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37–830 PDF 2007

S. HRG. 109–994

REFORM OF FHA’S TITLE I

MANUFACTURED HOUSING LOAN

HEARING

BEFORE THE

SUBCOMMITTEE ON HOUSING AND TRANSPORTATION

OF THE

COMMITTEE ON 

BANKING, HOUSING, AND URBAN AFFAIRS 

UNITED STATES SENATE

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

ON

EXAMINATION OF S. 2123, TO MODERNIZE THE MANUFACTURED HOUSING LOAN INSURANCE PROGRAM UNDER TITLE I OF THE NATIONAL 

HOUSING ACT

APRIL 4, 2006

Printed for the use of the Committee on Banking, Housing, and Urban Affairs

(

Available at: http://www.access.gpo.gov/senate/senate05sh.html 

COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS 

RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah 

WAYNE ALLARD, Colorado 

MICHAEL B. ENZI, Wyoming 

CHUCK HAGEL, Nebraska 

RICK SANTORUM, Pennsylvania 

JIM BUNNING, Kentucky 

MIKE CRAPO, Idaho 

JOHN E. SUNUNU, New Hampshire 

ELIZABETH DOLE, North Carolina 

MEL MARTINEZ, Florida 

PAUL S. SARBANES, Maryland 

CHRISTOPHER J. DODD, Connecticut 

TIM JOHNSON, South Dakota 

JACK REED, Rhode Island 

CHARLES E. SCHUMER, New York 

EVAN BAYH, Indiana 

THOMAS R. CARPER, Delaware 

DEBBIE STABENOW, Michigan 

ROBERT MENENDEZ, New Jersey

KATHLEEN L. CASEY, Staff Director and Counsel 

STEVEN B. HARRIS, Democratic Staff Director and Chief Counsel 

MARK CALABRIA, Senior Professional Staff Member 

JONATHAN MILLER, Democratic Professional Staff 

SARAH GARRETT, Democratic Legislative Assistant 

JOSEPH R. KOLINSKI, Chief Clerk and Computer Systems Administrator 

GEORGE E. WHITTLE, Editor 

SUBCOMMITTEE ON HOUSING AND TRANSPORTATION

WAYNE ALLARD, Colorado, Chairman 

JACK REED, Rhode Island, Ranking Member 

RICK SANTORUM, Pennsylvania 

ELIZABETH DOLE, North Carolina 

MICHAEL B. ENZI, Wyoming 

ROBERT F. BENNETT, Utah 

MEL MARTINEZ, Florida 

RICHARD C. SHELBY, Alabama 

DEBBIE STABENOW, Michigan 

ROBERT MENENDEZ, New Jersey 

CHRISTOPHER J. DODD, Connecticut 

THOMAS R. CARPER, Delaware 

CHARLES E. SCHUMER, New York

TEWANA WILKERSON, Staff Director

(II)

CONTENTS

TUESDAY, APRIL 4, 2006

Page

Opening statement of Senator Allard .................................................................... 1

Opening statements, comments, or prepared statements of: 

Senator Reed ..................................................................................................... 3

WITNESSES 

Brian D. Montgomery, Assistant Secretary for Housing–Federal Housing 

Commissioner, U.S. Department of Housing and Urban Development ........... 4

Prepared statement .......................................................................................... 20

Response to written questions of Senator Reed ............................................. 29

Michael J. Frenz, Executive Vice President and Chief Operating Officer, 

Government National Mortgage Association, U.S. Department of Housing 

and Urban Development ...................................................................................... 7

Prepared statement .......................................................................................... 21

Kevin Clayton, President and Chief Executive Officer, Clayton Homes, Inc., 

on behalf of Manufactured Housing Institute and Manufactured Housing 

Association for Regulatory Reform ..................................................................... 8? 

Prepared statement .......................................................................................... 23

Kevin Jewell, Consultant, Manufactured Housing Project, on behalf of Consumers Union ....................................................................................................... 10

Prepared statement .......................................................................................... 27

Response to written questions of Senator Reed ............................................. 29

(III)

(1)

REFORM OF FHA’S TITLE I

MANUFACTURED HOUSING LOAN PROGRAMS 

TUESDAY, APRIL 4, 2006

U.S. SENATE, SUBCOMMITTEE ON HOUSING AND TRANSPORTATION, COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS, Washington, DC.

The Subcommittee met, at 3 p.m., in room SD–538, Dirksen Senate Office Building, Senator Wayne Allard (Chairman of the Subcommittee) presiding. 

OPENING STATEMENT OF SENATOR WAYNE ALLARD 

Senator ALLARD. I will call the Subcommittee on Housing and 

Transportation to order. We have a pretty tight schedule for most 

Members today, including my Ranking Member, Senator Reed, and 

so we are going to move the hearing along fairly quickly, and I 

want to get started on time so we can get as much covered as we 

can. When we hit 4 o’clock, we will probably draw the hearing to 

a close, and then if there are any questions that remains—and 

there likely will be—we will submit those to you and ask that you 

get them back to us within 10 days, if you would. 

Homeownership has many benefits for communities and families, 

and both Congress and the President have pursued policies designed to support and promote homeownership. We have been successful, as evidenced by the current record high homeownership 

rates. Manufactured housing represents an important component of 

our homeownership gains. 

According to Harvard’s Joint Center for Housing Studies, in collaboration with the Neighborhood Reinvestment Corporation and 

the Ford Foundation, manufactured housing represents two-thirds 

of affordable housing added to the stock in recent years, and it is 

a growing portion of all new housing. In fact, buyers of manufactured housing contributed to a substantial share of the growth in 

low-income homeownership. 

Manufactured housing can also be a particularly critical source 

of homeownership in areas where site-built construction can be 

more difficult or costly, such as in rural areas. Similarly, the difficult building conditions and the short construction season in 

many mountain communities can make manufactured housing an 

attractive alternative. 

The manufactured housing industry has evolved from the trailers 

of the past. Consumers can choose from a vast spectrum of prebuilt 

homes, from very affordable mobile homes up to multimillion-dollar 

homes, completely indistinguishable from site-built homes. Some 

2

manufactured housing is placed on land owned by the homeowner; 

whereas, other homes are placed on lots rented or leased by the 

homeowner. While land ownership can offer greater economic benefits and control, home-only purchases are often much more affordable. 

Different financing models have evolved for different types of 

manufactured housing. Homebuyers with a real property title permanently sited on owned land are often able to access FHA’s Title 

II program. To accommodate other homebuyers who have had personal property titles, in 1969 FHA’s Title I program began insuring 

manufactured housing loans made by private lenders. While the 

Title I program has been important in promoting financing of manufactured housing, its usage has significantly declined due to key 

structural flaws. In 1992, the program insured 30,000 loans, but in 

recent years have seen fewer than 2,000 loans. We must find a way 

to fix these limitations and reinvigorate the program, a recommendation echoed by the Ford Foundation, the Neighborhood 

Reinvestment Corporation, Harvard’s Joint Center for Housing 

Studies, the Millennial Housing Commission Report, and Frontline 

Systems in a HUD-commissioned report. 

I have introduced legislation, Senate bill 2123, the FHA Manufactured Housing Loan Modernization Act, to reform the Title I 

program. My legislation patterns the Title I program on the successful Title II single-family program and incorporates many of the 

suggestions from the HUD-commissioned report. I am pleased to 

have Senators Bayh, Martinez, Dole, Johnson, Chambliss, and Lincoln join me in this strong bipartisan effort. 

The bill would move the Title I program from a portfolio-based 

system to loan-by-loan insurance. This change would remove a significant barrier to lender participation. This would be balanced 

against lender accountability measures, including tighter underwriting standards by FHA, increased monitoring of FHA lenders, 

continued co-insurance and increased capital requirements for participating lenders. 

My bill will also raise the loan limits, which have not changed 

since 1992. Updating the loan limits to reflect the current market 

price will make the Title I programs useful to more families. These 

changes will benefit homebuyers. A revitalized Title I program will 

better insure that families are able to access one of the most affordable sources of homeownership. As additional lenders come into the 

program, increased competition will lead to lower rates and costs. 

Title I reform will also benefit the industry. The manufactured 

housing industry is currently in the midst of a 5-year downturn, 

partly stemming from over-tight credit conditions. The absence of 

Title I activity has inhibited the manufactured housing industry’s 

recovery. More securitization will add liquidity to the market. Finally, my bill will benefit taxpayers, in part because it explicitly 

states that the program must become financially self-sufficient and 

actuarially sound. Also, the current structure of the Title I program 

leaves Ginnie Mae highly vulnerable to losses. In the late 1980’s 

and early 1990’s, Ginnie Mae lost millions. While they have since 

taken steps to stem the losses, some of the measures have inhibited 

the program. In some regards, losses have been minimized because 

the program is barely functioning. By setting insurance on a loanVerDate 0ct 09 2002 17:59 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 S:\DOCS\37830.TXT SBANK4 PsN: KEVIN
3

by-loan basis, Ginnie Mae will be better able to recoup losses, as 

it does under the Title II program. 

Reform of FHA’s Title I manufactured housing program will help 

promote one of the most affordable sources of homeownership. We 

have an excellent lineup of witnesses here today to discuss the 

issue. 

First, we will hear from Brian Montgomery, Assistant Secretary 

for Housing and the Federal Housing Commissioner at HUD. I 

know that HUD is working on a broader FHA reform package, and 

we will be interested to hear how Title I may fit into HUD’s proposal. 

Next, we will hear from Michael Frenz, Executive Vice President 

of Ginnie Mae. At this point Ginnie Mae is no longer accepting new 

lenders into the program. We will be interested to hear about the 

circumstances that led to this point, as well as your reform suggestions. 

Kevin Clayton of Clayton Homes will testify on behalf of the 

manufactured housing industry. As the President and CEO of a 

company that manufactures, sells, finances, and insures manufactured homes, he will be able to provide a valuable perspective. 

Finally, we will hear from Kevin Jewell, a Consultant for Consumers Union. Mr. Jewell has written a number of reports on the 

manufactured housing industry. 

I would like to thank all of the witnesses for appearing before the 

Subcommittee today. We appreciate your time, and your testimony 

will be helpful as the Committee continues to work on this issue. 

Next, I would like to call on my colleague, Senator Reed, for any 

comments he may have. 

STATEMENT OF SENATOR JACK REED 

Senator REED. Thank you very much, Mr. Chairman. Thank you 

for holding this hearing on the FHA Title I program, and I thank 

all the witnesses for your testimony and participation today. 

Affordable housing is rare in today’s market. The average cost of 

a home in the country today has topped $200,000. Back in Rhode 

Island, the average home price is now $265,000. And for this reason, I have been working with the Chairman on an amendment to 

the GSE reform bill that hopefully will create some affordable 

housing funds and help lower the price of it and make access to affordable housing more consistent throughout the country. 

Manufactured housing is one of the means that low-income 

households can afford to own their own home. It plays an important role in augmenting affordable homeownership throughout this 

country. For example, for households with very low incomes, 23 

percent of new homeowners purchase manufactured homes, and 

that is a significant benefit for these low-income households. 

Despite these opportunities for low-income families to become 

homeowners, manufactured housing also has experienced some 

shortcomings that we will look at today, I hope, and discuss in 

some detail. 

Particularly when it comes to manufactured homes situated on 

leased land. These homes tend to depreciate. Loans for these types 

of housing arrangements tend to have high interest rates, resulting 

in a larger loan payment, than payments for manufactured homes 

4

on owned land. As a result of these interest rate peculiarities, default rates on loans for these homes tend to be considerably higher 

than conventional loans, in fact, as much as 4 times as high. And 

because these homes are considered personal property, buyers tend 

to be subject to fewer protections than homebuyers experiencing 

foreclosure. And depending on the State in which they live, consumers also tend to face less stable living situations, and they may 

have month-to-month leases that do not guarantee that they will 

be able to maintain their home on the land that they have leased. 

And, finally, there is at least some circumstantial evidence of 

predatory lending practices involved in the purchase of these 

homes. That is something we want to look at. 

Again, I think this is a wonderful opportunity to look seriously 

at these issues and try to advance a reform agenda, and I thank 

the Chairman for his efforts. 

Thank you, Mr. Chairman. 

Senator ALLARD. Thank you very much, and now we will go to 

the panel. 

First of all, I would like to call upon Brian Montgomery, Assistant Secretary for Housing and the Federal Housing Commissioner, 

Department of HUD. 

Mr. Montgomery. 

STATEMENT OF BRIAN D. MONTGOMERY

ASSISTANT SECRETARY FOR

HOUSING–FEDERAL HOUSING COMMISSIONER,

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 

Mr. MONTGOMERY. Thank you very much. Chairman Allard, 

Ranking Member Reed, and distinguished Members of the Subcommittee, thank you for the opportunity to testify on S. 2123, the 

FHA Manufactured Housing Loan Modernization Act of 2005. At 

your pleasure, I would like to submit my statement for the record. 

Senator ALLARD. They will be made a part of the record. 

Mr. MONTGOMERY. Thank you, sir. 

In 1969, Congress expanded Title I insurance to cover loans on 

manufactured housing. Under Title I, FHA insures loans on manufactured housing that does not qualify as real estate. Title I borrowers may finance the purchase of a manufactured home and a 

land lot, or they may finance the manufactured home only or the 

land lot only. FHA-approved lenders make Title I loans eligible to 

borrowers from their own funds, and FHA insures the lenders 

against loss. 

Secretary Jackson and I support the concepts presented in the 

bill introduced by Chairman Allard and agree that the Title I program is in need of reform. In fact, the Administration’s FHA reform 

bill includes provisions very similar to those proposed by the Chairman. Certainly, both bills are intended to expand affordable housing opportunities and drive down consumer costs, while limiting 

risks to the Federal Government. HUD officials have discussed the 

proposed changes with industry leaders and manufactured home 

lenders, and I think we are all in agreement that the changes will 

accomplish these objectives. 

The need for a viable Title I program is very clear. Nearly 22 

million Americans, or roughly 8 percent of the population, live in 

5

manufactured housing. If enacted, this legislation will expand the 

financing options for families seeking to purchase these types of affordable homes. In many areas of the country, particularly rural 

areas, manufactured housing is the only form of quality affordable 

housing available, so it is sensible to have a strong FHA program 

to help families buy these homes at a fair price. At an average cost of $58,100—that is a 2004 figure—a manufactured home is typically more affordable than bricks and mortar 

homes, which cost on average $201,000, excluding the price of the 

land, I might add. In addition to value, today’s manufactured 

homes offer new homebuyers many of the property features they 

desire. They can choose walk-in closets, fireplaces, or even ‘‘Energy 

Star’’ appliances. 

If enacted, the program changes proposed by the Allard bill and 

the Administration’s FHA reform legislation will modernize the 

Title I manufactured home program in a manner that we believe 

will encourage more lenders to participate in the program. Additional competition will drive down the financing costs for prospective homebuyers while improving the programs long-term financial 

soundness. 

Both bills remove the key impediments that drove lenders away 

from Title I for the last several years, and both propose to increase 

the loan limits to levels that reflect today’s manufactured housing 

prices. Both bills also propose that the limits be indexed to permit 

annual adjustments to keep them in line with actual home costs. 

The most important change proposed in both bills is the conversion of Title I from a portfolio insurance program to an individual 

loan insurance program, similar to our current Title II program. 

This change will eliminate the most problematic statutory limitation of the program today, and that is the restriction on insurance 

claim payments to 10 percent of the value of a lender’s loan portfolio. 

This outdated portfolio insurance structure, which results in uncertainty and higher costs, was the primary reason Ginnie Mae 

curtailed securitization of Title I manufactured home loans in 1989. 

With portfolio insurance, lenders are not guaranteed coverage 

against loss and subsequently price their loans for additional risk. 

The higher loan costs, in turn, increase the likelihood of borrower 

default. 

With additional default risk, but insufficient coverage, the losses 

grew to unsustainable levels in the 1990’s, and Ginnie Mae pulled 

out of the program. The elimination of this outdated insurance 

model will encourage Ginnie Mae to reconsider participation in the 

secondary Title I securities market. 

HUD’s proposal is also consistent with S. 2123 in that it retains 

the 90-percent co-insurance feature of the Title I program, whereby 

FHA covers only 90 percent of the lender’s loss. Co-insurance provides lenders with additional incentive to perform high-quality

underwriting to protect themselves from loss. As such, the co-insurance feature will help ensure only responsible lenders participate 

in the program. 

Finally, HUD agrees with and offers in its own legislation a

provision stating that the insurance coverage should include a 

guarantee to lenders that their claims will be paid. We believe a 

6

loan-level insurance model that includes such an ‘‘incontestability 

clause,’’ guaranteeing insurance coverage, will help drive down the 

price of these loans, again by reducing the risk of loss to lenders. 

This risk will be transferred to FHA. To address this, should either the Allard or larger FHA reform bill be enacted, FHA plans 

to implement additional risk control measures. 

I mentioned at the outset of this testimony that HUD’s bill is 

slightly different from S. 2123. One of the differences is the provision regarding insurance premiums. The Senate bill mimics the existing Title II coverage, with a 2.25-percent up-front premium cap, 

and retains the existing Title I annual insurance premium with a 

1-percent cap. Our version, however, allows FHA flexibility in setting premiums at a level appropriate to ensure adequate cashflows 

and to cover potential losses. 

For both the Title I and Title II programs, HUD is proposing a 

risk-based insurance premium structure. Combining a risk-based 

premium charge with the appropriate up-front underwriting standards, HUD will be able to operate the program in a more financially sound manner and, over time, at a negative credit subsidy 

rate, as proposed in the Allard bill. Although both bills propose 

that FHA operate the program in a self-sustaining manner, without the risk-based premium structure, it is unlikely FHA could operate the program at a break-even. FHA needs flexibility to set the 

premiums at appropriate levels to assure adequate cashflow to 

cover these costs. 

This flexibility is particularly important because nonreal estate 

manufactured housing does not always appreciate in value. Defaults are more likely and recoveries are lower with this type of 

property. FHA will bear this additional risk and must have the 

ability to set premiums at levels commensurate with the risk. 

While we look forward to working with the Subcommittee to find 

common ground on these issues, I want to make clear that HUD 

supports the underlying reforms in this legislation. As FHA Commissioner, I believe that modernization of the Title I program is 

long overdue and that the FHA Manufactured Housing Loan Modernization Act proposes appropriate modifications to make Title I 

a viable, affordable financing option once again. 

In closing, I want to thank you, Mr. Chairman, Ranking Member 

Reed, and Senator Bayh for introducing legislation to improve Title 

I and for holding this important hearing. I appreciate the interest 

of the Subcommittee in the program and in expanding access to a 

critical form of affordable housing. 

Thank you, sir. 

Senator ALLARD. Thank you. 

Now, we will call on Mr. Frenz, Executive Vice President of 

Ginnie Mae. 

Mr. Frenz. 

7

STATEMENT OF MICHAEL J. FRENZ

EXECUTIVE VICE PRESIDENT AND

CHIEF OPERATING OFFICER,

GOVERNMENT NATIONAL MORTGAGE ASSOCIATION,

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT 

Mr. FRENZ. Thank you, Chairman Allard and Ranking Member 

Reed. I appreciate the opportunity to testify before you on efforts 

to modernize FHA’s Title I manufactured housing loan program. At 

your pleasure, I would like my written statement entered into the 

official record. 

Senator ALLARD. It will be entered in the record. 

Mr. FRENZ. Ginnie Mae promotes affordable housing by linking 

local housing markets to global capital markets. We do this by 

guaranteeing payments to investors in mortgage-based securities 

that carry the full faith and credit of the U.S. Government. 

Ginnie Mae’s securities are comprised of loans individually insured or guaranteed by Federal entities: FHA, VA, Rural Housing 

Service—in the case of manufactured housing, FHA. Most types of 

Federal mortgage insurance reimburse lenders for most of the costs 

of delinquency and foreclosure, including principal and interest 

payments to investors that had not been collected from borrowers. 

Ginnie Mae is called upon to honor its guarantee only when the 

financial institution that issued the security is unable to make payments to investors. Because the loans are individually insured, this 

generally happens when the financial institution fails. 

When an issuer defaults on its obligation to pay Ginnie Mae security holders, Ginnie Mae assumes responsibility for servicing the 

portfolio and making payments to investors. At that point, Ginnie 

Mae’s risk is dependent on the nature of the insurance or guarantee provided at the loan level. 

Ginnie Mae began securitizing manufactured housing loans in 

the early 1970’s. At the program’s peak, approximately $3 billion 

of securities were outstanding and 30 to 40 issuers were active at 

a given time. Between 1986 and 1988, however, 12 issuers with 

$1.8 billion of securities defaults, resulting in Ginnie Mae assuming their portfolios and suffering large losses. 

In 1989, due to those losses, Ginnie Mae imposed a moratorium 

on the acceptance of new issuers, which helped to limit subsequent 

losses. To date, Ginnie Mae has experienced $514 million of losses 

on manufactured housing portfolios. 

Why were Ginnie Mae’s losses on these portfolios so severe? A 

number of structural features unique to the Title I program exposed Ginnie Mae to risks that could not be mitigated. For the sake 

of brevity, I will focus on the two most important in terms of losses 

to Ginnie Mae. 

The most important feature is the limit on insurance per lender. 

FHA limits its exposure by capping lender insurance coverage at 

10 percent of all originations and purchases. Once claims reach 10 

percent of the outstanding portfolio, the loans are effectively no 

longer insured, leaving issuers with little economic incentive to 

continue servicing loans and making payments to security holders. 

Ginnie Mae suffered large losses when assuming the portfolios of 

lenders that had exhausted FHA insurance coverage. 

8

The second feature is that Title I loans are registered for insurance, but not reviewed by FHA for insurance eligibility at origination. Instead, FHA reserves the right to contest a claim for up to 

2 years after claims are paid. This increases the risk to the issuer, 

or Ginnie Mae upon a default, that loans are not insured and 

raises costs for borrowers. 

Today, the manufactured housing program at Ginnie Mae has almost completely wound down. There are four approved issuers in 

the program, with only one issuing new securities. During 2005, 

only $9 million in new securities were issued, and as of December 

31, 2005, approximately $187 million were outstanding. 

In summary, the structural features of the Title I program 

caused significant losses and made it impossible for Ginnie Mae to 

maintain a viable securitization program. To the extent that the 

Title I program is restructured to address those features, Ginnie 

Mae would consider lifting its current moratorium and working 

with FHA to support this important loan product that can help 

many Americans achieve their dreams of homeownership. 

Thank you for this opportunity to discuss Ginnie Mae’s experience with its manufactured housing securitization program. I will 

be pleased to answer any questions you have. 

Senator ALLARD. Mr. Clayton of Clayton Homes. 

STATEMENT OF KEVIN CLAYTON

PRESIDENT AND CHIEF EXECUTIVE OFFICER,

CLAYTON HOMES, INC. ON BEHALF OF

MANUFACTURED HOUSING INSTITUTE AND MANUFACTURED

HOUSING ASSOCIATION FOR REGULATORY REFORM 

Mr. CLAYTON. Chairman Allard, Ranking Member Reed, thank 

you for the opportunity to comment, and I ask that my written 

statement be part of the offical hearing record. 

Senator ALLARD. They will be made a part of the full record. 

Mr. CLAYTON. Thank you. Clayton Homes is a vertically integrated modular and manufactured housing company owned by 

Berkshire Hathaway. We began 50 years ago and have been lending on manufactured housing for the past 35 years. Both of our 

lending affiliates—Vanderbilt Mortgage and 21st Mortgage—specialize in the origination and serving of $17 billion in manufactured 

home loans, including FHA Title I. I appear before you representing both the Manufactured Housing Institute and the Manufactured Housing Association for Regulatory Reform. 

The manufactured housing industry today is in the midst of a severe economic downturn with production levels down 60 percent 

since 1998. The primary cause for this market contraction has been 

the loss of available financing for potential homeowners who apply 

for manufactured housing loans. 

Manufactured housing has changed dramatically in recent years. 

The pictures that I shared with you indicate the positive and significant exterior and interior aesthetic enhancements. As material 

prices have skyrocketed, developers are now rushing to use manufactured housing as a more efficient means to build beautiful subdivisions. 

Lending on manufactured housing has also changed. Today, the 

industry serves two distinct markets. First, over 80 percent of

9

current industry mortgages include real estate as part of the transaction. The other small segment, 20 percent or less, is the homeonly market which is also a much needed and very important segment. The home-only segment serves families who want to enjoy 

homeownership without the additional burden of purchasing land. 

The majority of these owners are placing the home on family land. 

The common example is the grandparents allowing the kids to 

place a home on their property, but they are not about to let the 

kids require them to subdivide the land and encumber it with a 

lien. 

During past industry recessions, the FHA Title I program provided much needed capital. However, in recent years, it has not 

functioned as Congress or FHA intended. Unfortunately, the current FHA Title I program is burdened with nonvalue-added processes causing it to serve less than 2,000 homeowners annually. 

This compares to 1992, when the program was insuring over 30,000 

loans annually. 

Unchanged since 1992, the loan limits are too low for today’s 

manufactured home. The home-only program has a current loan 

limit of just $48,600 resulting in less than 1,000 square feet of living space, typically—too small for families today or to accommodate 

the aesthetic improvements of today’s manufactured housing. 

The Title I program has certain structural problems which make 

it very difficult for Ginnie Mae to recoup losses when lenders leave 

the program or go out of business. This has caused Ginnie Mae to 

severely limit the number of lenders for which it will guarantee 

loan securitizations. Thus, the advantages of the secondary market 

are greatly curtailed, particularly given Fannie Mae and Freddie 

Mac’s limited participation. The end result is tens of thousands of 

low- to moderate-income homebuyers have been denied access to 

credit in this Federal Government program for several years. 

S. 2123 will provide the necessary reforms to revive and stabilize 

this program. It would raise the loan limits and index them to inflation, and the legislation would also require that each loan be 

separately insured, like FHA Title II today. 

To ensure that the Federal taxpayer is protected, the legislation 

requires the program to be actuarially sound by: Allowing HUD to 

increase the up-front insurance premium; directing HUD to address underwriting standards as market conditions dictate; 

strengthening the downpayment requirement; and maintaining the 

current requirement that lenders co-insure 10 percent of each insurance loss. 

Each of these reforms was recommended in four independent 

studies which examined this program over the past 4 years. While 

the industry strongly supports these recommendations, we are open 

to other suggestions that might also improve and strengthen this 

program. 

In closing, Mr. Chairman, we respectfully urge you to move 

S. 2123 through the legislative process as quickly as possible. 

Thank you for your time and attention to this important program, 

and I appreciate the opportunity to answer your questions. 

Senator ALLARD. Mr. Jewell with the Consumers Union. 

10

STATEMENT OF KEVIN JEWELL

CONSULTANT, MANUFACTURED HOUSING PROJECT,

ON BEHALF OF THE CONSUMERS UNION 

Mr. JEWELL. Thank you, Senator Allard and Ranking Member 

Reed. 

I am Kevin Jewell. I am with Consumers Union, and I request 

that my written comments be submitted for the record. 

Senator ALLARD. Without objection. 

Mr. JEWELL. In 2001, Consumers Union launched the Manufactured Housing Project with one goal, one question. And that question was: Does ownership of a manufactured home offer the same 

benefits as ownership of a conventional home? 

The answer is, all too often, it does not. Market failures in the 

lending marketplace mean that consumers often end up owing 

more than they wish and end up underwater on a loan months or 

years after their purchase. Problems with warranty service and durability contribute to these failures. 

The question is: What are the benefits of conventional homeownership? You mentioned that there are subsidies for homeownership: Why do we subsidize homeownership? I submit to you the two 

major factors discussed in the academic literature are stability and 

investment value. Stability allows people to build ties with their 

community, and payment on an asset that appreciates allows families to invest to build an asset. 

The home-only product that is the focus of this legislation offers 

neither stability nor investment for the family. The question is: 

Can we add language to this bill to restore those benefits to the 

product? In terms of stability, we can. We can require that homeowners that buy under this product demonstrate long-term control 

of the land upon which that home is going to sit. That control could 

be land ownership, although if the consumer owns the land, we 

would encourage them to go with a real estate product. But as Mr. 

Clayton discussed, if they are placing the home on family land, and 

they are able to demostrate that the landowner is willing to issue 

them a long-term guarantee for the placement of that home, that 

would demonstrate control. 

Freddie Mac, a few years ago, began a program called a leasehold program, where they offered personal property loans that required that the homeowner have a lease that was 5 years longer 

than the term of the loan. With the high loan-to-value that we see 

in this product, a consumer might have merely hundreds of dollars 

of equity for the first 5 to 10 years. If they are on a month-tomonth lease, and the landowner decides they want to close the 

park or evict the homeowner, it may be in that consumers best interest to send that home back to the bank. The cost of moving a 

home—and remember, we do not call these mobile homes any more 

because they are not particularly mobile—the cost of moving a 

home easily runs into thousands of dollars and can damage the 

home, decreasing its value. 

Requiring demonstration of stability and long-term control of the 

land is one needed change to this bill. 

The other is, can we do anything about the fact that a home-only 

manufactured home loan is a depreciating asset? No, we cannot. 

Generally, manufactured homes that are not on owned land depreVerDate 0ct 09 2002 17:59 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 S:\DOCS\37830.TXT SBANK4 PsN: KEVIN
11

ciate. We can ensure that the purchase occurs at a reasonable 

price. That is where the appraisal standard in the bill helps. It prevents what we have seen in the past in this industry, where consumers end up paying too much for a home in the beginning. The 

creation of liquidity in the resale market, by providing loans for 

used homes, is a potential benefit of this bill. In fact, I would submit that it may be worthwhile limiting this program only to used 

homes. The new home market has private participants. The used 

home market does not have many active participants, and without 

a Government policy interest in creating investment opportunity or 

a Government policy interest in stability, we question the underlying interest in this legislation. 

Thank you. 

Senator ALLARD. I want to thank the panel for their testimony. 

Senator Reed and I will take 5 minutes apiece and ask questions. 

That will get close to 4:00 o’clock, Senator Reed. I know you have 

to get going and so do I, so we will pull the hearing to a close. 

On this issue of choices for families, most of the families that 

choose to purchase manufactured housing that is not placed on 

owned land, actually, what choices do they have? And with these 

choices, are there reasonable alternatives out there that perhaps 

would fit one family but may not fit another? I am wondering if 

perhaps individually the members on the panel might want to comment on the choices that families have when they do not have the 

choice of putting a manufactured home on land. You want to comment on that, Mr. Montgomery? 

Mr. MONTGOMERY. Yes, thank you, Mr. Chairman. Certainly 

speaking for my home State of Texas and many parts of that State, 

manufactured housing is about their only option that is reasonably 

priced. You go to a lot of parts of East Texas, that is about all you 

see for miles on end. For these families who are lower income, their 

options are limited, and one of the primary reasons we are looking 

at reforming Title I, just as we are Title II, in the case of Title I, 

just the interest rates are so onerous. And here we are at the U.S. 

Department of Housing and Urban Development, and we are only 

participating in 1,700, 1,600 loans throughout the whole country. 

Tells us right away that the program needs to be reformed, needs 

to be modernized. 

We think by making some of the changes, Mr. Chairman, that 

are in your bill, certainly eliminating the 10 percent portfolio cap, 

doing some stricter underwriting on the front end, so that we can 

do a preendorsement review and guarantee that we can put FHA 

insurance on it, will certainly, we think, drive down interest rates 

and much more affordable to even more lower-income families, especially those who have very limited options, especially, again, in 

the rural communities where sticks and bricks construction is just 

so cost prohibitive. 

Senator ALLARD. Any other comments? 

Mr. CLAYTON. If I may? 

Senator ALLARD. Yes, Mr. Clayton. 

Mr. CLAYTON. The current industry data does show that 80 percent of these homes go on land where the land is part of the mortgage, so we are only talking about 20 percent of the overall market, 

and of that 20 percent, only 25 percent of that 20 percent are in 

12

the land-lease community environment where they do have exposure to a landlord raising rents. It is not likely that grandparents 

are going to kick the kids off the land, and the common situation 

is that these homes are going on family land out there. 

I hate to really wreak havoc on this program, the positive change 

we have made, based on that small population of homes that go 

into communities. And, of course, the good news is that in most 

States out there now there are laws that—and we are working with 

State associations across the Nation—address this land-lease issue. 

So the consumers have a lot of options on using this home-only 

product, and they are finding good uses for that. 

Senator ALLARD. So we have rural areas where electricians are 

not necessarily readily available, or plumbers, the skilled trades 

that you need to build a home. I have tried building a home in a 

remote area and it is not easy because those people will not leave 

the more profitable urban areas to go into those areas. But you are 

saying these are family farms or family ranches or some family 

owned property, and they take a section of it and decide they want 

a home on it. They keep it within the family, but allow one of the 

kids, for example, to just purchase a home and take, in this case 

it would be a consumer loan on that one home, and that is something that you do not frequently run into? 

Mr. CLAYTON. That is the most common loan—a home-only loan 

that does not have land. As you said, it is almost impossible to get 

an affordable site-built home out in a rural America, so manufactured housing is also great form of housing, and provides employment and labor for those people. 

Senator ALLARD. Any other comments? 

Mr. Jewell. 

Mr. JEWELL. What we find is that in rural areas people tend to 

own the land or a relative owns the land because the land is inexpensive. It is in the urban areas that we find the majority of the 

park placements, and that is where the tenure problem is going to 

lead to a lack of stability. 

Requiring an affidavit or a lease demonstrating long-term control 

of the land, a lease from the aunt or from the parent saying, ‘‘The 

owner of the home has a right to leave this home here for 5 to 10 

years,’’ is not going to impact those transactions. However, it will 

protect the consumer who buys a home on a month-to-month lease 

in a city, or in a year-to-year lease, and find out that the park 

owner was not willing to give them a 5-year lease. The homeowner 

may have planned on staying in that park for 10 years, for 20 

years, but if they do not have stability of tenure, they should know 

that up front. The FHA should know that, because that is going to 

increase the risk of default. 

Mr. CLAYTON. Could I make a comment? 

Senator ALLARD. Mr. Clayton. 

Mr. CLAYTON. With all due respect, since lending money beginning in 1972, we found that the grandparents do not look favorably 

on giving the kids guaranteed access to leave the home there for 

an extended period of time. I am afraid that you are suggesting a 

hindrance to this program that will stifle homeownership. 

Senator ALLARD. I guess this a question I have. You may have 

some families where it is a good choice, some families where it is 

13

a bad choice, and why would you exclude everybody, including 

those families for which it is a good choice? I guess that is the 

question that comes up at this particular point in time. 

Mr. Jewell. 

Mr. JEWELL. Thank you, Senator. We want them to be able to 

demonstrate that it is a good choice for them, and if FHA’s loan 

is at the whim of the grandparents, the FHA should know that. Because the way that these loans are structured with the high loan 

to value, the equity builds very slowly, and it may be that the equity in the home will not cover the cost of moving that home to another location for 5 to 10 years. In that case, the consumer may be 

better off saying, ‘‘Repossess the home, because it is going to cost 

me $5,000 to move it, but I only have $100 in it or I only have $500 

in it.’’

Senator ALLARD. Mr. Clayton. 

Mr. CLAYTON. May I address that? 

Senator ALLARD. Yes. 

Mr. CLAYTON. This bill has the financial management belts and 

suspenders that if HUD finds a lender where the loans are not performing well—they can cut that lender off, they can raise the insurance premiums. This bill is absolutely crafted so that it will ensure 

reasonable loan performance. 

Senator ALLARD. My time has expired. Go ahead, Senator Reed. 

Senator REED. Thank you very much, Mr. Chairman. 

Secretary Montgomery, just as a point of departure, FHA does 

not collect data on defaults on this title, do they? 

Mr. MONTGOMERY. That is correct, Senator. We do not at this 

point. Right now, we only pay a claim on the back end, and even 

then, sometimes the lender has to jump through hoops for us to 

even approve paying a claim. 

Senator REED. Does that point to a more aggressive review by 

FHA of this program in terms of getting the data on defaults? 

Mr. MONTGOMERY. Yes, Senator. There are some parts of the 

Title I that could better mirror Title II, again, with the ultimate 

goal we think of having tighter underwriting, and a guarantee payment of a claim, which you do not have right now, we can drive 

down the cost of the loan. 

Senator REED. Historically, there is a higher rate of default on 

these types of arrangements than on the usual real estate transaction, and I think we have all, again, returned consistently to this 

notion that leased land is a factor that might prompt this. Repossessions seem to be higher. Has any one at GAO or anyone else 

done an actuarial study about the likely effects of the reform proposals in terms of the FHA insurance fund? 

Mr. MONTGOMERY. Senator, I am not aware of a GAO study looking at that, but you are absolutely right. As referenced earlier, the 

claim rate on these types of loans has been higher than it has been 

on a traditional Title II program. But I would say though, certainly 

as the volume has diminished through the years, so has the claim 

rate, and it is at its lowest level in many years. 

Senator REED. But I presume from these efforts to reform the 

legislation, and also the huge demand for affordable housing, that 

the hope is that if this legislation is done properly, that the volume 

of FHA Title I loans on manufactured homes will increase dramatiVerDate 0ct 09 2002 17:59 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00017 Fmt 6633 Sfmt 6633 S:\DOCS\37830.TXT SBANK4 PsN: KEVIN
14

cally. And if there are structural problems already or actuarial 

problems already embedded in the program, we should know about 

those. So, I think it might be helpful if your Department would 

look actuarially at the impact of the reforms, so we start off with 

what we are going to put in place and grow is sound. 

Let me ask a question to the whole panel, and that is the Ford 

Foundation sponsored a report by Harvard’s Joint Center in 2002. 

One of the conclusions about manufactured homes, unless sited on 

owned-land, manufactured housing will have little or no potential 

to increase in value faster than the rate of inflation. 

What mechanisms in the reform proposal will there be to protect 

a consumer from owing more than the value of the home? Why 

don’t I start with Mr. Jewell and work my way down here. 

Mr. JEWELL. One benefit that is in the bill is the language requiring appraisal, if properly implemented. One of the major historical problems with personal property loans was that consumers 

were buying the home for more than it was worth. There was no 

appraisal standard. There was an invoice standard. That meant 

from day one the consumer was under water. So that is a positive. 

A danger especially for new homes, is that new manufactured 

homes have an unwrapping effect. It is a new manufactured home. 

A consumer signs a contract and it becomes a used manufactured 

home, and a used manufactured home is worth a lot less than a 

new manufactured home. Why would a consumer buy a used one 

when there is a new one just like it on the dealers’ lot? 

This drop in value, makes a high loan-to-value product, especially dangerous for new homes. My calculations show that if you 

are allowing 95 percent loan to value, and 2.2 percent of the insurance fees to be financed into the principal, and another 2 percent 

to come from outside sources, a consumer might have as little as 

three-quarters of 1 percent equity at the time of signing. If that 

transition from a new home to a used home drops the value more 

than three-quarters of a percent, that consumer is going to start 

out under water. 

Senator REED. Let me ask a follow up on the appraisal. Would 

that appraisal include not just the structure itself, but the land, 

the lease, the value of the lease? Is that what this appraisal will 

look at? 

Mr. JEWELL. That is what we would ask to be implemented. It 

is very important that the appraisal looks at the installed location 

value, not the value on the dealer’s lot. The value after it has been 

installed on someone’s land and inspected, including looking at its 

location and rent. But the implentation is something you would 

have to ask Mr. Montgomery. 

Senator REED. Can you respond? Then I will finish up. 

Mr. CLAYTON. Certainly. The premium being paid up front that 

Mr. Jewell referenced is exactly how FHA Title II, as I understand 

it, does that today as well. One way to control the equity, of course, 

is by limiting the loan term, so home-only loans are limited to 240 

months, which is a good idea. These homes, mostly we are talking 

about now, costs $40, $50, $60 thousand. So that helps. 

And the Harvard Study talked about, which is something the industry supports and is becoming very common, where the homeVerDate 0ct 09 2002 17:59 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 S:\DOCS\37830.TXT SBANK4 PsN: KEVIN
15

owners actually take over ownership of their land-lease community, 

and that is something that we support wholeheartedly. 

We are here today because in the 1990’s lending from Wall 

Street came too easy, and now the rating agencies have basically 

just cut off all capital to this industry, and thus the need for why 

we are here today. 

And just exactly as you said, an important part of this is the resale market. That is the one component, as this program gets some 

traction, that will be helped the most—the financing of used homes 

out there so the consumer can sell the home rather than defaulting. 

Senator REED. Thank you. 

Mr. Frenz, a quick comment, and then Secretary Montgomery, 

then I think the Chairman. 

Mr. FRENZ. Sure. We believe that FHA’s more stringent underwriting standards would help prevent certain abuses. We would 

significantly increase net worth requirements for lenders in our 

program to increase the likelihood that we would attract more reputable lenders. We would also monitor relationships between lenders and dealers to minimize abuses. We would require lenders, for 

example, to track delinquencies by dealer. We would also plan to 

develop more rigorous field review procedures, and we would conduct extensive due diligence on the officers and directors of companies applying to be in our program to minimize those types of 

abuses. 

Senator REED. Thank you. 

Mr. Secretary, quickly. 

Mr. MONTGOMERY. Yes. I would just agree absolutely with Michael’s observation. Also, FHA is one of the most transparent loan 

processes around. As you know, we have a punitive side to us as 

well with our Inspector General and GAO. By providing the mortgage insurance premium, we can drive the cost of loans, and certainly, the ironclad guarantee on the front end, which you do not 

have today, that will pay a claim, we are just saying everything 

would line up to make it more affordable, and we think decrease 

the likelihood that you would have a family getting upside down 

on a loan that you see today. 

Senator REED. Thank you, Mr. Chairman. 

Senator ALLARD. I have a question now for you, Mr. Montgomery. 

In your testimony, you testified that HUD proposes increasing the 

premiums, and then removing the premium caps, rather than just 

increasing the caps. Why do you suggest removing the caps entirely? This is a concern with the industry, and can we come to a 

point where you would accept caps at a certain level that would be 

acceptable maybe to HUD, somewhere along the line, is my question? 

Mr. MONTGOMERY. Yes. Thank you, Chairman Allard, and that 

is certainly something we could discuss more at length on the surface. We are not opposed to setting some cap, whatever that cap 

may be, but we are, at FHA, on both the Title I and Title II side, 

looking to do what the conventional market has done for some 

time, and that is price a product more commensurate with a particular borrower’s risk. Right now, the one-size-fits-all does not fit 

all any more. You have some lower risk borrowers paying more of 

16

a premium, they should be. And the worse side of that, sir, is we 

have many families who are unable to use FHA because their FICO 

scores are lower. 

And we think by being able to make the risk more flexible, if you 

will, sir, we can price it to the risk and also avoid some of the problems we may have had in the last 15 or 20 years. 

Senator ALLARD. Do you think the 2.25 percent cap is insufficient 

in the bill? 

Mr. MONTGOMERY. Mr. Chairman, I would like to go back and 

crunch the numbers, but what we are looking at on the Title II side 

is somewhere around 3 percent, but bear in mind, sir, these are 

caps. Under the risk-based pricing structure, other families could 

pay lower as well. 

Senator ALLARD. Thank you. 

This is for Mr. Frenz. In your testimony you mentioned that the 

current portfolio based system provides a moral hazard for lenders. 

Can you, please, elaborate on this, and do you believe that the proposed change to a loan-by-loan insurance system will eliminate the 

moral hazard? 

Mr. FRENZ. Thank you, Mr. Chairman. It does create a moral 

hazard up until the point that the cap is reached, because as lenders have losses in portfolios and claims against the FHA fund, they 

can increase that 10 percent by adding loans at the margin. So up 

until the point where the cap is reached, it creates incentives for 

lenders to add more loans, which results in more risk to FHA and 

ultimately to Ginnie Mae. 

I believe that a loan-by-loan insurance program and the elimination of a cap would largely eliminate that problem. 

Senator ALLARD. So you support eliminating the cap? 

Mr. FRENZ. I do. 

Senator ALLARD. In our negotiations, I mean the industry has a 

problem in eliminating the cap. If there was to be a certain cap 

level in the bill, is there a level there where you think would be 

acceptable to you? 

Mr. MONTGOMERY. Mr. Chairman, I could give you a number 

today, but——

Senator ALLARD. You suggested 3 percent. 

Mr. MONTGOMERY. Three percent is what we are looking at on 

the Title II side, but we will certainly continue talking with the industry. I think they have been very open in their discussions of 

that matter. 

Senator ALLARD. Mr. Frenz. 

Mr. FRENZ. I would not be able to give you an answer today. I 

would have to discuss it with other people at Ginnie Mae and with 

Mr. Montgomery. 

Senator ALLARD. Very good. Okay. Mr. Clayton, in your testimony you described the manufactured housing that a family could 

purchase under the existing loan limits. What kind of home would 

a family be able to purchase under the proposed loan limits in the 

bill? And for those who might think that the increases are too high, 

would you not agree that even under the new limits the home 

would still be reasonably modest? 

Mr. CLAYTON. Yes, it would be. I suggest that the proposed limits 

are far from being too high, with material prices over the last 5 

17

years having increased north of 30 percent for home builders. And 

so the limits that are proposed will work, and tying them to inflation is a necessary ingredient. But it would be a home that, obviously, if it has smaller square footage, then it could include some 

of the very nice aesthetic changes, which also help in the resale 

value, which is a very important component. It would also allow us 

to start financing homes with steeper-pitch roofs, things like that 

which would serve the consumer very, very well. I hope I addressed 

your question. 

Senator ALLARD. I think you did. You are saying over what period of time was there a 30 percent increase in construction? 

Mr. CLAYTON. Over 5 years. 

Senator ALLARD. Over 5 years? 

Mr. CLAYTON. We have seen them increased by 30 percent. 

Senator ALLARD. So you think about 6 percent a year then on the 

average over 5 years, you end up with a 30 percent increase. 

Mr. CLAYTON. Correct. 

Senator ALLARD. And is this for manufactured housing, or is it 

just housing in general? 

Mr. CLAYTON. I suspect that it is all housing in general. I speak 

to manufactured housing only. 

Senator ALLARD. Okay. In manufactured housing though, there 

are certain advantages to manufacturers as opposed to construction 

that would help keep the cost of the product down. Do you still 

think that is as high as for the overall industry? 

Mr. CLAYTON. I do because the material prices I am referring to 

are lumber, gypsum, steel. 

Senator ALLARD. That is before you can start construction? 

Mr. CLAYTON. Correct. 

Senator ALLARD. Senator Reed. 

Senator REED. Thank you very much, Mr. Chairman. 

One of the other issues that has come up is the arrangements between the dealers and the financiers, and sometimes these arrangements are too close for comfort. I think that Mr. Frenz referred to 

this in his comments. But could the panel respond to what steps 

you think should be taken to ensure that there is an appropriate 

relationship, and that these lending arrangements are not abusive 

or predatory? 

Some of the things that I have heard about are requirements for 

either large downpayments or some type of arrangements on what 

the dealer sells the property, that locks the person in. Mr. Clayton, 

why don’t you start? 

Mr. CLAYTON. Thank you for the opportunity, because there have 

been major changes in the manufactured housing industry, particularly over the last 3 years, starting really with the law change that 

you supported, I assume, the law change in 2000, which mandated 

that all of our homes, by last year, have to be inspected at the setup and delivery. So we are insuring a proper installation of homes. 

I might add that there is not a single manufactured home built 

after 1994, in any of the past hurricanes in the last 3 years, that 

was severely damaged. So it is a very sound, strong product that 

we are building today. 

Lenders’ best practices is something, as an industry association, 

that we enacted. Homebuyers will be able to choose those lenders, 

18

if they so desire, that follow the lenders’ best practices—those 

which do all the verifications of the customer data and the retailer 

information that has been provided to them. 

Another industry program is, truth in invoicing—we call this 

TIPS. Every manufacturer has to stamp the invoice, saying that it 

as reflected, and there is total transparency as to what is in the 

invoice. 

There is a community attributes program now that is out there, 

that gives the lender the ability to see what kind of community it 

is lending into—looking at rent increases, and other kinds of 

things, and rate each community before they lend into it. 

So we think all these major initiatives really address some of the 

negatives that were brought up in manufactured housing in the 

late 1990’s. 

Senator REED. There are some other issues you might comment 

on, nonrefundable deposits in certain cases, and also a fee structure that discourages buyers from looking around for other lenders, 

rather than the approved lender. Is that commonplace now? 

Mr. CLAYTON. It is not commonplace at all in the industry today. 

And we continue to work with State associations to address issues 

like that. 

Senator REED. Mr. Jewell, any comments on these issues or the 

lending arrangements underlying the transaction? 

Mr. JEWELL. Our experience in Texas: In 2001, 2002, and 2003, 

Consumers Union reviewed complaints at the Attorney General’s 

Office, and at the Texas Department of Housing and Community 

Affairs, which regulates the manufactured housing community in 

Texas. We uncovered a pattern of nonrefundable deposits, difficulty 

for consumers to shop around for lending products. Unfortunately, 

the tying between lenders and manufacturers means that a consumer often does not have the bank on their side. 

In a conventional home where you have a bank going into a real 

estate transaction, the bank does not want that loan to fail. With 

the manufactured homes—no one is saying that the manufactured 

home lender wants that loan to fail, but they are going to make 

money off of both the loan and the home. There is additional incentive for them to sell that home even if the financing in the transaction is a little questionable. 

Senator REED. Mr. Frenz, and then Secretary Montgomery, and 

then I will relinquish my time. Any comments further? 

Mr. FRENZ. My only further comment in addition to what I said 

earlier was that we would work with FHA to see what they are 

doing to monitor those relationships, and we would augment our 

field review efforts to help them out. 

Senator REED. Thank you. 

Secretary Montgomery, final word. 

Mr. MONTGOMERY. Yes, sir. If this goes forward, we would certainly establish new and tighter underwriting guidelines for lenders to follow, including a preendorsement of review, similar to what 

we do on Title II. And I would also say again that FHA is one of 

the most transparent loan products out there. 

Senator REED. Thank you. 

Thank you, Mr. Chairman. 

19

Senator ALLARD. I guess I am the bottom-line guy, so we will get 

to the ultimate question. If Senate bill 2123 or similar legislation 

is enacted into law, does Ginnie Mae intend to lift the current moratorium on the program and new lenders? 

Mr. FRENZ. If the bill in its current form were to pass, Mr. Chairman, I believe we would. 

Senator ALLARD. Thank you. 

We are running out of time here. I think there will be more questions I think I want to present to the panelists, and I think maybe 

Senator Reed might have a few more questions he would like to 

send out. If you could respond within 10 days, the Committee 

would appreciate that. 

I want to thank you for taking time to come to testify before the 

Committee. I know it is not easy to get away from your personal 

schedules to be here, but your testimony is important. It is important for us to understand the impacts of legislation and the impacts 

of what is happening in the current program. So, I thank you all 

for being here to help inform us. 

With that, I will go ahead and adjourn the hearing. Thank you. 

[Whereupon, at 4 p.m., the hearing was adjourned.] 

[Prepared statements and response to written questions supplied 

for the record follows:] 

20

PREPARED STATEMENT OF BRIAN D. MONTGOMERY

ASSISTANT SECRETARY FOR HOUSING—FEDERAL HOUSING COMMISSIONER

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

APRIL 4, 2006

Chairman Allard, Ranking Member Reed, and distinguished Members of the Subcommittee, thank you for the opportunity to testify on S. 2123, the FHA Manufactured Housing Loan Modernization Act of 2005. At your pleasure, I would like to 

submit my formal comments. 

Title I is the Nation’s oldest Federal housing loan insurance program, enacted in 

1934 as part of the National Housing Act to permit the Federal Housing Administration (FHA) to insure home improvement loans. In 1969, Congress expanded Title 

I insurance to cover loans on manufactured housing. 

Under Title I, FHA insures loans on manufactured housing that does not qualify 

as real estate. Title I borrowers may finance the purchase of a manufactured home 

and a land lot, or they may finance the manufactured home-only, or a land lot-only. 

Title I financing does not require the homebuyer to own the land where the manufactured home is located and the home does not have to be affixed permanently to 

the land. FHA-approved lenders make Title I loans to eligible borrowers from their 

own funds and FHA insures the lenders against loss. 

Secretary Jackson and I support the concepts presented in the bill introduced by 

Chairman Allard and agree that the Title I program is in need of reform. In fact, 

the Administration’s FHA reform bill includes provisions very similar to those proposed by the Chairman. Certainly, both bills are intended to expand affordable 

housing opportunities and drive down consumer costs, while limiting risks to the 

Federal Government. HUD officials have discussed the proposed changes with industry leaders and manufactured home lenders and I think we are all in agreement 

that the changes will accomplish these objectives. 

The need for a viable Title I program is clear. Nearly 22 million Americans, or 

8 percent of the population, live in manufactured housing. If enacted, this legislation 

will expand the financing options for families seeking to purchase these types of affordable homes. In many areas of the country, particularly rural areas, manufactured housing is the only forms of quality affordable housing available, so it is sensible to have a strong FHA program to help families buy these homes at a fair price. 

At an average cost of $58,100 (as of 2004) a manufactured home is typically more 

affordable than ‘‘bricks-and-mortar’’ homes, which costs on average $201,418, excluding the price of the land. In addition to value, today’s manufactured homes offer 

new homebuyers many of the property features they desire: Buyers can choose 

vaulted ceilings, walk-in closets, fireplaces, state-of-the-art appliances, spacious floor 

plans, and cost effective ‘‘Energy Star’’ upgrades. With growing public awareness 

and advances in technology, manufactured housing is well positioned to be a major 

provider of quality affordable housing in the years ahead. 

If enacted, the program changes proposed by the Allard bill and the Administration’s FHA reform legislation will modernize the Title I manufactured home program in a manner that will encourage more lenders to participate in the program. 

Additional competition will drive down the financing costs for prospective homebuyers while improving the program’s long-term financial soundness. 

Both bills remove the key impediments that drove lenders away from Title I for 

the last several years and both propose to increase loan limits to levels that reflect 

today’s manufactured home prices. Both bills also propose that the limits be indexed 

to permit annual adjustments to keep them in line with actual home costs. 

The most important change proposed in both bills is the conversion of Title I from 

a portfolio insurance program to an individual loan insurance program, similar to 

FHA’s Title II programs. This change will eliminate the most problematic statutory 

limitation of the program today—the restriction on insurance claim payments to 10 

percent of the value of lender’s loan portfolio. 

The outdated portfolio insurance structure, which results in uncertainty and higher costs, was the primary reason Ginnie Mae curtailed securitization of Title I manufactured home loans in the early 1990’s. With portfolio insurance, lenders are not 

guaranteed coverage against loss and subsequently price their loans for additional 

risk. The higher loan costs, in turn, increase the likelihood of borrower default. 

With additional default risk, but insufficient coverage, the losses grew to 

unsustainable levels in the 1990’s and Ginnie Mae pulled out of the program. The 

elimination of this outdated insurance model will encourage Ginnie Mae to reconsider participation in the secondary Title I securities market. 

HUD’s proposal is also consistent with S. 2123 in that it retains the 90 percent 

coinsurance feature of the Title I program, whereby FHA covers only 90 percent of 

21

the lender’s losses. Co-insurance provides lenders with additional incentive to perform high-quality underwriting to protect themselves from loss. As such, the coinsurance feature will help ensure only responsible lenders participate in the program. 

Finally, HUD agrees with and offers in its own legislation a provision stating that 

the insurance coverage should include a guarantee to lenders that their claims will 

be paid. We believe a loan-level insurance model that includes such an ‘‘incontestability clause,’’ guaranteeing insurance coverage, will help drive down the pricing 

for these loans, again by reducing the risk of loss to the lenders. 

This risk will be transferred to FHA. To address this, should either the Allard 

or larger FHA reform bill be enacted, FHA plans to implement additional risk control measures, including:

• collection of detailed borrower, property, and loan-level data into the insurance 

systems to improve tracking and performance measurement; • development of more rigorous underwriting standards appropriate for this unique 

property type; • establishment of up-front review procedures when loans are submitted for insurance; and • enhancements to lender monitoring and enforcement of program compliance.

I mentioned at the outset of this testimony that HUD’s bill is slightly different 

from S. 2123. One of the differences is the provision regarding insurance premiums. 

The Senate bill mimics the existing Title II coverage, with a 2.25 percent up-front 

premium cap, and retains the exiting Title I annual insurance premium with a 1.0 

percent cap. Our version, however, allows FHA flexibility in setting premiums at a 

level appropriate to ensure adequate cashflow to cover losses. 

For both the Title I and Title II programs, HUD is proposing a risk-based insurance premium structure. Combining a risk-based premium charge with appropriate 

up-front underwriting standards, HUD will be able to operate the program in a 

more financially sound manner and, over time, at a negative credit subsidy rate, as 

proposed in the Allard bill. Although both bills propose that FHA operate the program in a self-sustaining manner, without the risk-based premium structure, it is 

unlikely FHA could operate the program at ‘‘break-even.’’ FHA needs flexibility to 

set the premiums at appropriate levels to assure adequate cashflow to cover costs. 

This flexibility is particularly important because nonreal estate manufactured 

housing does not appreciate in value. Defaults are more likely and recoveries are 

lower with this type of property. FHA will bear this additional risk and must have 

the ability to set premiums at levels commensurate with that risk. 

Another difference between the two bills is that the Administration’s proposal retains FHA’s existing Title I claims procedures, whereby lenders dispose of properties 

and then seek compensation from FHA. S. 2123 proposes that HUD dispose of properties conveyed by lenders in exchange for insurance benefits, similar to Title II. 

HUD has never performed this type of disposition of personal property, as opposed 

to real estate. FHA has neither the infrastructure nor the expertise to introduce 

such a practice and, thus, our legislation would retain the existing Title I property 

disposition process. 

While we look forward to working with the Subcommittee to find common ground 

on these issues, I want to make clear that HUD supports the underlying reforms 

proposed in this legislation. As FHA Commissioner, I believe that modernization of 

the Title I program is long overdue and that the FHA Manufactured Housing Loan 

Modernization Act proposes appropriate modifications to make Title I a viable, affordable financing option once again. 

In closing, I want to thank you, Chairman Allard, for introducing legislation to 

improve Title I and for holding this important hearing. I appreciate the interest of 

the Subcommittee in the program and in expanding access to a critical form of affordable housing for hundreds of thousands American families. Thank you for providing me the opportunity to testify today. 

—————

PREPARED STATEMENT OF MICHAEL J. FRENZ

EXECUTIVE VICE PRESIDENT & CHIEF OPERATING OFFICER

GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GINNIE MAE)

U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

APRIL 4, 2006

Thank you, Chairman Allard, Ranking Member Reed, and distinguished Members 

of the Subcommittee. My name is Michael Frenz and I am the Executive Vice PresiVerDate 0ct 09 2002 17:59 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00025 Fmt 6621 Sfmt 6621 S:\DOCS\37830.TXT SBANK4 PsN: KEVIN
22

dent and Chief Operating Officer of the Government National Mortgage Association 

(Ginnie Mae). I have held this position since October 2004. 

I appreciate having the opportunity to testify before you on S. 2123, the FHA 

Manufactured Housing Loan Modernization Act of 2005. 

Section 2 of this bill (Findings and Purposes) states, ‘‘The dramatic reduction in 

the use of the Title I program is due primarily to certain structural problems of the 

program, which have resulted in refusal by Ginnie Mae to accept new participants 

into the program . . . .’’ It is my intention today to provide a thorough description 

of the structural features of the current Title I program that exposed Ginnie Mae 

to significant risks, and ultimately led to Ginnie Mae’s decision to curtail its exposure to these risks by imposing a moratorium on the approval of new issuers of securities backed by Title I loans. 

Ginnie Mae’s Mission 

Ginnie Mae’s mission is to support affordable housing by linking local housing 

markets to global capital markets. We do this by guaranteeing mortgage-backed securities (MBS). Ginnie Mae securities carry the full faith and credit guarantee of 

the U.S. Government. Ginnie Mae has securitized more than $2.4 trillion in MBS, 

helping more than 32 million low- and moderate-income families become homeowners. Additionally, we meet our mission without directly buying, selling, or 

issuing securities. Instead, we guarantee MBS issued by private financial institutions. The Ginnie Mae full faith and credit guarantee assures investors they will 

receive timely payments of principal and interest on their securities. 

A clear understanding of the nature of the Ginnie Mae guarantee—that is, that 

Ginnie Mae insures investor payments, not borrower mortgages—and the manner 

in which its business model limits exposure to credit risk is crucial to understanding 

the challenges we have encountered in our manufactured housing securitization program. 

Ginnie Mae’s securities are comprised of loans backed by single-family, multifamily, and manufactured housing units. These loans are individually insured or 

guaranteed by the Federal agencies with which Ginnie Mae partners—in the case 

of manufactured housing, FHA. 

The Ginnie Mae guarantee is activated only when the financial institution that 

issued the security fails to meet its obligation to make security payments to the investor. Because the loans are individually insured, this generally happens only 

when an institution fails. 

The existence of loan-level insurance coverage provided by other Federal agencies 

typically means that Ginnie Mae assumes minimal credit risk. When an issuer fails, 

Ginnie Mae steps in, assumes responsibility for the portfolio, and becomes subject 

to the same risks as the issuer, where losses are influenced by borrower credit risk, 

the value of the underlying collateral, and the time it takes to dispose of that collateral. As a result, like any other issuer, Ginnie Mae’s risk exposure is largely dependent on the nature of the insurance or guarantee provided at the loan level. 

Ginnie Mae began securitizing manufactured housing loans in the early 1970’s. 

At the peak of the manufactured housing program, Ginnie Mae guaranteed approximately $3 billion worth of securities, and had about 30 to 40 active issuers. Between 

1986 and 1988, however, 12 Ginnie Mae issuers with $1.8 billion of securities 

backed by Title I loans defaulted, resulting in Ginnie Mae assuming their portfolios 

and suffering significant losses. 

One of the actions Ginnie Mae took to mitigate this risk was to impose a moratorium on the acceptance of new issuers into the manufactured housing program in 

1989. This moratorium helped limit Ginnie Mae’s subsequent losses; since 1989 only 

10 more issuers with about $500 million of securities defaulted. To date, Ginnie Mae 

has experienced $514 million of losses on these defaulted portfolios. 

Title I Structural Features 

Why were Ginnie Mae’s losses on these portfolios so severe? A number of structural features unique to the Title I program exposed Ginnie Mae to risks that, for 

all intents and purposes, could not be mitigated. These features include:

• The existence of limits on the amount of FHA insurance per lender; 

• The existence of coinsurance between FHA and the lender; 

• The underwriting process for Title I loans; and 

• The calculation for the payment of claims by FHA.

While each of these features serves to mitigate FHA risks, the collective impact 

exposed Ginnie Mae to significant risk, rendering its losses more severe and less 

predictable. I would now like to take the time to discuss each of these features in 

greater detail. 

23

First, Title I requires FHA to limit its loss exposure by capping lender insurance 

coverage at 10 percent of all originations and purchases. After FHA pays the lender 

claims in an amount equal to the 10 percent cap, it will pay no additional claims. 

In other words, insurance is not provided on a per loan basis, but rather is limited 

to a defined percentage of each lender’s portfolio. Tying the maximum amount of 

insurance coverage available to lenders to the volume of loans originated, created 

a classic moral hazard problem: As lenders’ portfolios experienced losses, they were 

incented to make more loans in order to increase the amount of claims payments 

for which they were eligible. And, when the claim limits were reached on troubled 

portfolios, lenders had little incentive to continue servicing portfolios and were more 

likely to stop making payments to security holders. Thus, Ginnie Mae sustained 

substantial losses when it assumed the portfolios of these lenders who had already 

exhausted their FHA insurance coverage. 

Second, Title I is a coinsurance program: At the loan level, FHA reimburses a 

lender for 90 percent of the loss, and the lender takes the remaining 10 percent of 

the loss. While coinsurance can decrease the incentive for lenders to make risky 

loans, it had the opposite effect when combined with the portfolio cap; coinsurance 

caused lenders to reach their caps, which in turn resulted in significant losses for 

Ginnie Mae. 

Third, Title I loans are registered for insurance, but are not endorsed. This means 

that, unlike for Title II loans, FHA does not review Title I loan eligibility for insurance coverage at origination. Instead, FHA reserves the right to contest the payment of a claim on a manufactured housing loan for up to 2 years after it has already paid the claim. Therefore, a lender has no assurance that a loan in its portfolio will be eligible for insurance and a claim will be paid. This differs from Title 

II single-family loans, where the insurance contract is deemed to be incontestable 

upon endorsement of the loan. While this is a prudent practice for FHA, to the extent that Ginnie Mae takes a defaulted portfolio, this feature exposes Ginnie Mae 

to potentially higher losses. 

Finally, the Title I formula for calculating FHA’s payment of claims limits the 

amount of the claim to the outstanding principal balance of the loan less the appraised value of the manufactured housing unit. Often the market value of the manufactured home is less than the appraised value. If the sales price of the manufactured housing unit falls short of the appraised value, the difference is the lender’s 

responsibility. This provision limits FHA’s exposure, but increases losses suffered by 

the lender—and by Ginnie Mae in the event of an issuer default. 

Taken together, these four structural features of the Title I program contributed 

to the significant losses experienced by Ginnie Mae. Today, the manufactured housing program has been almost completely wound down. 

There are now only four approved issuers in the Ginnie Mae manufactured housing program, with just one currently active. In 2005, only $9 million in new securities were issued, and the total amount of securities has steadily decreased to the 

point that, as of the end of 2005, there were only approximately $187 million outstanding. In addition, the total remaining balance of the manufactured housing 

portfolios that Ginnie Mae assumed due to issuer defaults has decreased to $53 million, of which $25 million is in the form of Ginnie Mae securities, and $28 million 

is in loans and repossessed manufactured housing units. 

Conclusion 

The structural features that I have discussed today made it impossible for Ginnie 

Mae to maintain a viable manufactured housing securitization program. To the extent that the Title I program is restructured, Ginnie Mae would consider lifting its 

current moratorium on the program and work with FHA to support this important 

product that helps many Americans achieve their dream of homeownership. 

Thank you for this opportunity to discuss Ginnie Mae’s experience with its manufactured housing securitization program, and I would be pleased to answer any 

questions you may have. 

—————

PREPARED STATEMENT OF KEVIN CLAYTON

PRESIDENT AND CHIEF EXECUTIVE OFFICER, CLAYTON HOMES, INC.

APRIL 4, 2006

Introduction 

Chairman Allard and Members of the Housing Subcommittee, my name is Kevin 

Clayton. I am the President and Chief Executive Officer of Clayton Homes, Inc. 

24

which is headquartered in Maryville, Tennessee. We are a national, vertically integrated modular and manufactured housing company owned by Berkshire Hathaway. 

Through our family of brands, we build, sell, finance, lease, and insure a full spectrum of affordable housing. Since 1972, we have been successfully originating and 

servicing manufactured homes loans, including FHA Title I loans. I am here today 

representing both the Manufactured Housing Institute (MHI) and the Manufactured 

Housing Association for Regulatory Reform (MHARR). Today’s manufactured homes 

have evolved dramatically over the past decade with home designs and floor plans 

that appeal to a growing number of American families. I respectfully request that 

this written statement be made part of the official hearing record. 

It is an honor to appear before you today to testify in strong support of S. 2123, 

the ‘‘FHA Manufactured Housing Loan Modernization Act of 2005.’’ This bill was introduced by Subcommittee Chairman Wayne Allard who was joined by full Committee Members Evan Bayh and Mel Martinez as original cosponsors. S. 2123 represents a bi-partisan effort to reform an important affordable housing program. The 

FHA Title I mortgage insurance program insures loans made by private lenders to 

finance the purchase of manufactured homes that will be placed primarily in landlease communities or private land. This program is targeted to benefit lower-income 

homebuyers to find adequate affordable housing who are particularly challenged 

with escalating material prices. 

Background 

The manufactured housing industry has gone from 376,000 building starts in 

1998 to approximately 145,000 in 2005. This represents a sixty percent (60 percent) 

decline in housing shipments and sales. The primary cause for this market contraction has been the loss of available financing for potential homeowners who apply 

for a manufactured housing loan. As a result, the industry has not been able to 

serve the housing needs of individuals and families of low- to moderate-income who 

want to purchase a home without the encumbrance of land or real estate. 

In the past, when credit availability became curtailed, the FHA Title I program 

provided much needed liquidity. In recent years, however, FHA Title I has not functioned as an ‘‘automatic stabilizer’’ in the marketplace. During the early 90’s, Title 

I insured over 30,000 loans per year. In each of the past 3 years, FHA Title I insured less than 10 percent of that amount, or less than two thousand (2,000) manufactured home loans per year. While Fannie and Freddie are permitted under their 

charters to purchase and to create a secondary market for ‘‘home-only’’ loans, both 

GSE’s have not done so to date. The sole secondary market participant for Title I 

loans is the Government National Mortgage Association (Ginnie Mae). As described 

below, Ginnie Mae’s participation in this market has been extremely limited in recent years. 

Ginnie Mae, which facilitates the securitization of FHA loans, attributes the decline of Title I activity to certain ‘‘structural problems’’ which make it very difficult 

for it to recoup its losses when lenders go out of business. This does not happen 

with FHA Title II (real property) loans because under that program, insurance is 

set on a loan-by-loan basis. Ginnie Mae officials have stated that if these structural 

problems (especially the insurance issue) can be addressed as submitted within, 

they would end the moratorium on certifying new lenders and would help facilitate 

the securitization of more Title I loans. This would add much needed liquidity to 

the program. 

Current System 

The existing loan limits are set by statute and have not been increased since 

1992. Ninety-five percent of the loans insured under Title I are ‘‘home-only’’ transactions. Such loans are also commonly referred to as personal property or chattel 

loans. 

The current loan limit set by Congress in 1992 for ‘‘home only’’ loans is $48,600. 

This amount is woefully inadequate to meet the average loan needed to purchase 

a manufactured home and it remains one of the primary reasons for the recent inactivity in the Title I program. The current loan threshold would limit homebuyers 

to a single-section manufactured home which, on average, would be less than 1,000 

square feet in living space and lack many of today’s aesthetic improvements to manufactured housing. Such cramped living quarters are hardly conducive to family living. 

One of the bill’s purposes is to move the current weak and inefficient Title I insurance system for manufactured housing toward the stronger and more mainstream 

Title II insurance system. One of the weaknesses of the current system is that the 

underwriting standards are very vague and leave too much discretion to individual 

lenders. FHA does not review lender underwriting today—the insurance is autoVerDate 0ct 09 2002 17:59 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00028 Fmt 6621 Sfmt 6621 S:\DOCS\37830.TXT SBANK4 PsN: KEVIN
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matic with few financial safeguards. The insurance premiums are also too low which 

further exacerbates the fiscal soundness of this program. 

Another weakness is that, unlike Title II where every loan is fully insured, under 

Title I FHA maintains a separate account for each lender for future claims equal 

to 10 percent of the principle balance of all Title I loans that lender originates. For 

example, if a lender originates $1 million in Title I manufactured home loans, only 

$100,000 is insured by FHA—the remaining $900,000 in not covered. Once that account becomes depleted due to foreclosures and insurance payouts, there is no insurance coverage remaining to pay future claims for loans that particular lender had 

originated. If additional loans end up in foreclosure and if the lender has inadequate 

loan reserves, Ginnie Mae (which guarantees the timely payment of principal and 

interest to investors) must compensate investors for principle and interest payments 

owed to them. During the 1990’s, this insurance system created large losses for 

Ginnie Mae and resulted in it refusing to issue certificates (eagles) to all but three 

manufactured housing lenders. 

Proposed System 

The new system proposed under S. 2123 would require that each loan be insured 

separately, as with Title II today. The bill would also institute a new system of financial ‘‘belts and suspenders’’ whose purpose is to provide a negative credit subsidy 

for taxpayers, which the legislation mandates. Specifically, the bill would: Require 

HUD to increase the upfront insurance premium and address underwriting standards; strengthen downpayment requirements; increase lender capital requirements; 

and maintain the current requirement that lenders coinsure 10 percent of each insurance loss. The current lender ‘‘account system’’ would disappear and each loan 

would be insured by FHA, similar to the Title II program today. 

Under S. 2123, each party to the transaction would be responsible and held accountable for loan performance: The borrower would be required, of course, to keep 

monthly payments current; HUD would be responsible for increasing insurance premiums and addressing underwriting standards as market conditions dictate; and 

the lender would be accountable for 10 percent of the losses on loan defaults. 

As mentioned, the loan limits have not been increased since 1992. S. 2123 would 

remedy this by instituting a one-time loan limit increase of 40 percent pegged to 

the current limits. While this might sound like a large increase, in reality it is not 

when you take into account the fact that production costs for the construction of 

manufactured homes have increased by over 50 percent since 1992. The new loan 

limits would be indexed for inflation going forward under the same consumer price 

index (CPI) used for other FHA programs. 

The sum total of these reforms would result in lower-income families across the 

country being able to utilize the Title I program to purchase larger homes. In addition, the new financial safeguards will allow FHA to insure every loan. This should 

increase Ginnie Mae participation with more lenders being certified to issue Ginnie 

Mae securities. More securitizations would open up the secondary market for these 

loans—hopefully adding much needed liquidity and resulting in lower interest rates 

and fees. The ultimate beneficiaries, of course, would be low- and moderate-income 

homebuyers who will be able to enjoy more living space at a lower cost of financing. 

Independent Studies In Support of Reform 

Over the course of the past 4 years, four independent housing studies have been 

performed which address manufactured housing—all of which support reform of the 

Title I program. Three of the reports focus exclusively on manufactured housing, 

and two reports focus entirely on FHA Title I. The relevant pages from these reports 

have been provided to the Subcommittee electronically as appendices to this written 

statement. I will briefly describe each report and its relevant findings below. 

The Millennial Housing Commission was a statutory bi-partisan commission established by Congress in 2000. The commission was charged with examining, analyzing, and exploring affordable housing programs in the United States and how 

they might be improved going forward. It submitted its report to this Committee 

in May 2002, as well as to the House Financial Services Committee and to the 

House and Senate Appropriations Committees. The recommendations contained in 

this report have served as a blueprint for housing legislation considered by Congress 

in subsequent years. 

The report specifically covers the credit crunch currently prevalent in the financing of manufactured homes on leased land. On page 81 of the report, the Commission highlights the problem and recommends that ‘‘FHA’s Title I and II programs 

be promoted and loan limits be increased; and Ginnie Mae approve more lenders 

as issuers/servicers, or instruct current issuers to make and service loans for manuVerDate 0ct 09 2002 17:59 Dec 06, 2007 Jkt 000000 PO 00000 Frm 00029 Fmt 6621 Sfmt 6621 S:\DOCS\37830.TXT SBANK4 PsN: KEVIN
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factured homes.’’ S. 2123 embodies the recommendations made in the Millennial 

Housing Commission report. 

Later in 2002, the Neighborhood Reinvestment Corporation in collaboration with 

the Joint Center for Housing Studies at Harvard University issued a report to the 

Ford Foundation. The report, dated September 2002, was entitled ‘‘Manufactured 

Housing as a Community and Asset Building Strategy.’’ One of the authors of this 

report is former FHA Commissioner William Apgar, Senior Scholar of the Joint Center for Housing. Mr. Apgar served as HUD’s FHA Commissioner from 1997–2001 

and has a unique perspective of the FHA Title I program as its former regulator. 

The Ford Foundation report points out that unlike the beneficiaries of multifamily 

programs, owners of manufactured homes who do not own the land upon which the 

home sits do in fact build home equity and accumulate wealth. This is due to basic 

principle pay down in their monthly payments. These homeowners also benefit from 

homeownership tax breaks—mortgage interest deductions and property tax deductions—which are not available to renters. These factors are pointed out on page 9 

of the report under the heading ‘‘Affordable Rental Housing.’’

Not surprisingly, the report mentions that land ownership is a key driver of home 

price appreciation. However, it goes on to say (top of page 9) that ‘‘the absence of 

land acquisition costs makes manufactured housing on leased land an affordable 

home ownership option to lower-income people.’’ The report notes that increased privacy, greater access to land, and reduced financing costs make owning a manufactured home on leased land a reasonable alternative to multifamily housing for lower 

income families. Under the heading ‘‘Limited Sources of Mortgage Capital’’ found on 

page 14, the report states that ‘‘FHA and HUD need to allocate more staff and resources to explore options for supporting this segment (that is FHA Title I) of home 

ownership.’’ S. 2123 embodies the recommendations made in the Ford Foundation 

report. 

In 2003, HUD began to explore reform of the Title I program. In an effort to research both the need and the methods to reform the program, it retained the services of an outside contractor, Frontline Systems Inc., to prepare a comprehensive 

program analysis. Frontline Systems submitted its report to HUD entitled ‘‘FHA 

Final Title I Business Process Improvement Report’’ in June 2003. This report found 

that the Title I program was in dire need of modernization and made several policy 

and operational recommendations to HUD including: Raising the Title I loan limits; 

modifying current underwriting guidelines; changing the insurance structure to the 

Title II insurance model; and increasing lender participation. S. 2123 embodies these 

specific recommendations made in the Frontline Systems report. 

As a follow-up to the Frontline Systems report, in 2004 HUD contracted for a second Title I study with another outside contractor, Information Engineering Services 

Inc (IES). This study was intended to drill down and build upon the Frontline Systems report by suggesting additional statutory, regulatory, and administrative 

(handbook) recommendations. IES submitted its report to HUD entitled ‘‘Title I Program Findings and Recommendations’’ in July 2005. Consistent with the findings 

of the earlier Frontline Systems report, the IES report made several recommendations for reform and modernization of the Title I program. These recommendations 

include: Changing the existing insurance structure to mimic the Title II structure; 

raising the loan limits and tying future increases to CPI; modifying underwriting 

standards; and updating the perception of manufactured housing and understanding 

the role it plays in affordable housing. S. 2123 embodies specific recommendations 

suggested in the IES report. 

All four reports outlined above not only make the case for Title I reform, but also 

each report contained specific suggestions for improving this program. As pointed 

out, S. 2123 is not an original body of thought. Rather, it contains the suggestions 

of independent public policy experts, academics, former Members of Congress, and 

Federal housing regulators who have studied this program and have concluded it 

is in dire need of reform. 

Conclusion 

As Members of this Subcommittee are well aware, the homeownership affordability crisis in the United States has reached epic proportions in recent years. Land 

appreciation has driven homeownership beyond the reach of countless low- and moderate-income homebuyers across the country. While the FHA Title I program is 

largely immune from these problems due to the absence of land from typical transactions, it is subject to problems of a different sort. The outdated insurance structure, inadequate financial controls, and artificially low loan limits have all conspired 

to atrophy this program. 

Congress, working together with HUD and the manufactured housing industry 

must reform this much needed program now. Material prices for home building have 

27

increased more than 20 percent in the past 5 years while the loan limits have remained unchanged since 1992. Implementing the necessary reforms outlined above 

will give lower-income homebuyers the opportunity to enjoy one of the most efficient 

forms of housing available today. 

—————

PREPARED STATEMENT OF KEVIN JEWELL

CONSULTANT, MANUFACTURED HOUSING PROJECT

ON BEHALF OF THE CONSUMERS UNION

APRIL 4, 2006

Thank you Chairman Allard, Ranking Member Reed, and Members of the Subcommittee. My name is Kevin Jewell. I am speaking on behalf of Consumers Union. 

We are pleased to have the opportunity to share with you our research on the manufactured housing industry as it relates to the FHA Manufactured Housing Loan 

Modernization Act of 2005. 

Since 2001, the Consumers Union manufactured housing project has been exploring a fundamental question: Does ownership of a manufactured home present families with the same benefits that puts conventional homeownership in a special part 

of the American Dream? Our answer: No. The promise of low-cost, factory-built 

housing all has been besmirched in real life by a market wrought with failure. 

Conventional homeownership allows families to invest in an asset that historically 

has presented fairly stable positive returns for families. Stability of tenure strengthens communities, and investment results have historically build assets for families 

of all income ranges. 

Why hasn’t manufactured homeownership had the same sweeping success? The 

sales and financing process is ripe with abuse and variable product durability, warranty service, and code enforcement that contribute to a buyer-beware marketplace. 

Land tenancy for home-only units can be tenuous, leaving consumers at the mercy 

of the whims of landlords. Over time, manufactured homes without land general 

lose value. (See Consumers Union’s ‘‘Raising the Floor, Raising the Roof’’ for further 

discussion of these challenges. This report is available online at: http://

www.consumersunion.org/pdf/mh/raising.pdf.)

The bill before you (S. 2123) lies at an uneasy nexus of policy interest. On one 

hand, it facilitates the sale of a product that has yet to overcome its significant market problems. The home-only loans allowed by the bill will put the many homeowners in a depreciating asset, on a long-term note, but with a short-term lot lease. 

In these cases, homeowners will find their investment lives at the whim of a landowner. Here, we find we are encouraging families to make a purchase without stability or investment potential. 

We cannot expect the benefits of community or asset accumulation in this situation. 

On the other hand, this bill, with modification, could facilitate an appraisal-based 

chattel product that the private market has failed to provide. Reasonable loans on 

true inspected, installed, appraised values would be an improvement on loans on inflated values that have been all to common over the last decade in this industry. 

But significant changes are needed for the potential benefits of this product to 

outweigh the problems in this industry. A purpose of these proposed changes is to 

bring stability to this marketplace. As an insurer, it is in the government best interest to bring stability to this market, but it is also in the public interest for FHA 

to avoid setting up borrowers for loans with a high probability of failure. A family 

with a failed loan is worse off then before the purchase. 

Consumers Union suggests that this program be altered to remove eligibility for 

home-only loans in situations where the homeowner cannot demonstrate control of 

the land upon which the unit sits. Without control of the land, the homeowner and 

the lender lie at the whim of the landowner, and invites loan failure. In high loanto-value loans such allowed under this program, equity builds slowly in a depreciating asset. Our analysis indicates that the equity balance in even the larger FHA 

Title I loans would be such that it would not be worthwhile for a consumer to spend 

the cost of moving a home for 5–10 years after purchase. If rent was increased unacceptably, or a park was closed, it could be in the consumer’s best interest to send 

the home back to the bank and walk away from the deal. This would also push most 

families to bankruptcy or and exit from the mainstream financial marketplace. 

Control of the land does not have to be ownership, although that is the most common and conventional path for control. Co-op ownership has had success in New 

Hampshire. Freddie Mac has experimented, although with limited success, with a 

28

‘‘leasehold’’ program. In the Freddie Mac program, buyers enter into a transferable 

lease that codifies rent increases and other rules for 5 years past the term of the 

loan. At minimum, FHA should require 5–10 year transferable leases for the homeonly loans it makes. Until the equity in the loan matches the relocation cost, the 

borrower and insurer are at whim of the landowner. 

Extending to FHA Title I insured personal property homeowners the consumer 

protections enjoyed by real-estate homeowners is another important opportunity to 

create stability in this marketplace. The stability these protections offer the real estate market are an important reason for the historical success of that market. 

Personal property loans are generally subject to State repossession rather than 

State foreclosure laws. Insured loan contract language could explicitly incorporate 

the right to cure and antideficiency balance language found in foreclosure statutes 

into insured loan contracts. RESPA protections, such as good faith estimate of costs 

and kickback prohibitions, would place Title I personal property retail installment 

contracts closer to par to real estate loans and rebuild trust in this market. 

The lot product in the Title I program has potential to benefit consumers by allowing them to escape a rental situation. The home and lot product offers little benefit over a Title II real estate loan, but properly implemented the home and lot 

product could expand lender options in limited situations. In manufactured housing, 

even more than in conventional housing, the details matter. It takes a good loan 

and purchase transaction for manufactured homes to have a chance for asset-building and a successful homeownership transaction. More detailed commentary on this 

and other language in S. 2123 have been submitted in my extended comments. 

But the lot and lot-and-home products are of secondary in this debate. Without 

additional protections insuring tenure and clean transactions, this program has the 

potential to facilitate, even incentive, further failed loans in the marketplace. 

29

RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED

FROM BRIAN MONTGOMERY 

Q.1. Manufactured homebuyers, who often have few resources and 

cannot afford to purchase a site-built home, are vulnerable to 

subprime lenders who charge excessive interest and predatory fees. 

How will S. 2123 allow FHA loans to compete with subprime lenders who offer relaxed underwriting standards?

A.1. ‘‘Relaxed underwriting standards’’ come with a price, and that 

is built into the interest rate and the fees associated with subprime 

lending. By contrast, S. 2123 modernizes the Title I manufactured 

housing program in such a manner that lenders will be less likely 

to need a subprime outlet for their manufactured housing lending 

activity. 

Several factors will make the FHA product especially attractive 

for lenders and consumers, including an assurance that FHA will 

pay insurance benefits in the event the borrower becomes unable 

to make payments. In addition, FHA will develop underwriting 

guidelines that are appropriate for this type of housing to reduce 

risk to the lenders, borrowers, and FHA. The projected reduced cost 

to the consumer, as well as the ease with which the loan officer 

and lender can qualify the borrower, translates into less need for 

the high interest rate subprime loan.

Q.2. Manufactured homeowners who finance with personal property loans do not have foreclosure protections. What safeguards do 

you foresee S. 2123 providing for these owners?

A.2. By modernizing and restructuring the Title I program for 

manufactured housing, FHA believes that a major component to 

foreclosures will be eliminated, that being the high interest rates 

typically associated with these loans. High interest rates create a 

vicious cycle: Borrower payments are excessive, thus increasing the 

likelihood of default and repossession, and lenders feel compelled 

to keep rates high to cover expected losses and collection difficulties. 

S. 2123, if enacted, should result in a substantial reduction in interest rates thus increasing affordability and reducing the likelihood of default. While S. 2123 in and of itself does not provide any 

additional safeguards to foreclosure, by establishing an individual 

loan review process and by FHA enhancing its underwriting requirements, it will result in a reduced likelihood of foreclosure by 

assuring that these borrowers are likely to be able to make their 

payments in a timely manner. 

RESPONSE TO WRITTEN QUESTIONS OF SENATOR REED

FROM KEVIN JEWELL 

Q.1. What safeguards could be added to S. 2123 to ensure that consumers of manufactured housing are protected from predatory 

lending practices, from owing more on their home than the home 

is worth, and from having to leave their homes due to an eviction 

on leased property?

A.1. Language can and should be added S. 2123 to protect new 

homeowners, and the FHA, from the factors in the manufactured 

housing marketplace that lead to high rates of loan failure in manufactured housing loans. Much of the testimony in support of 

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S. 2123 has focused on the successful outcomes that manufactured 

housing can offer buyers. It is important that greater attention is 

paid to the risks facing buyers insured under the FHA Title I program. It is these risks—equity stripping loan structures, repossession with deficiency balances, and tenuous tenancy—that increase 

the likelihood of loan failure for homeowners who choose home-only 

manufactured housing as their housing option. 

Loan failure hurts not only the families buying homes under this 

program, but also the program itself. Unfortunately, this program 

is structured as an insurance product, and insurance products only 

pay out in the worst outcomes. To fashion a successful program for 

both families and the insurer, it is specifically the ‘‘worst case’’ 

risks that lead to loan failure that have to be addressed. 

To address the threat to family stability posed by short-term 

lease structures, S. 2123 should add language specifically requiring 

the homeowner demonstrate 5–10 years of transferable control of 

the land upon which the unit does or will sit and directing FHA 

to include land control in underwriting standards for the loan. 

To address the threat to investment potential from predatory 

sales and lending practices, the closing process should demonstrate 

that consumers have had an opportunity to make an informed decision to enter into the purchase contract. Home-only loans are not 

considered real estate loans for the purpose of many statutory consumer protections. This allows the closings of these loans to sidestep important consumer protections, such as those contained in 

the Real Estate Settlement and Procedures Act (RESPA). Protections equivalent to those found in transactions covered by RESPA, 

such as requiring consumers receive a good faith estimate of costs 

5 days prior to closing, prohibiting lender kickbacks, and requiring 

third party closings should be required in loans eligible for FHA insurance. These protections reduce the opportunity for high pressure 

closings and increase the quality of the loans covered. 

To reduce the likelihood consumers will get caught ‘‘underwater’’ 

on a loan, owing more on the home than the home is worth, language should be added to S. 2123 specifically directing the appraisal standard to be based on the installed, inspected market 

value of the insured unit at the site of demonstrated control. Mr. 

Frenz’s testimony referencing GNMA’s experience that the market 

value of manufactured homes is less than the appraised value gets 

directly at past appraisals to reflect to market value of the home 

in its final location. The Loan-to-Value calculations underwriting 

the loan should be based on the market value of the actual home 

as installed, not a hypothetical home on a dealer’s lot. Implementing this standard requires more than a note from the owner 

stating the home is installed, as is all is required under the current 

Title I program. The home should be inspected and appraised by 

licensed professionals after installation. 

Language should also be added restricting the program to used 

units. This will provide two benefits: It will avoid the effect of 

‘‘unwrapping’’ depreciation on units covered under this program, 

(The ‘‘unwrapping effect’’ is the initial loss in value once a home 

is moved off the dealers lot and declared ‘‘used’’) and will reduce 

this effect for current homeowners by increasing the availability of 

credit in the second hand market. 

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Last, the 2.25 percent cap on the initial loan premium should be 

reduced, and by no means increased, as this capitalized initial loan 

premium eats directly in to the homeowners’ initial equity. If, despite this negative effect, any increases are made to the capitalized 

premium amount, it is imperative the entire capitalized premium 

is then included in the principle amount used in the 95 percent 

LTV calculation. Otherwise, the program will put all participants 

underwater from the very start, setting the loan up for failure. 

The goal of a successful homeownership program is not to increase homeownership in this country by putting families in loans 

with a high probability of failure; a successful homeownership program should place families in homes that provide an opportunity 

for stability and asset accumulation. While significant challenges 

prevent manufactured homes without land from offering these benefits to families, the changes to the program we have suggested 

here can improve the stability and investment value of homes 

bought with loans insured under the Title I program.