Federal Housing Administration: Agency Should Assess the Effects of Proposed Changes to the Manufactured Home Loan Program
Published: 2007-08-24T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Pending legislation to the Federal Housing Administration's (FHA) Title I Manufactured Home Loan program would increase loan limits, insure each loan, incorporate stricter underwriting requirements, and set up-front premiums. GAO was asked to review (1) selected characteristics of manufactured housing and the demographics of the owners; (2) federal and state consumer protections for owners of manufactured homes; and (3) the potential benefits and costs of the proposed changes for borrowers and the federal government. In addressing these objectives, GAO analyzed select Census data; researched federal laws and laws in eight states; interviewed local, state, and federal officials; and analyzed various scenarios that might affect Title I program costs.
section_title: What GAO Found
paragraphs: According to 2005 American Housing Survey data, most manufactured homes (factory-built housing designed to meet the national building code) were located in rural areas in southern states, and most were occupied by lower-income owners rather than renters. Although the market for new manufactured homes declined substantially from 1996 to 2005, buyers increasingly bought larger homes and placed them on private property rather than in manufactured home parks. In addition, some states are experiencing park closures, with the properties being converted to other uses. Overall, manufactured homes can be an affordable housing option, with monthly housing costs lower than for other housing types. Owners of manufactured homes generally have more consumer protections if their homes are considered real rather than personal property, but protections provided by laws in the states GAO examined vary. Consumer protections extending to lending and settlement processes for personal property loans are not as broad as those for real property loans (mortgages). Also, delinquent Title I borrowers can be subject to repossession or foreclosure, but the consumer protections for repossession are often less extensive than those for foreclosure. State laws give owners of manufactured homes on leased land varying levels of notice, protection, and compensation related to length of leases, rent increases, evictions, and park closures. According to some FHA and lending officials, potential benefits of the proposed changes for borrowers include loans big enough to buy larger homes and more financing as more lenders participate in the program. The program insured about 24,000 loans in 1990 but only about 1,400 loans representing $54 million in mortgage insurance in 2006. While the changes could benefit borrowers, according to FHA and the Congressional Budget Office, the potential costs could expand the government's liability. To gain an understanding of the effects of the proposed changes, GAO presented various scenarios. Although risk factors unique to manufactured home lending (such as placement on leased land) as well as commonly used predictors of loan performance (such as credit scores) are associated with default risk, these data were not available. Instead, GAO modeled different variations of borrower default risk and other factors (such as premiums and lender recovery) that were based on the experience of FHA loans to illustrate how variations in these key factors could affect potential gains and losses to FHA's General Insurance Fund. The analysis suggests that in all instances where borrowers had medium or high default risk, the fund would experience a loss. However FHA has not articulated which borrowers would be served, how the loans would be underwritten and priced under a risk-based structure, or collected data on credit scores and land ownership type. FHA explained that among other reasons, it had not done so because the Title I program was currently a low-volume program. As a result, the effects of the proposed changes are unclear.

section_title: Letter
paragraphs: Manufactured housing (factory-built housing designed to meet the  Manufactured housing (factory-built housing designed to meet the  Department of Housing and Urban Development’s (HUD) national building  Department of Housing and Urban Development’s (HUD) national building  code) provides affordable housing for approximately 17 million  code) provides affordable housing for approximately 17 million  Americans. Relative to other forms of housing (generally referred to as  Americans. Relative to other forms of housing (generally referred to as  site-built housing), a manufactured home can be more affordable,  site-built housing), a manufactured home can be more affordable,  particularly when a home is purchased without the cost of the land. In  particularly when a home is purchased without the cost of the land. In  such a purchase, the home generally is not titled as real property, but is  such a purchase, the home generally is not titled as real property, but is  considered personal property or chattel, which denotes property that is  considered personal property or chattel, which denotes property that is  movable and personal, such as an automobile or furniture. Consequently,  movable and personal, such as an automobile or furniture. Consequently,  lending for manufactured homes differs from other home lending because  lending for manufactured homes differs from other home lending because  prospective buyers can receive either a real estate or a personal property  prospective buyers can receive either a real estate or a personal property  loan.  loan.
Currently, the Federal Housing Administration (FHA) of HUD offers the  Currently, the Federal Housing Administration (FHA) of HUD offers the  only active federal loan guarantee program that includes an option for a  only active federal loan guarantee program that includes an option for a  “home-only” product; that is, a personal property loan for the purchase of  “home-only” product; that is, a personal property loan for the purchase of  a manufactured home without the land on which the home will be located.  a manufactured home without the land on which the home will be located.  However, FHA officials explained that the purpose of the Title I  However, FHA officials explained that the purpose of the Title I  Manufactured Home Loan Program (Title I)—to protect mortgage lenders  Manufactured Home Loan Program (Title I)—to protect mortgage lenders  against the risk of default through insurance or a guarantee—is not  against the risk of default through insurance or a guarantee—is not  currently being met because the current design of the program passes the  currently being met because the current design of the program passes the  majority of the insurance risk to the lenders who in turn charge borrowers  majority of the insurance risk to the lenders who in turn charge borrowers  higher interest rates. In addition, the lending market associated with  higher interest rates. In addition, the lending market associated with  manufactured homes has undergone significant changes over the last 15  years. Market growth in the 1990s was followed by a large number of  repossessions from 2000 to 2002. Because of the amount of origination  fees manufactured home lenders received, some lenders focused on  increasing sales volume to the detriment of assessing borrowers’  creditworthiness. As a result, officials and literature suggest that the  quality of the manufactured home loan pool began to deteriorate and less  creditworthy borrowers began to default on their loans, causing a high  number of repossessions (personal property is repossessed rather than  foreclosed). Subsequently, many lenders exited this market, resulting in a  decrease in the availability of private financing for manufactured homes.  Furthermore, loan volume generated through Title I declined by 94 percent  from 1990 to 2006, with 1,438 loans insured in 2006 representing $54  million in mortgage insurance.
In addition to the relative scarcity of financing for manufactured homes,  the owners of manufactured homes are in a unique position relative to  other homeowners in terms of the federal and state consumer protections  applicable when they buy, finance, and occupy the housing. That is,  whether the manufactured home is considered real or personal property  affects what consumer protections apply and what recourse is available.  For example, consumer and tenant protections, particularly at the state  level, are especially pertinent for owners of manufactured homes who lose  leases to their underlying ground because they lived on land sold for  commercial or other residential development. Some owners of  manufactured homes found that their homes lost most or all of their value  in such situations. And, according to state and local officials, the loss of  manufactured housing parks, particularly in growing metropolitan areas,  has exacerbated the shortage of affordable housing.
Legislation has been introduced to make changes to the Title I program  that may increase the demand for and availability of loans for  manufactured homes. With the potential expansion of the program, you  asked us to review the proposed legislation and consumer protections  available for owners of manufactured homes. Specifically, this report (1)  describes selected characteristics of manufactured housing and the  demographics of the owners, (2) compares federal and state consumer and  tenant protections for owners of manufactured homes, and (3) describes  the proposed changes to FHA’s Title I Manufactured Home Loan program  and assesses potential benefits and costs to borrowers and the federal  government.
To determine selected characteristics of manufactured housing and the  demographics of the owners, we analyzed Census data from the  Manufactured Housing and American Housing Surveys. Specifically, we  used Manufactured Housing Survey data from 1996 through 2005 to  examine changes in the manufactured housing industry, such as the  number of homes placed and the size of these homes. We relied on 2005  American Housing Survey data to provide information on the  demographics of the manufactured homeowner. We did not use earlier  years of American Housing Survey data because the sample of  manufactured homes in the survey changed in 2005. However, in both the  Manufactured Housing and American Housing Surveys, data about the  ownership of the land (that is, owned or leased) on which the home is  placed are limited. We assessed the reliability of the Manufactured  Housing and American Housing Surveys by reviewing information about  the data, performing electronic data testing to detect errors in  completeness and reasonableness, and interviewing knowledgeable  officials regarding the quality of the data. We determined that the data  were sufficiently reliable for the purposes of this report. To compare  federal and state consumer and tenant protections available for owners of  manufactured homes, we researched relevant federal laws and laws in the  eight states (Arizona, Florida, Georgia, Missouri, New Hampshire, North  Carolina, Oregon, and Texas) that we selected for our review. The eight  states were selected based on a combination of factors including the  volume of FHA Title I loans in the state from 1990 through the first quarter  of 2007; the concentration of manufactured housing as a percentage of  housing units in the state; information from our interviews of industry and  consumer officials; and previous studies conducted on manufactured  housing. In each state, we conducted semistructured phone interviews  with the state regulator, representatives of the manufactured housing  industry, and a consumer group, such as the state manufactured  homeowners association. To assess the potential costs and benefits of the  proposed changes to the Title I program, we conducted a literature review;  interviewed FHA officials, FHA lenders, Ginnie Mae officials, and officials  from federal and other lending programs, such as Fannie Mae, Freddie  Mac, U.S. Department of Agriculture Rural Housing Service, and the  Department of Veterans Affairs; and reviewed policies and procedures  from programs that provide financing for manufactured homes to  determine what additional factors, such as default risk and the location of  the manufactured home, could be considered to mitigate risk for lending  for manufactured housing. To illustrate potential costs and other effects of  the proposed legislation, we conducted an analysis of different scenarios  of potential loan performance that incorporated these additional factors.  We used this approach because we did not have sufficient data on the  credit scores of FHA borrowers or the location of the homes to perform a  more in-depth analysis. Appendixes I and II contain additional information  about our methodology. We conducted our work in Washington, D.C.,  Atlanta, and Chicago, from October 2006 through June 2007 in accordance  with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: Manufactured homes differ from site-built homes based on how they are  constructed, classified, financed, and appraised, with many differences  resulting from the home’s status as either real or personal property.  Manufactured home parks have a variety of ownership models, ranging  from sole to corporate ownership and including cooperative and nonprofit  ownership as well. FHA’s Title I program dates to 1969, where it has  served primarily low-income individuals and the majority of the lending  has been geographically concentrated.
subsections: section_title: Differences between Manufactured, Modular, and Site-Built Homes
paragraphs: The National Manufactured Housing Construction and Safety Standards  Act of 1974 set a national building code for the construction of  manufactured homes, known as the HUD Code, which became effective on  June 15, 1976. For the purposes of this report, we define manufactured  homes as factory-built housing units designed to meet the HUD Code.  Manufactured homes can be single-wide, double-wide, or multi-wide (see  fig. 1). The federal standards regulate manufactured housing design and  construction, strength and durability, transportability, fire safety, and  energy efficiency. Units constructed and completed prior to June 15, 1976,  are not considered HUD-approved and generally are considered mobile  homes.
Every home built to the HUD Code is identified with a red metal tag,  known as the HUD certification label. This distinguishes manufactured  homes from modular homes. Both types of homes are factory-built, but  modular home “modules” are then assembled on a site. And, unlike  manufactured homes that are federally regulated under a national building  code, modular homes must meet the state, local, or regional building  codes where the home is to be sited. Finally, site-built housing is  constructed on a lot and must meet local building codes (see table 1).
section_title: Manufactured Homes Can Be Considered Personal or Real Property, with Corresponding Differences in Financing and Appraisals
paragraphs: Unlike site-built homes, which are titled as real property and usually  financed through a mortgage, a manufactured home may be financed as  personal property or as real property. When a homebuyer purchases a  manufactured home without tying the purchase to land and does not title  the home as real property, the home is generally considered personal  property, or chattel, which denotes property that is movable and personal,  such as an automobile or furniture. Private sources—such as national  consumer-finance companies and manufactured home lending specialists  who work directly with manufactured home dealers and also through FHA  Title I approved lenders—provide home-only or personal property  financing, which is more akin to a consumer loan such as an automobile  loan than a mortgage. Typically, these loans have higher interest rates than  mortgages due to factors such as quick credit approval and their  availability to those with marginal credit histories. To begin the process, a  customer submits a credit application to the manufactured home lending  specialist, who may or may not be affiliated with the dealership. The credit  application also may be sent to a local bank. The lender reviews the  applicant’s credit and makes a decision on whether to approve a loan.  Manufactured homes not considered real property do not undergo market- based appraisals. Instead, they undergo a loan-to-invoice appraisal, where  the manufacturer’s certified invoice, in effect, substitutes for an appraisal.
In contrast, when a manufactured home is attached to the underlying land  by a permanent foundation and the home and the land are treated as a  single real estate package under state law, the home is generally  considered real property and borrowers can obtain conventional real  estate mortgages, which include conventional and government-assisted  mortgage financing obtained through traditional mortgage lenders. Home  and land financing for manufactured homes is similar to conventional  mortgage lending for site-built housing. Manufactured homes that are  financed using a conventional real estate mortgage undergo an appraisal  that factors the location into the appraised value and also includes  comparable prices of manufactured homes.
section_title: Ownership Types of Manufactured Home Parks
paragraphs: Manufactured homes can be placed on either private property where the  homeowner typically owns the land or in a manufactured home park. In a  manufactured home park, also known as a mobile home park or a land- lease community, owners of manufactured homes pay rent for the land  underneath the homes in addition to the loan payments they make for the  units (the homes). The park owner typically provides sewer, water,  electrical systems, landscaping, and maintains the roads and other  common areas.
Manufactured home parks have a variety of ownership models. Investors,  ranging in size from small family operations to large conglomerates that  own several properties across the country, own most of the manufactured  home parks. Tenants of these parks may or may not have a lease and have  no control over rent increases. According to officials we interviewed, in  states such as Florida, California, and New Hampshire, resident-owned  communities are more prevalent; that is, park tenants collectively  purchased their community by forming either a for-profit or nonprofit  cooperative corporation. Cooperative ownership allows residents to  control the land by buying memberships or shares in the corporation and  have more control over membership dues increases. Another ownership  model involves a land trust, typically run through a nonprofit organization,  in which the nonprofit owns the land and ensures against the possibility of  sale or foreclosure of the land.
section_title: Title I Manufactured Home Loan Program
paragraphs: FHA first insured loans for manufactured housing in 1969, under a  program that came to be known as the Title I Manufactured Home Loan  Program. The program was created to reduce the risk to lenders through  insurance or a guarantee and encourage lenders to finance manufactured  homes, which had traditionally been financed as personal property  through comparatively high-interest, short-term consumer installment  loans. Under Title I, FHA can guarantee loans for manufactured homes, for  manufactured homes and the property on which they are located, or for  the purchase of a manufactured home lot. FHA insures Title I  manufactured home loans under the General Insurance Fund, which is  supported by lenders’ insurance premiums (currently an annual premium  of 1 percent, based on the initial loan amount). Since 1998, three lenders  have originated the majority of Title I loans.
Almost all of Title I loans are for the manufactured home-only loans rather  than for home-and-land or land-only loans. In 2005, FHA Title I  Manufactured Home lending accounted for only 2.8 percent of the  personal property loan market; conventional lending accounted for the  remainder. According to data from FHA, from 2004 to mid-2007, 66 percent  of FHA Title I borrowers were 34 years or younger compared with 2.7  percent who were 65 years or older. From 2004 to mid-2007, the majority  (73 percent) of the borrowers had a monthly income from $1,000 to $3,000  (or approximately $12,000-$36,000 annually). From 1990 to 2005, the  majority of FHA Title I lending has been in southern states. Twenty states,  primarily in the South, Southwest, and the Midwest, received more than 85  percent of the FHA Title I loans (see fig. 2).
FHA’s Insurance Operations Division administers the Title I program, as  well as a property improvement program. The majority of the staff and  budget allocations are for the property improvement program. In fiscal  year 2006, the division had a staff of nine and a total budget of $1.1 million,  approximately $350,000 of which supported the manufactured home loan  program.
section_title: Manufactured Homes Were More Likely to Be Located in Rural Areas in the South, Owned by Lower- Income Individuals, and Cost Less Than Other Types of Housing
paragraphs: Available data on geographic and demographic characteristics of  manufactured homes and their owners indicate that most manufactured  homes were located in rural areas of the South and were occupied by  lower-income earners who owned, rather than rented, the homes. The  market for new manufactured homes declined significantly from 1996 to  2005, but homes that were purchased were larger in size and more often  placed on private property. Although limited data were available on the  number of manufactured home parks, regulatory, industry, and consumer  officials from seven of the eight states in which we conducted interviews  told us that manufactured home parks were closing because rising land  values were driving redevelopment. Housing costs for manufactured  homes were lower than costs for other housing types; however, the costs  of moving manufactured homes were relatively high and options for  placing homes in new locations were few, which affected owners’  mobility.
subsections: section_title: The Majority of Manufactured Homes Were Found in Rural Areas, Mainly in the South, and Owned by Low-Income Earners
paragraphs: Manufactured homes were located in every state, but were most often  located in rural areas. According to 2000 Census data, manufactured  homes were more concentrated in rural areas, particularly in the South  and desert Southwest, as a share of total housing units (see fig. 3). In 2005,  according to data from the American Housing Survey, approximately 6  percent of occupied homes in the U.S. are manufactured homes. The  majority of the occupied manufactured homes (68.5 percent) were located  in rural areas, while 31.5 percent were found in suburban areas and central  cities. State, industry, and consumer officials in more than half of the  states we reviewed also told us that manufactured homes were more likely  to be located in either rural or suburban parts of their states.
Compared regionally, manufactured homes represented a larger share of  occupied homes in the South than in other areas of the nation. For  instance, 10 percent of occupied housing in the South consisted of  manufactured homes, compared with 6 percent in the West, 5 percent in  the Midwest, and 2 percent in the Northeast (see fig. 4). Overall, in 2005, 57  percent of occupied manufactured homes were located in the South, 19  percent in the West, 17 percent in the Midwest, and 7 percent in the  Northeast.
Our analysis of 2005 American Housing Survey data showed that more  occupants of manufactured homes were owners than renters (see fig. 5). A  majority (79.5 percent) of those living in manufactured homes owned their  homes, compared with 17.4 percent who rented their manufactured  homes.
Although those who lived in manufactured housing were more likely to  own their homes, they tended to have lower annual incomes (see fig. 6).  More owners of single-wide and double-wide homes earned less than  $49,999 compared with owners of site-built homes, who were more likely  to earn $50,000 or more. For example, in 2005, of all owners of single-wide  homes, 15.1 percent earned $10,000 or less annually and 23.6 percent  earned from $10,000 to $19,999. In comparison, 6 percent of owners of site- built homes earned $10,000 or less and 8.3 percent earned from $10,000 to  $19,999.
Almost half of all owners of manufactured homes earned less than $30,000  in 2005 (see fig. 7). More specifically, 49.4 percent of owners of  manufactured homes earned this amount compared with 23.4 percent of  owners of site-built homes. Officials we interviewed from six states told us  that owners of manufactured homes were more likely to be low-income  individuals. Apartment renters also were proportionally lower-income  than owners of site-built homes, with 56.8 percent earning less than  $30,000.
section_title: Fewer, but Larger, Homes Were Sold and Placed on Private Property, but the Number of Manufactured Home Parks Is Unknown
paragraphs: The total number of new manufactured homes sold decreased from 1996  to 2005. According to Census data from the Manufactured Housing Survey,  332,000 new manufactured homes were sold in 1996 compared with  118,000 sold in 2005, a net decrease of 64.5 percent. California and Florida  had the highest number of new manufactured home units sold in 2005, a  change from 1996 when North Carolina and Texas reported the highest  number sold. According to officials that we interviewed, several factors  may have contributed to the decrease in manufactured home sales, such as  lower interest rates available for site-built homes, the decrease in available  financing for manufactured homes due to consolidation experienced in the  industry, and a large number of repossessions that flooded the market  with units and increased the supply of manufactured homes. For example,  as a result of the decrease in financing options for manufactured homes,  industry officials explained that manufacturers lowered production of  manufactured homes and instead built more modular homes, because  more financing options were available. Modular homes can often be built  in the same factory as manufactured housing but are not required to meet  the HUD Code.
Although consumers purchased fewer new manufactured homes in 2005  than in 1996, according to the Census data from the Manufactured Housing  Survey, they bought more double-wide or multisection homes. In 2005, 76  percent of the manufactured homes purchased were double-wides or  larger, compared with 51 percent in 1996 (see fig. 8). However, FHA data  shows 82 percent of the loans originated through FHA’s Title I  Manufactured Home Loan program for fiscal years 2005 and 2006 were for  the purchase of single-wide homes. Officials we interviewed attributed this  trend to FHA loan limits that were too low to enable borrowers to  purchase larger, multisection homes using guaranteed loans.
Manufactured homes were more likely to be placed on private property.  From 1996 to 2005, more new manufactured homes were placed on private  property than in manufactured home parks, even though placements  overall (in both parks and private property) decreased since 1996.
According to data from the Manufactured Housing Survey, in 1996, 229,790  new manufactured homes were placed on private property compared with  88,420 homes placed inside a manufactured home park. In 2005, 80,757  manufactured homes were placed on private property and 28,850 were  placed inside a manufactured home park (see fig. 9). Because FHA does  not collect placement data, it is unclear where manufactured homes  purchased with FHA Title I loans were located—on owned or leased land.  However, FHA officials told us that, based on their review of lender  insurance claims, most of the Title I loans are for manufactured homes on  leased land.
Similarly, officials we interviewed from five states reported that more  placements were occurring on private property than in manufactured  home parks. The officials cited a variety of reasons why new  manufactured homes were more likely to be placed on private property.  First, the lack of financing available for manufactured homes to be placed  on leased land decreased the likelihood of units being placed in a  manufactured home park. For example, one official stated that the lack of  manufactured home financing resulted in more manufactured homes being  placed on private land because of the increased availability of financing  for homes that are considered real property. Second, the increase in the  size of manufactured homes to double-wides or multisection could prevent  the homes from fitting into park spaces designed for smaller units. Third,  both industry and consumer officials suggested that the quality and style  of new manufactured homes had improved, allowing them to blend in with  other site-built homes on private property. Developers have created  affordable housing opportunities by using manufactured homes in infill  lots located in urban areas or subdivisions. For example, in Seattle, a  community development corporation used manufactured homes to create  affordable single-family and town homes in a development called Noji  Gardens. In Kentucky, Frontier Housing, an affordable non-profit housing  developer, built affordable housing communities using a combination of  manufactured, modular, and site-built homes (see fig. 10).
section_title: Variability of State Requirements Makes It Difficult to Use State Data to Determine the Number of Manufactured Home Parks
paragraphs: Data were not available on the number of manufactured home parks  because states define and license them differently (see fig. 11). For  example, the definition of a manufactured home park in New Hampshire is  a parcel of land that accommodates two or more homes; however, in  Florida, certain provisions apply to manufactured home parks with 10 or  more homes. Moreover, most states do not require manufactured home  parks to be licensed; this is typically done at the local level. As a result,  data on the number of manufactured home parks in each state and at the  national level are limited. Anecdotally, several officials we interviewed  suggested that the creation of new manufactured parks was uncommon,  with few parks being developed since the early 1980s. The officials  suggested that local zoning restrictions prevented manufactured home  parks from being built and that localities often preferred to promote other  land use options to attract development with greater potential to raise the  tax base. Officials from most of the states that we reviewed told us that  most manufactured home park closings were caused by rising land prices  and subsequent pressure to redevelop the site.
Although anecdotal data indicate a number of manufactured home parks  have closed, the extent to which closures have occurred is unknown.  Through a database search of national and local newspapers, we found  closures had occurred in 18 states between May 2005 and May 2007. In  some cases, other types of housing (such as condominiums, town homes,  and single-family homes) were built on the former park sites, while in  other cases the parks were converted to commercial use. A few parks also  were converted from investor-owned parks to resident-owned parks. In  some instances, local municipalities tried to curb the number of closures  by placing a moratorium on park owners selling to developers.
section_title: Costs of Living in a Manufactured Home Were Lower Than for Other Home Types, but High Costs of Moving and Few Placement Options Limit Mobility of Homes
paragraphs: Manufactured homes can be more affordable than other housing types.  According to 2005 American Housing Survey data, monthly housing costs  for manufactured homes generally were lower than for site-built homes  (see fig. 12). More than half of the owners of manufactured homes (54.7  percent) had monthly housing costs from $100 to $499. In comparison, a  little more than a quarter (27.4 percent) of owners of site-built homes had  monthly housing costs from $100 to $499.
The costs of moving manufactured homes can be high, and, according to  state, industry, and consumer officials we interviewed, the cost-prohibitive  nature of moving manufactured homes was one reason why owners  moved them infrequently. Officials explained the price could range from  $3,000 to $25,000. According to officials, a variety of factors influence  moving costs, including distance of the move and the size of the home. In  addition, moves involve set-up and dismantling costs, such as utility and  other work to prepare the land. Several officials suggested that  homeowners, particularly those on fixed incomes, could not afford the  cost of moving their manufactured homes because they did not have the  financial means to do so. As discussed later, in cases of park closures,  some states have a relocation fund and, sometimes, property owners or  developers might provide some funds for displaced residents to move their  manufactured homes, assuming the displaced residents can find a place to  move.
section_title: Owners of Manufactured Homes Have More Consumer Protections If Homes Are Considered Real Rather Than Personal Property, and Protections Provided by States Vary
paragraphs: Borrowers with loans for real property are generally entitled to a broader  set of protections under a federal law governing the loan settlement  process than borrowers with personal property loans. For instance,  borrowers taking out loans for real property receive uniform settlement  statements, as well as escrow statements. Additionally, although state law  for situations of foreclosure (real property) and repossession (personal  property) varies, consumer protections for foreclosure are generally  broader than for repossession. Finally, tenant protections—involving  issues such as the length of leases for land, requirements for notice and  frequency of rent increases, notice of eviction, and park closures—vary  across the eight states we reviewed, as did state aid for displaced residents  of parks that closed.
subsections: section_title: Fewer Federal Protections Apply to Loan and Settlement of Personal Property Than Real Property
paragraphs: Generally, borrowers with personal property loans are entitled to fewer  consumer protections under federal laws than borrowers with real  property loans. Under the Truth in Lending Act (TILA), borrowers  (including Title I borrowers) who purchase homes using personal property  loans receive certain disclosures. For instance, creditors generally are  required to provide the amount financed; the finance charge and the  finance charge expressed as an annual percentage rate; the number,  amount, and due dates or periods of payments; and the provisions for new  payment, late payment, or prepayment. The disclosures are intended to  make borrowers aware of the cost of the loan and policies for paying the  loan, so that lenders cannot charge arbitrary rates or implement policies  that are not disclosed to the borrower.
Borrowers who take out loans for the purchase of real property are  entitled to additional protections under the Real Estate Settlement  Procedures Act (RESPA), which is intended to ensure that consumers  receive information on the nature and costs of the real estate settlement  process and are protected from unnecessarily high settlement charges  caused by certain abusive practices. RESPA also protects Title I borrowers  or other buyers of manufactured homes if their federally related mortgage  loans are secured by land on which a manufactured home sits or on which  a manufactured home will be placed within 2 years. Borrowers are entitled  to receive a good faith estimate of settlement costs within 3 days of  submitting a loan application. At settlement, RESPA requires a uniform  settlement statement that shows all charges in connection with the  settlement both before and at the time of the settlement. RESPA also  requires an initial escrow statement that itemizes the estimated taxes,  insurance premiums, and other charges expected to be paid from the  escrow account in the first year. RESPA generally prohibits kickbacks  and unearned fees for settlement services and charges for the preparation  of certain documents. Additional disclosure requirements—an annual  escrow statement that summarizes deposits and payments and a servicing  transfer statement if the loan is transferred to a different lender—apply  after the loan is settled.
section_title: States Generally Provide More Protections for Borrowers in Foreclosure Than Repossession; However, Federally Insured Borrowers Are Entitled to Additional Protections
paragraphs: State law generally provides more consumer protections in connection  with foreclosures of real property than in connection with repossessions  of personal property; however, borrowers in certain federally insured loan  programs receive additional protections. Depending on state law and the  mortgage contract, the two most common methods of foreclosure are  judicial foreclosure and nonjudicial foreclosure by power of sale. The  level of protections to the homeowner in case of a foreclosure varies by  state.
All states let the homeowner redeem the mortgage by paying off the total  outstanding debt before the sale. However, only some states let a  homeowner cure a default by paying the installments due and the costs to  reinstate the loan prior to the resale of the home. Some states may allow  the homeowner time to redeem the property from the purchaser, which  often is the lender, after the foreclosure sale by paying the purchase price  for the home, plus related costs and interest. For example, in North  Carolina, a homeowner has 10 days to redeem the property after the  foreclosure sale.
Personal property loans typically are subject to repossession rather than  foreclosure. As with real property, the procedures can be judicial or  nonjudicial. Generally, creditors use judicial action procedures to  repossess manufactured homes. The Uniform Commercial Code, a model  code adopted by states in various forms, also authorizes a secured party,  upon default, to take possession of the collateral without judicial  process—self-help repossession—if that can be done without breach of  the peace. Because it may be difficult to avoid breaching the peace when  repossessing manufactured homes, this process is not likely to be used  often with manufactured homes. Time frame and notice requirements for  repossession can be less stringent than the corresponding requirements  for foreclosures. For example, the Uniform Commercial Code does not  prevent a creditor from immediately accelerating the note and  repossessing the collateral; however, some states do impose restrictions  on acceleration of repossession. Of the eight states we reviewed, five have  provisions in place that permit acceleration of repossession in certain  transactions only when the borrower is in default or in breach of the  agreement or when contract terms permit it under certain conditions. In  addition, some state statutes provide a right to cure a default prior to the  acceleration or repossession of a manufactured home and for other  consumer transactions in certain cases.
However, Title I Manufactured Home Loan borrowers are entitled to  additional protections under FHA regulations. For instance, lenders may  not begin the process of repossession or foreclose on a property securing  a Title I loan in default unless the property has been serviced in a timely  manner and with diligence and reasonable and prudent measures have  been taken to get the borrower to bring the loan account current. Title I  borrowers, like borrowers in certain other federally-insured loan  programs, are entitled to receive written notice of their default. For Title I  borrowers, this notice includes a description of the lender’s security  interest, a statement of the nature of the default and the amount due, a  demand upon the borrower to either cure the default or agree to a  modification agreement or a repayment plan, and a statement that if the  borrower fails to either cure the default or agree to a modification or a  repayment plan within 30 days of the notice, the maturity of the loan is  accelerated and full payment is required. Further, for federal home loans  that HUD, the Department of Veterans Affairs, and Rural Housing Service  guarantee, a lender cannot start foreclosure proceedings for a default in  payment until at least three full monthly installments are past due.
section_title: States Give Manufactured Homeowners Varying Levels of Notice, Protection and Compensation Related to Length of Leases on Land, Rent Increases, Evictions, and Park Closures
paragraphs: Tenant protection issues affecting owners of manufactured homes include  the length of the leases for land, rent increases, requirements for eviction,  and park closures. We analyzed state laws in eight states and found  varying written lease requirements (see fig. 13). For instance, five of eight  states have provisions for written lease requirements. The terms range  from any amount of time agreed upon by the landlord and tenant to a  minimum of 2 years. However, officials in some states with whom we  spoke suggested that enforcing this requirement was difficult. Notice of  rent increases range from 60 to 90 days; however, some states do not have  notice requirements on rent increases, such as Georgia, Missouri, North  Carolina, and Texas. States also qualify the rent increase provisions in  varied ways. Arizona provides that rents generally can only increase upon  renewal or expiration of the lease and the owner has to give 90 days  notice. New Hampshire requires 60 days notice to raise rents but is silent  on the number of times the rent can increase in a given year. Industry and  consumer officials suggested the lack of ability to control monthly  payments created additional risk for both lenders and borrowers.
Unlike owners of site-built homes, owners of manufactured homes living  on leased land can be subject to eviction for nonpayment of rent or  noncompliance with terms in lease agreements. Additionally, nonpayment  of rent can be a signal that the homeowner is behind on loan payments as  well. All states that we reviewed require good cause for eviction; however,  the amount of time that the affected party has to cure the cause for the  eviction (that is, to bring the late rent payments current) ranges from 7 to  30 days from receipt of notice. Failure to cure an eviction for an owner of  manufactured home on leased land could require the homeowner to move  from the manufactured home park. However, as mentioned earlier, such a  move may be cost-prohibitive.
Homeowners also can be forced to move because parks close. Notice  requirements for those residents that had to move for this reason vary  from 120 to 545 days in the states we reviewed (see fig. 14). But the states  we reviewed also have a range of tools to aid the displaced owner of a  manufactured home, such as offering the park residents the right of first  refusal (the first opportunity to bid on the purchase of the park) and also  offering relocation funds or tax credits for displaced residents. For  example, one of the eight states we reviewed offers residents the right of  first refusal. However, although Arizona, New Hampshire, and Oregon do  not have a right of first refusal law, the states do have laws that provide  notice of the park sale and time in which to prepare a bid. In New  Hampshire, state law requires both the park tenants and state financing  agency receive notice when a manufactured home park is sold. The New  Hampshire Community Loan Fund then works with the park tenants to  form a nonprofit cooperative in which the tenants would own both the  land and their homes. Three states we reviewed have a relocation fund or  tax credit for displaced residents (Arizona, Florida, and Oregon). Some  interviewees suggested that in some park closures, especially those with a  lot of publicity, the developer or buyer of the land would partially  compensate the displaced residents.
Although a few states offer relocation funds for displaced manufactured  home residents, officials from all states we reviewed cited potential  barriers in finding a place to relocate the homes, such as a lack of  vacancies in nearby parks, age requirements that park owners or  municipalities place on units, and costs associated with moving and  relocating homes. For instance, many parks will not allow homes built  before 1976, and localities in some states may have laws prohibiting  placement of homes that are more than 5 or 10 years old. Further, in states  such as Florida, wind zone requirements for certain areas may prevent the  relocation of a home not rated (certified) to withstand winds of certain  speeds. In addition to costs, officials also cited potential damage to the  home as a barrier to movement.
section_title: More Information Is Needed to Determine the Impact of Proposed Changes to the Title I Program
paragraphs: Legislative proposals to change the Title I program would increase loan  limits; insure each loan made; incorporate stricter underwriting  requirements; and establish up-front premiums and adjust annual  premiums; but the potential effects of the changes on the program and the  insurance fund are unclear. According to some FHA and industry officials,  the potential benefits for borrowers include larger loans with lower  interest rates to buy larger homes. Also, increased access to financing for  borrowers could occur since more lenders would be more likely to  participate in the program because individual loans could be insured.  Industry officials also identified several factors unique to manufactured  home lending, such as the decreased ability of borrowers to build equity,  the location of the home (owned or leased land), and the cost of recovery  to the lender after defaults that can increase the risks of manufactured  home lending. To illustrate the effects of the proposed changes, we  developed an approach that used variations of unique risk factors  associated with manufactured home lending, as well as commonly used  predictors of loan performance, such as credit scores, to illustrate default  scenarios. Our analysis suggests that loans for homes on leased land and  to borrowers with poor credit have greater risk of default. And, in all  instances where borrowers had medium or high default risk, we show the  fund experiencing a loss. However, FHA has not yet assessed risks  associated with the proposals or detailed changes to its underwriting  requirements. The agency also has not yet collected data needed to help  assess risks such as credit scores and land type. FHA officials explained  that it had not done so because the Title I program was low-volume and  because they were unsure if the legislation would pass. FHA officials said  that they chose to devote their resources to changing the much larger Title  II program. As a result, the effects of the proposed changes to the Title I  program are unclear.
subsections: section_title: Proposals to Change the Title I Program Would Increase Loan Limits, Insure Each Loan Made, Incorporate Stricter Underwriting Requirements, and Set Premiums
paragraphs: Several bills introduced in Congress from 2005 to 2007 detailed proposed  changes to the Title I Manufactured Home Loan program, but the majority  of the bills contained similar provisions. For example, all would increase  the loan limits of the program and index them annually. In the latest bill  that passed the House in May 2007, the loan amount for a home-only loan  would increase from $48,600 to $69,678. For the land-only loan, the loan  limit would increase from $16,200 to $23,226 and for combined home and  land loans, the loan limit would increase from $64,800 to $92,904.
All but one of the bills would require a change to the mechanism that FHA  uses to insure against its insurance risk. Currently, FHA accounts for its  insurance risk by insuring only a portion (10 percent) of a lender’s Title I  Manufactured Loan portfolio. For example, if a lender’s portfolio in a given  year totaled $1,000,000, FHA’s guarantee to the lender would not exceed  $100,000. The proposed legislation removes the portfolio cap and insures  each loan on an individual basis. However, the current risk-sharing  mechanism on individual loans between FHA and lenders (where FHA  covers 90 percent of the loss if there is a claim on a defaulted loan and the  lender absorbs the remaining 10 percent) would not change.
Moreover, FHA would be required to establish specific underwriting  criteria to ensure the financial soundness of the program within 6 months  of the passage of the legislation. Currently, Title I regulations require a  lender to exercise prudence and diligence in underwriting a loan to  determine whether the borrower is an acceptable credit risk, such as  requiring lenders to conduct a credit investigation and obtain a credit  report. But the Title I regulations do not contain provisions that would  address other factors specific to manufactured homes, such as whether  the home is placed on owned or leased land. For Title I, FHA reviews the  lender’s underwriting only when a default occurs within the first 2 years of  the loan and a lender submits a claim for insurance. FHA then has 2 years  to deny a claim for insurance even after FHA has certified the claim for  payment. The proposed legislation also would require FHA to provide  incontestable insurance endorsements, meaning that no claim could be  denied because of underwriting issues—absent fraud or  misrepresentation.
All but one of the bills would establish up-front mortgage insurance  premiums, not to exceed 2.25 percent of the loan amount and adjust the  annual insurance premiums up to 1 percent of the remaining unpaid  principal balance, rather than the original loan amount as stipulated in  current law. The remaining bill would give the agency flexibility to  establish premiums through risk-based pricing. If such a provision were  made law, FHA officials told us that they would provide a range of  premiums based on historical analysis of FHA loan data.
Furthermore, all but one of the bills would require operations at negative  subsidies—that is, without cost to the government. Currently, the Title I  program is operated at a positive subsidy, meaning that the present value  of estimated cash outflows (such as claims) to FHA’s General Insurance  Fund exceed the present value of the estimated cash inflows (such as  borrower premiums). According to the Federal Credit Supplement, FHA’s  Title I Manufactured Home Loan program is expected to require a $487,000  subsidy in fiscal year 2007 and a $76,000 subsidy in 2008. FHA officials  state it is unlikely the program could generate negative subsidies because  of the proposed premium structure and potential for depreciation of the  assets underlying the loans (the manufactured homes).
Some of the bills also would require that the claim and disposition of  property for the Title I program be similar to the Title II program, where  FHA disposes of the used homes once the lender receives insurance  benefits. FHA opposes this change to the bill and proposes to continue  having the lenders dispose of the property. As discussed later, recovery  cost for manufactured housing are higher than for other types of housing  and lenders require strong recovery practices, such as a network for  selling homes in place, to recoup more than half the loan balance after a  default.
section_title: According to FHA and Industry Officials, Potential Benefits of Proposed Changes Include Increasing the Number of Borrowers, More Lender Participation, and Expansion of the Secondary Market
paragraphs: FHA and lending industry officials with whom we spoke cited benefits that  could accrue to borrowers, the industry, and the Title I program if the  proposed legislation were enacted. These officials suggested that  increasing the loan limits would allow more borrowers to buy  manufactured homes at lower interest rates and also larger homes. As  noted earlier, in recent years buyers have expressed a heavy preference  for purchasing double-wide or multisection units.
FHA, Ginnie Mae, and lending industry officials also suggested that  increasing the limits and eliminating the portfolio cap would increase  lender participation and demand for Title I loans, which in turn could  increase competition and decrease borrower interest rates. In particular,  Ginnie Mae officials stressed that eliminating the portfolio cap would be  central to their decision to expand their participation in the secondary  market for manufactured home loans. This, in turn, could provide more  liquidity to lenders and greater access to credit for borrowers. Ginnie Mae  was the main guarantor of securities backed by FHA Title I loans on the  secondary market up until 1989 when Ginnie Mae placed a moratorium on  new manufactured housing issuers because of the high risks associated  with the product. Currently, Ginnie Mae has four lenders in its  manufactured home program with just one active. According to Ginnie  Mae officials, it imposed the moratorium because structural features of the  Title I program, such as the portfolio cap and the nonspecific underwriting  requirements, exposed Ginnie Mae to greater risk and losses. According to  Ginnie Mae, once claim amounts were reached on troubled portfolios,  lenders had little incentive to continue servicing the portfolios and make  payments to security holders. Ginnie Mae then sustained substantial losses  when it assumed the portfolios of lenders that reached FHA coverage  limits. In addition, one lending official suggested more stringent  underwriting requirements would be beneficial to the industry, which still  is recovering from the defaults and repossessions of the early 2000s.  Industry officials suggested that federal agencies, such as FHA, and the  government-sponsored enterprises could help facilitate changes in the  industry, such as improving underwriting requirements.
However, according to FHA and the Congressional Budget Office (CBO),  the elimination of the portfolio cap could increase significantly the amount  of claims paid and expand the government’s liability under the program  since each loan would be insured on an individual basis. FHA officials also  said that they believed risk-based pricing would help compensate FHA’s  insurance risk. The extent to which risk reduction would occur and what  borrowers would be excluded would depend on underwriting  requirements, such as the ranges of credit scores allowed.
section_title: Lending Officials Identified Factors Unique to Manufactured Home Lending That Can Affect Loan Performance
paragraphs: Industry officials identified several risk factors unique to manufactured  home lending, such as the decreased ability of borrowers to build equity,  the lack of consistency and transparency in appraising and pricing homes,  the location of the home (owned or leased land), the cost of recovery to  the lender after defaults, and issues related to the installation of the home.  Based on our review of literature and interviews with lending industry  officials, owners of manufactured homes generally have less ability to  build equity than the owners of site-built homes. As assets, manufactured  home can depreciate in value after purchase, similar to automobiles. For  example, officials explained that manufactured homes bought with  personal property loans generally depreciated in value if not attached to  land. The officials emphasized that, even after years of making payments, a  borrower could choose to default on a loan if the home was worth less  than the loan balance.
In general, manufactured homes are appraised differently when  considered real property compared to personal property. When a home is  placed on real property, the value of the home is determined based on  comparable homes in the vicinity. When a home is considered personal  property, the value is based on the price that the manufactured home  dealer had determined for the unit. However, lending officials with whom  we spoke suggested prices varied by dealers and that pricing of  manufactured homes was not transparent because dealers are not  mandated to display a manufacturer’s suggested retail price. In addition,  states conduct little or no recording of sales data. Further, the officials  suggested that the lack of transparency resulted in some consumers  overpaying for the manufactured home, particularly in instances where the  dealer would present the price in monthly payment terms. One lender  identified California as a model state, because it requires all manufactured  home purchases to go through escrow, whether real or personal property,  which helps to monitor sales prices. This lender’s loans performed  significantly better in California than in other states, and the lender  suggested that California’s transparent pricing was one of the main  reasons.
Furthermore, industry officials suggested that the location of the home on  owned or leased land is a predictor of loan performance. According to our  review of literature and interviews with industry officials, loans for  manufactured homes placed on owned land (titled as real property) tend  to perform better than loans for homes on leased land (titled as personal  property), as they tend to appreciate more. Some officials suggested  appreciation could occur on leased land, but that appreciation would be  dependant on location and amenities available (such as pools, club  houses, or golf courses).
In contrast to other housing types, many lending industry officials  suggested that the cost of recovery for lenders when a loan defaulted was  greater with manufactured homes. For instance, for manufactured homes  the costs to the lender in a foreclosure or repossession (which may  involve the movement of the home) would be proportionately higher  relative to the loan amount than for more expensive site-built housing.  Some states have lien holder statutes in place that may help the lender  protect its collateral in cases of borrower default by requiring notification  of lenders in case of abandonment or eviction. Of the states we reviewed,  Arizona, New Hampshire, Oregon, and Texas have such a statute. Some  lending industry officials suggested that losses and high recovery costs  could be mitigated by selling the home in place. They suggested that lease  agreements between lenders and community owners should ensure that  manufactured homes located on leased land could be sold in place if  borrowers defaulted.
According to some of lending officials we interviewed, the size of the  home also was a predictor of performance. Loans for larger manufactured  homes (double-wides or multisection units) tend to perform better than  loans for single-wides. The officials with whom we spoke suggested that  these loans performed better because the income level of those borrowers  tended to be higher. However, the majority of Title I loans have been for  single-wides, which according to FHA and industry officials was because  of the current loan limits.
In addition, many industry officials suggested the type and quality of  installation of the home affects the value of the home and that, in theory,  states with stronger inspection programs help maintain the value of the  home for the consumer. The Manufactured Housing Improvement Act of  2000 set standards for installation inspections across the country, but  states continue to differ in how they monitor installation of homes. Until  recently, many states did not have a program to inspect the installation of  manufactured homes. In our review of eight state installation programs,  we found the level of inspections varied by state (see fig. 15). For example,  five of eight states require 100 percent inspection (Arizona, Florida, New  Hampshire, North Carolina, and Oregon). All of those that require 100  percent inspection had installation programs in place prior to the  implementation of the Manufactured Housing Improvement Act, except  for New Hampshire, whose requirement went into effect in July 2006. The  remaining states relied on state officials inspecting from at least one  manufactured home installer in Georgia or from 10 to 35 percent of  manufactured homes in Missouri and Texas, but Georgia and Missouri  made changes to their installation programs after the passage of the act.  Prior to these changes, the two states inspected installations on a  consumer complaint basis. Further, state programs differ in how they  conduct installation inspections. For instance, Florida, New Hampshire,  and North Carolina rely on local jurisdictions to conduct the inspections;  Arizona and Oregon use a combination of both state and local officials;  while Georgia, Missouri, and Texas use only state officials.
section_title: Our Analysis Suggests That Poor Credit and Homes Placed on Leased Land Are Key Factors Associated with Greater Risk of Defaults of Loans for Manufactured Homes
paragraphs: In the absence of available data on the credit of FHA borrowers and the  location of the homes (owned or leased land), we developed scenarios  using assumptions based on various risk factors, such as the default risk of  borrowers and the ability of lenders to recover losses. In addition, we  considered the experience of FHA’s Title I program since 1990 and of non- FHA personal property manufactured housing loans. For example, from  1990 to 2002, FHA’s cumulative defaults expressed as a percentage of  originated loans, did not drop below 10 percent and have exceeded 25  percent in 8 of the 13 years (see fig. 16). However, loans from 2003 to 2006  may not be reflective of the default experience because they are recent  loans and lending industry officials explained that the peak default period  for these types of loans generally occurs from the third to the fifth year.  Non-FHA manufactured housing loans also had high cumulative losses,  typically above 15 percent for loans originated between 1997 and 2001, but  lower than FHA’s cumulative losses.
Our scenarios incorporate assumptions based on factors such as annual  default rates for different yearly intervals, loan interest rates, and loan  terms. Once we established these parameters, we included additional  factors, such as variations on the lenders’ ability to recover their losses in  cases of default and the borrowers’ insurance premium schedule (based  on the premiums suggested in the proposed legislation). Our assumptions  about default rates reflect an important characteristic of home-only  manufactured housing loans. Even after years of loan payments, a  borrower may not have enough equity in the home to avoid a default in the  face of adverse financial conditions or may choose not to pay off a loan if  the home is worth less than the loan balance.
Based on discussions with lending industry officials and our review of  available manufactured home lending data, we assumed three variations of  default: a low default experience, a moderate default experience, and a  high default experience. In general, the low default experience would  reflect conditions in which borrowers possessed good credit quality  (credit score), lenders used high-quality underwriting requirements, and  lenders’ security interests in the collateral were well protected in terms of  those factors that are associated with the preservation of value, such as  placement of the home (owned versus leased land) and installation. The  high default experience would reflect conditions in which borrowers had  poorer credit quality, and collateral values and lenders’ security interests  also were lower.
The following assumptions in our analysis were based on discussions with  lending industry officials on possible recovery outcomes and possible  legislative changes regarding FHA’s upfront and annual premiums:  If lenders had a strong recovery program (which may include a good  network of dealers who resell manufactured homes) they would  achieve a net recovery of 50 percent per claim. Alternatively, we  assumed a moderate recovery rate would be 33 percent of the claim,  and a low recovery rate would be 25 percent.
Two different potential up-front premium amounts—a high up-front  premium of 2.25 percent of the original loan amount and a low up-front  premium of 1 percent of the original loan amount.
Two different annual premiums—a high annual premium of 1 percent  of the declining loan balance and a low annual premium of 0.5 percent  of the declining loan balance.
To determine the potential impact on FHA’s General Insurance Fund, we  used the above assumptions to calculate the relationship between the  amount and timing of both expected claims and premiums to FHA. Similar  to a subsidy calculation, we estimated the present value of estimated cash  outflows (such as claims) net of the present value of the estimated cash  inflows (such as premiums) to FHA’s General Insurance Fund.
The results of our analysis show that in all instances where borrowers had  moderate or high default risk, the fund experienced a loss—that is, the  present value of estimated cash outflows exceeded the present value of  cash inflows (see fig. 17). The range of the loss was determined by the  lender’s ability to recover its losses and the premiums the borrower paid.  For instance, in cases where the borrower paid high up-front and annual  premiums (2.25 percent and 1 percent, respectively) and was a moderate  default risk, and the lender had a high net recovery rate (50 percent), the  loss to the fund was less than 1 percent. However, if we varied the  scenario to lower the recovery rate for lenders (25 percent), the potential  loss to the fund was 4.4 percent. Similarly, when the borrower paid low  up-front and annual premiums (1 percent and 0.5 percent) and had  moderate default risk, the losses ranged from 4.4 percent if the lender had  a high net recovery rate to 8.5 percent if the lender had a low recovery  rate. The fund had the potential to experience gains in instances where the  borrower had low default risk, premiums were higher, and lenders had a  higher probability of high recovery of losses.
Our analysis also showed that there is potential for FHA’s General  Insurance Fund to experience a wide variation in the level of losses but  little potential for gains. The results suggested that there is greater risk of  loss from borrowers who have either moderate or high default risk.  Typically, these are loans where the borrower may not have a high credit  score, and the property is located on leased land—in which case the  lender’s security interest may be uncertain because of the variability  associated with rent increases, lease terms, and the potential for the  manufactured home park to be sold. In addition, the amount of the loss  was influenced by the amount of premiums paid. For instance, where  borrowers paid the highest up-front and annual premium, the loss was 11  percent in cases where the borrower also had high default risk and the  lender had low recovery, compared with a 15 percent loss in instances  where the borrower paid a low up-front and annual premium. However,  since FHA does not currently collect data on credit score or where the  property is located—owned or leased land—it is unclear how these  scenarios may actually affect the General Insurance Fund. See appendix II  for a more detailed discussion of our scenario analysis methodology.
section_title: Effects of the Proposed Changes Are Unclear Because FHA Has Not Yet Articulated Which Borrowers Would Be Served, Assessed Its Insurance Risks, or Developed Underwriting Requirements
paragraphs: FHA has not yet assessed the effect of the proposed changes to the Title I  program. More specifically, it has not developed criteria or models to  assess the potential effects of the proposed premiums or risk-based  pricing or developed specific underwriting requirements. Such  assessments and requirements are central to effective operation and  oversight of a revised Title I Manufactured Home Loan program. Our  internal control standards for federal agencies state that effective  management involves comprehensively identifying risk as part of short-  and long-term planning. Such planning would encompass the  identification of risks posed by new legislation or regulations. The results  of our scenario analysis also suggest that FHA could use modeling to  illustrate, in a general way, potential gains and losses to FHA’s General  Insurance Fund and that premium structures play a key role in  determining these outcomes.
Although the purpose of the Title I program is to serve low- to moderate- income families, it is unclear which borrowers a revised program would  serve because FHA has not yet shared the specifics as to how it plans to  compensate for risk, including how the premiums would be set. According  to FHA officials, they do not plan to develop criteria for assessments of  proposed premiums or risk-based pricing until the program is approved by  Congress. FHA officials told us that they have begun to analyze a range of  up-front premiums and a maximum premium amount based on a historical  analysis of receipts and claims, but that they had not yet reached any  conclusions. In addition, FHA has not conducted an analysis to determine  under what conditions the program could operate at a negative subsidy if  the proposed changes were enacted. As mentioned earlier, FHA’s Title I  Manufactured Home Loan program is expected to require a $487,000  subsidy in fiscal year 2007 and a $76,000 subsidy in 2008. According to  HUD officials, they expect to calculate the new subsidy rate based on  projected defaults, interest and fees, and loan characteristics (such as loan  maturity, default and recovery rates, and up-front and annual fees) for the  2009 budget. CBO estimated that, if the legislation were enacted, FHA  could achieve a near zero subsidy for the Title I program assuming default  rates would be at 9.5 percent or lower. CBO also acknowledged that  because of the uniqueness of FHA’s program and lack of comparative  programs in the private market, the potential costs of the program are  uncertain. The results of our analysis suggest that, in almost all situations,  there is potential for loss except when borrowers have lower default risk  (based on credit scores and other information). While credit score is one  of the key factors used to determine default risk, FHA does not collect this  information (discussed further below).
FHA officials also stated they have not yet developed specific underwriting  requirements for a revised program. Although industry and FHA officials  with whom we spoke discussed the unique risks for manufactured home  loans, the information FHA provided us about any changes to its  underwriting criteria have not addressed the specific characteristics of  manufactured housing. FHA officials did explain they would like to  establish review procedures when a loan is submitted for insurance,  similar to the procedures in FHA’s Title II loan program. In Title II, FHA  conducts post-endorsement reviews of 10 percent of its loans, with FHA  staff going over the lender’s underwriting decisions and calculations.
In explaining the agency’s limited assessments, FHA officials noted that  the agency is focusing its resources on assessing the impact of proposed  changes to the much larger Title II Mortgage Insurance program. As of  May 2007, FHA’s risk-based pricing proposal for the Title II program  established six different risk categories, each with a different premium  rate, for purchase and refinance loans. FHA used data from its most recent  actuarial review to establish six risk categories and corresponding  premiums based on the relative performance of loans with various  combinations of loan-to-value ratio (the ratio of the amount of the  mortgage loan to the value of the home) and credit score. Further, since  the current volume of the Title I program is low, FHA officials did not  anticipate large losses for the fund. However, the programmatic changes in  the proposed legislation are designed to increase the demand for Title I  manufactured home loans. FHA officials told us that once the legislation is  passed, it would take up to a year to implement changes to the program  and to work on developing the risk-based pricing strategy; however, they  were unsure if they would implement the program in stages or all at once.
As a result of FHA not conducting risk assessments or determining  underwriting requirements, potential effects of changes to the Title I  program remain unclear. Without such risk identification, FHA’s planning  may be adversely affected. In particular, the agency may lack timely  indications of whether the program could generate positive or negative  subsidies, which in turn would affect decisions about pricing premiums.
section_title: FHA Also Has Not Yet Developed an Approach for Collecting the Information Needed to Manage the Program
paragraphs: Currently, FHA does not collect information on the credit scores of  borrowers or the type of land on which manufactured homes are placed.  Our internal control standards for federal agencies state that an agency  must have relevant, timely, and reliable information to run and control its  operations. Of the factors identified as risks affecting manufactured home  lending, FHA maintains data only on the size and condition (that is, new or  existing) of the manufactured home. In 2004, FHA started to collect  information on borrower demographics, such as gender, address, birth  date, and monthly income. And, because FHA currently monitors a lender  only when a claim is filed for insurance and not before the loan is  originated, the information collected is not as thorough as would be  generated if the program required review prior to the endorsement of the  loan.
FHA officials told us it would like lenders to electronically capture more  information about borrowers during the underwriting process, but that the  current information system for the Title I program would need to be  updated to accommodate expanded data fields. FHA officials also told us  that they plan to collect more detailed borrower, property, and loan-level  data to improve tracking and performance measurement, but did not have  specific details as of July 2007. However, our interviews with lending  officials and the results of our scenario analysis both suggest that credit  score and the location of the home (on owned or leased land) are  important predictors of loan performance. Without more comprehensive  data on its borrowers and lenders, FHA may not be able to successfully  estimate default risks in its portfolio, mitigate risks to the insurance fund,  and, thus, effectively manage the program.
section_title: Conclusions
paragraphs: Manufactured homes are an affordable housing option, but they differ  from site-built homes in the way they are financed, sold, and the consumer  protections available. These differences create additional risks for both  the borrowers and lenders of manufactured homes. For example, the  ability for the homeowner to build equity is constrained if the property is  located on leased land and the land ownership also affects the ability of  the lender to recover its losses relative to other types of lending. These  risks are reflected in the performance of the Title I program, which has a  history of high default rates, as does the manufactured home lending  industry. However, the Title I program also provides a unique product as  the only active federal program offering insurance for home-only (personal  property) loans. According to recent FHA data, the majority of its  borrowers are younger and lower-income, suggesting that Title I helps  them achieve homeownership.
But changing and expanding a lending program can introduce new risks  and increase existing risks. FHA only insured slightly more than 1,400  loans in 2006. Changes to the Title I program are expected to increase loan  volume, which could generate the desirable outcome of providing more  lower-priced loans to lower-income individuals desiring to purchase a  home. Yet, both FHA and CBO suggest proposed changes can increase  FHA’s insurance risk and expand the government’s liability. The extent of  gains or losses to FHA’s General Insurance Fund will depend on a variety  of factors, such as the borrower’s default risk, the lender’s ability to  recover losses, and the amount of premiums paid. However, FHA has not  articulated which borrowers would be served, how the loans would be  priced under a risk-based structure and the expected increase in risk to  the General Insurance Fund, how the loans would be underwritten, and  the additional data it plans to collect to manage the program. Thus, the  agency lacks vital information for implementing any changes to the  program. If FHA were to conduct such risk identification, it could plan to  anticipate changes to the program, target new borrower populations, and  more effectively manage existing loan portfolios. In particular, with  indications of whether the program could generate positive or negative  subsidies, the agency could make appropriate and well-informed decisions  about pricing premiums. For example, an analysis similar to the one we  performed would provide at least an indication of what scenarios would  produce the highest risks for losses to the fund. Finally, more  comprehensive data on its borrowers and lenders could allow FHA to  mitigate the risks inherent with the manufactured home product.
section_title: Recommendations for Executive Action
paragraphs: In light of the growth that a revised Title I program could spur and  previous experience in the manufactured home loan industry that included  a high number of defaults and repossessions, prior to the implementation  of a revised program, we recommend that the Secretary of Housing and  Urban Development direct the Assistant Secretary for Housing and Urban  Development—Federal Housing Commissioner to assess the effects of the  proposed changes. At a minimum, this action should  articulate which borrowers would be served if the program were  expanded, including the financial conditions and creditworthiness of  the served borrowers;   develop criteria or economic models to assess the potential effect of  the proposed changes including risk-based pricing; that is, determine  what circumstances or pricing structures would most likely result in a  positive or negative subsidy if the proposed changes were enacted; and   develop detailed proposed changes to its underwriting requirements  that account for unique attributes of manufactured housing and the  characteristics of FHA’s targeted borrower population.
We also recommend that the Secretary of Housing and Urban  Development direct the Assistant Secretary for Housing and Urban  Development—Federal Housing Commissioner to develop an approach for  collecting the information needed to manage the program, including the  credit scores of borrowers and whether the manufactured homes are on  owned or leased land.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided HUD with a draft of this report for review and comment.  HUD provided comments in a letter from the Assistant Secretary for  Housing—Federal Housing Commissioner (see app. III). HUD agreed with  the recommendations in our report and described plans for implementing  these recommendations. More specifically, HUD agreed with our  recommendation to assess the effects of the proposed changes prior to the  implementation of a revised program. FHA noted that it recently initiated a  review of the credit subsidy calculation for the Title I Manufactured Home  Loan program and that the results of the study will be used to develop  models to test underwriting and premium pricing options. As we noted in  our report, this type of analysis or an analysis similar to the one we  performed could provide an indication of the risks for losses to FHA’s  General Insurance Fund.
HUD also agreed with our recommendation to develop an approach for  collecting the information needed to manage the program. As we  mentioned in our report, HUD stated it began collecting additional data,  such as borrower information on age and income in 2004. HUD stated that  it did not collect information on the location of the homes (owned or  leased land) because the program requirements for both types of homes  were essentially the same; however, HUD plans to collect these data under  a revised program to track loan characteristics. HUD also agreed to collect  appropriate credit and application variables such as credit scores. Finally,  the agency noted that it intended procedures for originating and  underwriting Title I loans to mimic those of FHA’s real estate financing  programs.
As agreed with your offices, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies of this report to the Ranking  Member, Senate Committee on Banking, Housing, and Urban Affairs;  Ranking Member, Subcommittee on Housing, Transportation, and  Community Development, Senate Committee on Banking, Housing, and  Urban Affairs; Chairman and Ranking Member, House Committee on  Financial Services; and Chairman and Ranking Member, Subcommittee on  Housing and Community Opportunity, House Committee on Financial  Services. We will also send copies to the Secretary of Housing and Urban  Development and will make copies available to other interested parties  upon request. In addition, the report will be made available at no charge  on the GAO Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please contact me  at (202) 512-8678 or shearw@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Key contributors to this report are listed in appendix IV.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The Chairmen of the Senate Committee on Banking, Housing, and Urban  Affairs and its Subcommittee on Housing, Transportation, and Community  Development and Senator Jack Reed requested that we evaluate the  Federal Housing Administration’s (FHA) Title I Manufactured Home Loan  program. Specifically, the objectives of this report were to (1) describe  selected characteristics of manufactured housing and the demographics of  the owners, (2) compare federal and state consumer and tenant  protections for owners of manufactured homes, and (3) describe the  proposed changes to FHA’s Title I Manufactured Home Loan program and  assess potential benefits and costs to borrowers and the federal  government.
In summary, to address our first objective we analyzed Census data from  the Manufactured Housing Survey from 1996 to 2005 and the 2005  American Housing Survey. To address our second objective, we  researched relevant federal laws and laws in eight states (Arizona, Florida,  Georgia, Missouri, New Hampshire, North Carolina, Oregon, and Texas)  and conducted semistructured phone interviews with state, industry, and  consumer group officials in those eight states. We also used the  information gathered in the interviews to inform our discussion in the first  and third objectives. For our third objective, we interviewed FHA officials  and lending officials from programs that provide financing for  manufactured homes. To learn about risk-mitigation practices, we also  reviewed policies and procedures from the programs mentioned above.  Finally, we conducted an analysis using different scenarios that  incorporated assumptions of risk for manufactured housing lending to  illustrate potential costs of the proposed legislation. We conducted our  work in Washington, D.C., Atlanta, and Chicago, from October 2006  through June 2007 in accordance with generally accepted government  auditing standards.
subsections: section_title: Selected Characteristics of Manufactured Housing and the Demographics of the Owners
paragraphs: To determine selected characteristics of manufactured housing, we  analyzed Census data from the Manufactured Housing Survey. Census  conducts the Manufactured Housing Survey on a monthly basis and  samples approximately 350 manufactured home dealers or 1 in 40 of the  manufacturers that ship manufactured homes each month. The sample of  manufactured home dealers surveyed fluctuates based on the total number  of manufactured homes shipped. Specifically, we used Manufactured  Housing Survey data from 1996 through 2005 to examine trends in the  manufactured housing industry, such as the number of homes sold,  average sales price, where the homes were placed (owned or leased land),  and the size of these homes (single-wide versus double-wide units). To  determine demographic characteristics of manufactured home owners, we  relied on the 2005 American Housing Survey. Census conducts the  American Housing Survey every 2 years, sampling approximately 55,000  housing units to gather data on apartments; single-family homes;  manufactured or mobile homes; vacant housing units; age, sex, race and  income of householders; housing and neighborhood quality; housing costs;  equipment and fuels; and the size of the housing units. We choose to use  2005 American Housing Survey data since they were the latest available.  We did not provide information on trends in earlier years because the  sample of manufactured housing used in previous surveys (through 2003)  changed, making it difficult to compare 2005 data with previous data. Data  on land ownership for manufactured homes (that is, owned or leased land)  was limited in the Manufactured Housing and American Housing Surveys;  as a result, we could not report differences in the data for where the  manufactured home was placed. We assessed the reliability of the  Manufactured Housing and American Housing Surveys by reviewing  information about the data, performing electronic data testing to detect  errors in completeness and reasonableness, and interviewing  knowledgeable officials regarding the quality of the data. We determined  that the data were sufficiently reliable for the purposes of this report.
Because Census data used in our American Housing Survey analyses are  estimated based on a probability sample, each estimate is based on just  one of a large number of samples that could have been drawn. Since each  sample could have produced different estimates, we express our  confidence in the precision of our particular sample’s results as a  confidence interval. For example, the estimated percentage of occupied  manufactured homes located in the South was 56.7 percent, and the  confidence interval for this estimate ranges from 56.6 percent to 56.8  percent, with a percentage point error of 0.1 percent. This is the interval  that would contain the actual population value for 95 percent of the  samples that could have been drawn. As a result, we are 95 percent (or  more) confident that each of the confidence intervals in this report will  include the true values in the study population. All variables from  American Housing Survey that are included in this report have 95 percent  confidence intervals of plus or minus 5 percentage points or less.
We conducted a literature review and examined relevant studies on  manufactured housing. We also conducted a review of newspaper articles  from May 2005 to May 2007 to identify where manufactured home park  closures occurred in the United States. Because states collect different  types of information on manufactured home parks and even define them  differently, the consequent variability of the state data makes determining  the number of manufactured home parks extremely difficult. Thus, we  relied on a database search of national and local newspapers to provide  anecdotal information on park closures. We used several different search  parameters and keyword searches and identified park closures in 18  states; however, it is possible that other closures occurred in other states  during the period we reviewed, but were not identified in our searches.
section_title: Federal and State Consumer and Tenant Protections for Owners of Manufactured Homes
paragraphs: To compare federal and state consumer and tenant protections for owners  of manufactured homes, we reviewed federal laws relevant to  manufactured housing, such as the Real Estate Settlement Procedures Act  and the Truth in Lending Act. We reviewed prior work on state laws for  manufactured housing conducted by the National Consumer Law Center  and the American Association of Retired People and also interviewed  officials from these organizations. We then selected eight states and  reviewed statutes related to the consumer protections provided for  foreclosure and repossession and the tenant protections applicable to  contracts or acts, such as written lease requirements, rent increases,  evictions, and park closures.
The eight states were selected based on a combination of factors including  the volume of FHA Title I loans in the state from 1990 through the first  quarter of 2007; concentration of manufactured housing as a percentage of  housing units in the state; information from our interviews of industry and  consumer officials; and previous studies conducted on manufactured  housing. The table below indicated the characteristics of the states we  reviewed.
We also conducted semistructured interviews with regulatory, industry,  and consumer officials in each state. We pretested our interview questions  on-site in Georgia and conducted the remaining interviews by telephone.  We used interview responses on state statutes to check our interpretation  of the state statutes containing consumer and tenant protections  applicable to manufactured home owners. In each of the states, we  interviewed officials who represented (1) the state regulator for  manufactured housing, (2) the state industry group who are affiliates of  the National Manufactured Housing Industry group, known as the  Manufactured Housing Institute, and (3) a consumer advocacy group, such  as the state manufactured homeowner’s association. In total, we  conducted 25 interviews across the eight states.
To synthesize interview data, we compiled the responses by interview  question into a document for each state (state summary), which we  reviewed for accuracy and completeness. Next, we identified themes  among the interviews and created categories within a response, noting the  state and type of official interviewed. For example, in our question on  placement options for owners of manufactured homes when the park in  which they live closes, we identified categories, such as a (1) a  neighboring park, (2) private land, and (3) lack of space to move. We then  identified the states that provided a response fitting with each category  and totaled the number of states in each category. We also used this  method to compare installation programs across eight states based on our  interviews with state regulators.
section_title: Proposed Changes to Title I Program and Potential Benefits and Costs to Borrowers and the Federal Government
paragraphs: To describe the proposed changes to the Title I Manufactured Home Loan  program, we reviewed current and proposed FHA regulations and  legislation. Our review of proposed legislation included Senate Bills 2123  (109th Congress, 2005) and 3535 (109th Congress, 2006) and House of  Representative Bills 2803 (109th Congress, 2005) and 4804 (109th  Congress, 2006), House of Representative Bill 2139 and Senate Bill 1741  from the 110th Congress in 2007.
To assess the potential costs and benefits of the proposed changes to the  Title I program, we interviewed FHA officials, FHA lenders, Ginnie Mae  officials, and officials from federal and other lending programs, such as  Fannie Mae and Freddie Mac, the U.S. Department of Agriculture Rural  Housing Service and the Department of Veterans Affairs, community  banks, industry and consumer groups, and a rating service. In addition, we  interviewed officials from HUD’s Inspector General Office. To learn about  risk-mitigation practices, we also reviewed policies and procedures from  programs that provide financing for manufactured homes at the above  agencies and reviewed relevant literature. A few industry officials also  provided information on loan performance for their manufactured home  loan portfolio.
We also conducted an analysis using different scenarios that incorporated  assumptions of risk for manufactured housing lending to illustrate the  potential benefits and costs of the proposed legislation. We incorporated  various risk factors unique to manufactured home lending (such as site  location and loss mitigation practices of lenders), as well as other  commonly used predictors of loan performance such as credit scores, into  a model to illustrate ways in which these key factors might affect the  performance of manufactured housing loans and, thus, how variation in  these key factors might affect potential gains and losses to FHA’s General  Insurance Fund. Our estimates relied on assumptions concerning a few  key inputs such as level of default risk, net recovery rate of lenders, and  insurance premiums. See appendix II for a more detailed description of  our scenario analysis methodology.
We also analyzed FHA data, housed in the F-72 database, on the  manufactured home loan program. We used these data to review loan  performance from 1990 to 2005, the size of the units purchased, and the  states in which the loans were originated. We also used the data to  generate demographic information on FHA Title I borrowers. However,  FHA only began collecting demographic data in 2004, so our analysis was  limited to the period from June 2004 through April 2007. In addition, we  could not assess where the manufactured homes were placed and the  credit scores of the borrowers because FHA did not collect these data. We  assessed the reliability of the F-72 database by reviewing information  about the data, performing electronic data testing to detect errors in  completeness and reasonableness, and interviewing knowledgeable  officials regarding the quality of the data. We determined that the data  were sufficiently reliable for the purposes of this report.
Finally, we reported information provided by HUD using 2005 Home  Mortgage Disclosure Act data on manufactured housing and the number of  personal property loans originated by the FHA Title I program compared  with the rest of the market. We also assessed the data reliability of this  output and the computer program used to extract the information and  determined the data were sufficiently reliable for our purposes.
section_title: Appendix II: Scenario Analysis Methodology
paragraphs: To gain an understanding of the effects of the proposed changes to the  Federal Housing Administration’s (FHA) Title I Manufactured Home Loan  program, we developed an approach that could illustrate potential effects  of the changes on the program. Our model of different scenarios used  assumptions to illustrate the importance of various risk factors unique to  manufactured home lending (such as site location and loss mitigation  practices of lenders), as well as other commonly used predictors of loan  performance, such as credit scores. For instance, the ability of the owner  of a manufactured home to build equity may be limited when the land is  leased, which also often increases the risks associated with the loan. If a  borrower with a home on leased land were to default, lenders could face  higher costs and lower recoveries (relative to site-built homes) in trying to  repossess, move, and resell the personal property.
We developed a model to illustrate some of the ways in which these key  factors may affect the performance of home-only manufactured housing  loans, and, thus, how variation in these key factors may affect potential  gains and losses to the FHA’s General Insurance Fund, which is supported  by insurance premiums and used for several FHA insurance programs,  including the Title I program. Based on examining some loan performance  data from manufactured home lenders and discussions with officials with  substantial manufactured housing lending experience, we identified some  important characteristics of the performance of home-only manufactured  housing loans.
Our estimates rely on assumptions concerning a few key inputs: annual  prepayment rates, annual default rates (which vary over different time  intervals), and the net recovery rate (which measures the portion of the  loan balance recovered by the lender in cases of default). Further, because  FHA has not yet developed its risk-based pricing criteria for the proposed  legislative changes, we made different assumptions about the level of up- front mortgage insurance premiums and periodic insurance premium  payments based on the amounts discussed in the proposed legislation. By  varying the default rate, loss recovery, and premium rate assumptions, we  were able to generate a variety of loan performance and recovery  scenarios, and illustrate in a very general way the potential for gains and  losses to FHA General Insurance Fund that characterize each scenario.
In the absence of available data on the credit of FHA borrowers and the  location of the homes (owned or leased land), we attempted to benchmark  these scenarios based on the experience of FHA’s Title I program since  1990 and of non-FHA personal property manufactured housing loans. In  terms of FHA Title I experience since 1990, while the number of loans  originated dropped significantly from the early to mid-1990s, cumulative  defaults expressed as a percentage of originated loans did not fall below  10 percent from 1990 to 2002 and have exceeded 25 percent in 8 of the 13  years (see fig. 18). However, loans from 2003 to 2006 may not be reflective  of the default experience because they are recent loans and lending  industry officials explained that the peak default period for these types of  loans generally occurs from the third to the fifth year. In terms of non-FHA  loan performance, cumulative losses typically have been above 15 percent  for loans originated between 1997 and 2001.
The scenarios incorporate assumptions based on factors such as annual  default rates for different yearly intervals, loan interest rates, and loan  terms. Once we established these parameters, we factored in additional  assumptions and variations for the net recovery rate of the lender and an  insurance premium schedule for the borrower based on discussions with  lending industry officials on possible default scenarios, recovery  outcomes, and possible legislative changes regarding FHA’s upfront and  annual premiums. The discussion below provides more detailed  information on our assumptions.
Assumptions on Annual Default Rates. We characterized the peak  period of default as years 3 through 5, and we described the default  experience in years after this peak period in terms of a percentage of  the default rate assumed to hold during the peak period. In general, and  based on our discussions with lenders and others, we assumed that  default rates in years after the peak period would be 75 percent of what  they were during the peak period. In the high loss scenario, we  assumed that the peak period default rate also held in years 6 through 9  before dropping to 75 percent of the peak value. Our assumptions  about default rates reflect an important characteristic of home-only  manufactured housing loans: Even after years of loan amortization, a  borrower may not have enough equity in the home to avoid a default in  the face of adverse financial conditions.
We present three variations of default: a low default experience, a  moderate default experience, and a high default experience. In general, the  low default experience would reflect conditions in which borrowers  possessed good credit quality, lenders used high quality underwriting  requirements, and lenders’ security interests were well protected in terms  of those factors that are associated with the preservation of value, such  the placement of the home (owned land versus leased land) and  installation. The high default experience would reflect conditions in which  borrowers are of poorer credit quality, and collateral values and lenders’  security interests are also poorer (see fig. 19).
Assumptions Based on Annual Prepayment Rates. We assumed that  prepayments were constant at 4 percent per year. Modest changes in  this level did not lead to much difference in our results. Based on our  discussions with lenders and others, we believe manufactured home- only loan borrowers were not as likely as other homeowners to prepay  in the face of favorable refinancing opportunities. As a result, some of  these loans default in later years, but they also continue to generate  annual insurance premiums.
Additional Scenario Assumptions. Using the prepayment rates and  default rates that we selected, we calculated the value of claims in a  given year as the (unpaid) principal balance due in that year based on  an amortization schedule relating the selected interest rate and loan  term. Based on assumed prepayment and default patterns, we  calculated cumulative defaults and losses, expressed as a percentage of  the original loan balance, losses, and insurance premiums paid by year.
We also calculate the present value of FHA’s share of losses and the  present value of annual insurance premiums.
Assumptions on the Net Recovery Rate of Lenders. To provide  variations in our analysis, we make different assumptions on the  lenders’ ability to recover losses when a loan defaults. Based on  discussions with industry officials, we assume lenders that have a  strong recovery program (which may include a good network of  dealers who resell manufactured homes) may have a net recovery of 50  percent per claim. Those lenders who have moderate net recovery are  assumed to receive 33 percent of the claim, and those lenders with a  low net recovery may receive 25 percent of the claim.
Assumptions on the Insurance Premiums. Insurance premiums may  include an up-front payment and annual payment. FHA has not yet  developed its proposed risk-based pricing for potential FHA Title I  Manufactured Home Loan borrowers. However, several bills  introduced in Congress suggests the up-front annual insurance  premiums would not exceed 2.25 percent and the annual insurance  premium would be 1 percent of the annual unpaid principal balance of  the loan. For our analysis, we assumed two different potential up-front  premium amounts: the highest up-front premium was 2.25 percent of  the original loan amount and the lowest up-front premium was 1  percent of the original loan amount. We also assume two different  annual premiums; the highest annual premium was defined as 1  percent of the declining loan balance and lowest annual premium was  defined as 0.5 percent of the declining loan balance.
section_title: Appendix III: Comments from the Department of Housing and Urban Development
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Andy Finkel (Assistant Director),  Steve Brown, Tania Calhoun, Nadine Garrick, Phil Herr, Alison Martin,  John Mingus Jr., Marc Molino, Tina Paek, and Barbara Roesmann made  key contributions to this report.