The Vital Need for Chattel Lending

Personal property loans chattel lending manufactured homes ray leech

Personal Property Loans Are Increasingly Viable, Yet No More Attainable

ray leech DTS duty to serve plans home finance fannie freddie

By Raymond Leech

As the spring selling season hits its high point the housing market continues to face challenges. Higher interest rates are slowing sales, which is the intent, of course. However, the continued lack of affordable housing amid talk of a recession may turn away buyers to a degree that our current housing infrastructure may barely be able to handle.

Still, the manufactured housing industry may be a bright spot in the market.

Affordable housing is a critical issue because the country is millions of units short of demand. This being the case, there is growing consensus that business may expand compared to site-built homes.

Currently, the percentage of manufactured homes to site-built housing is about 11 percent. But there is some thought that percentage could increase this year, one driver being that the interest rates for chattel lending — a personal property loan often used for manufactured homes — is within two points of conventional mortgage rates, making the factory-built homes more competitive in the marketplace.  In past years, the spread has been double that, or more.

Regarding the supply of manufactured homes, there is also good news. Industry experts say that the previous backlog has been drastically reduced in nearly every market. HUD Code homes can be purchased and delivered in a few months.

Barriers To More Business

Hurdles remain when it comes to expanding growth for manufactured home units.

Tim Williams, the CEO of 21st Mortgage, said the biggest barrier of all to more manufactured home business is zoning issues. He noted that in Knoxville, Tenn., the home to his firm and Clayton Homes, local zoning laws prevent a manufactured housing unit from being set in the city. But, as Tim notes, it is a complicated issue.

But suppose someone had their home on a three-acre property and wanted to place a manufactured home on the property for their elderly parents to reside in. This scenario raises issues in the eyes of a lender. First, the home would be considered an investment property, and it is not attached to the real estate. To finance this unit requires a personal property or chattel loan. There are some lenders that may approve this transaction, but not many.  And right now, there is no secondary market for chattel loans.

Status of Chattel Financing

There may be changes to the chattel loan situation within a few years. Freddie Mac is exploring purchasing chattel loans as part of the Duty To Serve goals, updated last year. In the plan, Freddie Mac committed to purchasing from 1,500 to 2,500 chattel loans in 2024. They plan to complete a feasibility assessment of the requirements and processes needed to support chattel loan purchase, including underwriting, pricing, consumer protection, valuation and risk management. The big challenges they noted are a lack of lender standardization, no standard underwriting practices, and no consistent approach to assessing property values.

Accessory Dwelling Units and MH

In some areas of the country, especially California where there is a huge shortage of affordable housing, some jurisdictions are permitting accessory dwelling units or ADUs on a property. These are small independent living spaces that can be part of the home structure, for example, a mother-in-law suite over a garage, or independent of the main structure, such a small cottage on the property.  Since these are attached to the property, they can be financed through a cash out refinance with funds used to build the unit and tying it to the owner-occupied property.

The good news for MH is that Freddie Mac will purchase a mortgage secured by a 1-, 2- or 3-unit property that has a manufactured home ADU that meets the Guide requirements for both the manufactured home and the ADU.  So, in some areas of the country, there may be an opportunity for MH business in these situations.

As noted, 2023 could be a turbulent year in the housing industry. But there are hopeful signs that MH will continue to grow and make progress in addressing the affordable housing crisis in our country.

MHInsider is the leader in manufactured housing news and is a product of MHVillage, the largest marketplace for manufactured homes.