IN THIS REPORT:                                                                     APRIL 28, 2016

 

HASTILY-ARRANGED FHFA MEETING CONTINUES CHATTEL WHITEWASH

In a hastily-arranged meeting held on April 26, 2016, the Federal Housing Finance Agency (FHFA) has continued its whitewash of irregular ex parte communications with MHI and representatives of the industry’s largest businesses prior to the issuance of its December 2015 “Duty to Serve Underserved Markets” (DTS) proposed rule, which, as published, excludes manufactured home chattel loans from DTS participation.

Potentially recognizing the inherent taint on the pending DTS rulemaking as a consequence of those undocumented, undisclosed, closed-door meetings – the content and substance of which still have not been publicly disclosed — FHFA invited certain organizations (including MHARR) which had submitted comments on the DTS rule for a two-hour conference on the proposed rule with FHFA officials.

Both the occurrence and nature of the meeting were highly-unusual — verging on the bizarre for a federal rulemaking proceeding — for a number of reasons.  First, the meeting – offering certain FHFA-selected commenters on the rule the opportunity to verbally supplement and extend their written submissions – was held after the close of the official comment period on March 17, 2016.  Even though the meeting, therefore, was supposedly “on the record,” other DTS commenters were not offered the same opportunity to supplement their written submissions on the rule. Second, distinctly absent from the meeting were any consumer representatives, or representatives from either Fannie Mae or Freddie Mac, the Government Sponsored Enterprises (GSEs) that would be responsible for implementing DTS (but have a consistent record of opposing the securitization of manufactured housing chattel loans).  Third, the meeting was attended – from start to finish – by FHFA’s highest-ranking legal official, FHFA General Counsel Alfred Pollard.  And fourth, FHFA “ground rules” for the meeting, supposedly placing limits on the number of participants for each group, were selectively enforced, denying MHARR (and others) more participants in the meeting while allowing MHI to “stack” the meeting with multiple participants.   

Substantively, MHARR emphasized very early in the meeting – as it did in its written comments:

• that chattel loans represent the vast bulk of the manufactured housing market (i.e., 80% of all placements according to U.S. Census Bureau data);
• that chattel loans make affordable manufactured homes available to low and lower-income homebuyers who otherwise would be totally excluded from homeownership;
• that serving such low and lower-income purchasers lies at the core of the statutory mission of the GSEs and Obama Administration housing policy;
• that restricting DTS to manufactured home real estate loans, in addition to serving only a fraction of the market, would skew DTS toward the higher-income level of the HUD Code market, contrary to the mission of the GSEs and Administration policy;
• that restricting DTS to manufactured home real estate loans would not significantly expand the availability of manufactured home consumer financing, as demonstrated by the failure of the Fannie Mae “MH Select” program;
• that excluding manufactured home chattel loans from DTS would continue to force low and lower-income purchasers, in particular, into the higher-cost loans currently provided by the industry’s two dominant finance companies;
• that excluding manufactured housing chattel loans from DTS-mandated securitization and secondary market support would maintain current high-cost interest rates charged by the industry’s dominant lenders for such loans;
• that excluding manufactured home chattel loans from DTS would maintain the current lack of full-market competition within the HUD Code financing market, thereby continuing high-cost interest rates for such loans;
• that the “performance” information cited by FHFA for the exclusion of manufactured home chattel loans from DTS – primarily involving loans originated nearly two decades ago by Greentree Financial, Inc. and purchased by Fannie Mae prior to that company’s bankruptcy – is outdated, skewed and not representative of the performance of current chattel loans;
• that current manufactured home chattel loan default rates are within 1% of site-built default rates;
• that the inclusion of manufactured home chattel loans within DTS would result in lower available interest rates for consumers, which would further reduce default rates; and
• that the industry is producing its best homes ever, with proper installation nationwide and dispute resolution referrals at minimal levels, well below 1% of annual production.

In raising these key points, MHARR stressed that DTS is mandatory for both FHFA and the GSEs — not optional or discretionary in its implementation by either – and that Congress specifically and purposely took pains to include manufactured home chattel loans in DTS via an amendment to the original statutory language by the late Rep. Julia Carson, which was actively promoted advanced and supported by MHARR.

As a result, MHARR’s representative stated that the industry did not have the “burden of proof” to show why manufactured housing chattel loans should be included in DTS, but instead, it was FHFA’s (and the GSE’s) burden to show why they should not be included, contrary to Congress’ clear language and intent – and that nothing has been offered to date in the way of relevant, current data that would justify or support any such exclusion.   

While General Counsel for one of the dominant industry finance companies participated in the meeting, no chattel loan performance data specific to that company was provided for consideration by FHFA.  The only additional loan performance information offered at the meeting on behalf of the industry’s finance sector generally, was an aggregation of limited data from anonymous sources.  And while the same participant confirmed publicly available information showing a 2015 default rate of 2.64% for that dominant lender, he did not acknowledge that that rate is based, in large part, on loans with high-cost interest rates.  

More importantly, the same participants, representing the dominant industry lenders made it clear that although they (publicly) favored the inclusion of chattel loans in DTS, they also favored tight restrictions on lender participation in any such program to require “skin in the game.”  That “skin in the game” rationale, however, is the same excuse offered by the Government National Mortgage Association (GNMA) for its onerous restrictions on lender participation in the Federal Housing Administration’s (FHA) manufactured housing Title I program (i.e., the GNMA 10/10 rule, requiring lenders to maintain a minimum net worth of $10 million and a 10% reserve of all manufactured home loans) which has ensured that participation in that program is limited to a Clayton Homes, Inc. captive finance company, with originations at negligible levels.  

In summary, then, while the overall tone and direction of the meeting may offer a glimmer of hope for the possible nominal inclusion of manufactured home chattel loans in a final DTS implementation rule in some form, the reality is that little – if anything – of substance has changed, with the industry’s largest businesses and dominant finance providers publicly supporting chattel inclusion, but at the same time, in MHARR’s assessment, setting out markers for restrictions on lender participation in any DTS chattel program that would continue to unduly restrict competition (as has occurred within the FHA Title I program) and maintain high-cost interest levels on chattel loans.

And while FHFA, for its part, has indicated that it would consider the points raised and reiterated by MHARR on behalf of the industry’s smaller businesses and consumers, any failure by FHFA to include a robust and competitive program for manufactured home chattel loans within a final DTS rule, will either mean a trip back to Congress for direct remedial legislation, or consideration of possible legal remedies based on known irregularities in the DTS rulemaking process.  Congress, though, has already done its job – in clear fashion – to include chattel loans within DTS, meaning that injunctive relief against any resulting discriminatory or exclusionary rule, by the industry and consumers, may be warranted and necessary.