on their mobile homes, they often stop taking good care of the property as well – because they know it will be taken by the bank. This wear and tear, along with overall market conditions, mean that when banks repossess a mobile home, it is often worth a fraction of the original price.
As a result of the unique nature of mobile home risk, banks need to charge significantly more for mobile homes than for traditional mortgages. Unfortunately, the high default rates and risk associated with mobile homes keeps many credit unions away. For example, PenFed is a market-leading mortgage lenders. However, it does not finance mobile homes, as it explains here.
Removing the appraisal requirements makes a lot of sense: the make and model of a manufactured home makes it easy for a bank to understand the value at the time of purchase. Wasting money on an appraisal seems excessive.
However, the reduced disclosure and ability to charge additional fees does not seem like a good deal for consumers.
Disclosure and Transparency Is A Good Thing
The reality is that mobile home mortgages are very expensive. Before signing on the dotted line, consumers should understand exactly how much that mortgage is going to cost them over the life of the loan. Removing the added disclosure and counseling would certainly result in the sale of more mobile homes. But, we don’t think it benefits consumers.
Think about this in a slightly different way. If banks disclose the true cost of a product, fewer people will take out that product. So, the solution of the banks – in partnership with the lawmakers – is to reduce the disclosure, so that consumers will not hesitate to sign. That feels rotten.
Put It In The Interest Rate
Prepayment fees can dramatically increase the cost of the loan for the most responsible borrowers. Lenders often use these fees as a way to keep the headline interest rate down. At MagnifyMoney, we do not believe people should be punished for getting out of debt faster. Prepayment penalties, especially on mortgages with double-digit interest rates, feels like a responsibility tax, which we do not support.
Mobile Homes for Everyone?
Mobile homes are an affordable way for millions of American to live. And we believe that a credit market should exist to help people finance these purchases.
From our experience in banking, we are very familiar with the high frequency of defaults on these loans. This is a risky lending product for banks, and many credit unions just stay away. Credit unions avoid the product because they do not want to charge the interest rates required that make it profitable.
Banks have no such trouble charging the interest rate. But, they feel they need to do more. They are fighting the tough appraisal requirements, the limits on fees, and the disclosure requirements. We have some sympathy on the appraisal requirement. However, if a product is so expensive that merely disclosing the price causes a customer to turn down the product, then we have a bigger issue here. And the law introduced by the four Senators would not be a complete win for consumers. While we applaud the rare sign of bi-partisanship, we wish it wasn’t for less disclosure in the mobile home mortgage market.