Reformed FHA Program Will Offer Lenders New Business Opportunities

Modern manufactured homes are an unusual feature of today’s housing market, the rare homeownership opportunity that is both lower-cost and high-quality. Thanks to the efficiencies baked into the construction processes of manufactured homes, these factory-built houses are both faster and less expensive to build than site-built homes—saving buyers between $50,000 to $100,000 per unit.

However, despite these advantages, the manufactured housing market is struggling—not from a lack of willing buyers, but rather, because there haven’t been any functioning federal programs and few lenders. The result is that safe and affordable financing is out of reach for tens of thousands of credit-ready homebuyers looking to purchase a manufactured home.

Yet help might be on the way. New changes from the Federal Housing Administration (FHA) and Ginnie Mae, which insure and guarantee loans, could help open an untapped market for lenders looking to expand their businesses and improve access to credit for buyers of manufactured homes.

Unlike site-built homes, which are always titled as real estate, over 40% of manufactured housing is titled as personal property (the same way a car is titled). When a manufactured home is titled as personal property, a mortgage cannot be used, so the next best option is to take out a personal property loan, known in the industry as a “home-only” or “chattel” loan.

Demand for home-only financing is strong; in 2019, there were more than 200,000 home-only loan applications. Nevertheless, in 2021, only 36% of completed home-only loan applications were approved; this 64% denial rate has remained relatively unchanged over the last four years. Credit standards for home-only applicants are much higher than for buyers seeking a mortgage, and this helps explain the high denial rates. For example, research shows that a home-only loan applicant with a super-prime credit score (720 or higher) is less likely to be approved for financing than a mortgage loan applicant with a subprime credit score (580 to 619). And when buyers of manufactured homes are unable to secure a loan, they must either scrape together the cash on their own or resort to seller financing—or forgo the purchase altogether.

Yet tough credit standards are only one of several reasons the demand for home-only loans is not being met. Much of this market dysfunction is also attributable to a lack of lenders. Just five lenders originated more than 75% of all home-only loans from 2018 to 2022, four of whom specialize in home-only lending. Mindful of the dangers of such an uncompetitive market and consumer challenges with getting safe and affordable financing, the FHA and Ginnie Mae jointly announced late last month a series of updates designed to get more lenders to participate in the Title I Manufactured Home Loan and Title I Loan Securitization programs, the only federal programs that help lenders to make home-only loans.

To date, Title I programs have been grossly underutilized, due largely to outdated program requirements and guidelines. However, the recently announced updates should help to reduce these barriers to lender participation, paving the way for new entrants into a market that is desperate for more finance companies and uniquely positioned to help address the nation’s unprecedented affordable housing crisis.

The home-only lending market presents several major opportunities. For lenders, the market offers the prospect of a new and growing line of business. The FHA has an opportunity to extend its considerable manufactured housing expertise to strengthen a critical market. In addition, government-sponsored enterprises (GSEs) could play an important role and better fulfill their congressionally mandated Duty to Serve by beginning to purchase home-only loans to boost lender participation and the supply of financing. And for the housing market writ large, federal programs can increase the availability and affordability of manufactured homes and consumer access to safe, affordable financing for the nation’s most affordable pathway to homeownership.

Aware of these opportunities as well as the worrying shortage of home-only lenders, leaders from the manufactured housing sector, including nonprofit and for-profit lenders; federal officials from a range of government agencies; and other industry representatives convened in Washington, D.C., in February to discuss the changes FHA and Ginnie Mae are making and the next steps to best grow the home-only loan market. Attendees of the closed-door meeting, which was hosted by the Lincoln Institute of Land Policy and The Pew Charitable Trusts, agreed that the most effective way to address the current lack of home-only lenders is to establish functioning FHA and GSE loan programs that can attract additional loan originators.

Although FHA and GSE programs that can standardize the home-only market are crucial to growing that market, so too is lender participation. The more loan originators who are willing and able to serve home-only buyers, the more likely the home-only market will thrive, fueling a virtuous cycle of consumer demand that can grow new lending opportunities and increase access to affordable homeownership.

This op-ed was first published in Housing Wire on March 28, 2024.

George McCarthy is the president and CEO of the Lincoln Institute of Land Policy. Rachel Siegel is a senior officer with The Pew Charitable Trusts’ housing policy initiative.