Investors See Better Times Ahead… - Posted by Chuck
Posted by Chuck on November 17, 2003 at 24:04:00:
Investors See Better Times Ahead For The Manufactured-Home Industry
NEW YORK, Nov. 10 (U.S. News & World Report) ? If the industry that builds and finances manufactured homes were a trailer park, it would look as if a tornado had struck. A whirlwind of repossessions has crushed investors, pounded the sales of new homes to a 40-year low, flattened resale values by as much as 90 percent, and littered the corporate landscape with bankrupt builders and lenders.
The industry has been laid so low that a few influential investors think the worst is over and now is the time to buy. Warren Buffett, a venture capital group associated with former Vice President Dan Quayle, and thousands of smaller investors have been snapping up assets for pennies on the dollar. Neither Buffett nor Quayle returned calls asking for comment, but rivals praised their strategy. “Warren Buffett is a very astute investor,” says James Dorr, a money manager for Orbis Investment Management, which lost out to Buffett for control of Clayton Homes in April. “The industry is at a cyclical low. His timing couldn’t have been better.”
If these bottom fishers are right, it would mark the industry’s second dramatic reversal in a few years. Americans bought 373,000 manufactured homes in 1998, more than double the number in 1990. Factories were churning out two-bedroom single-wides for just $30,000 apiece, as well as big, fancy modular homes that compared well with traditional homes but cost about 15 percent less.
But like too many of the homes, the industry’s foundation was shaky. At least a third of buyers put their homes on rented lots not realizing that it’s the land, rather than the dwellings, that typically appreciates in value for any home buyer. Worse, lenders lowered underwriting standards–charging as little as $500 down and approving those with subpar credit–as they competed for the chance to make manufactured-home loans paying 10 percent to 18 percent. (Standard mortgages are available only to those who are buying the land as well.)
When the economy turned south in 2000, the manufactured-home industry was sucked into a spiraling depression. Credit Suisse First Boston estimates that repossessions more than tripled from an annual rate of about 30,000 in 1998 to 88,000 plus today. Resale values tumbled. One-year-old repossessed homes are wholesaling for as little as 70 cents on the dollar, while older homes go for as little as 10 percent of their loan values. Thanks to competition from cheap resales, Americans are on a pace to buy only 130,000 new manufactured homes this year. Manufacturers have laid off 30,000, or 40 percent, of their employees since 1998. And Oakwood, one of the industry leaders, is in bankruptcy.
As borrowers walked away from loans with balances greater than the value of their homes, payouts on bonds backed by those loans plunged. Conseco, the largest manufactured-home lender, went bankrupt last year. In September, the Federal Home Loan Bank of New York sold off $1 billion worth of formerly AAA-rated manufactured-home-loan bonds for 82 cents on the dollar. And some investors are worried about Fannie Mae’s $9 billion in mobile-home bonds. The company says its existing loans are performing fairly well, but it has tightened credit standards on new loans.
The optimists say that tighter lending practices are a sign that the worst is over. Borrowers who qualify under today’s tougher rules will be less likely to default. What’s more, as investors like Buffett and Quayle jump in, the fresh cash will eventually push interest rates down and thus revive sales.
Most important, there are signs that the beleaguered homeowners may have learned some painful lessons. In San Antonio, Brenda and Patrick Castillo are rethinking plans to sell their six-year-old single-wide, placed on a rented lot. They haven’t been able to find anyone willing to pay them the $28,000 they owe in a market where similar repossessed homes sell for about $21,000. So they are thinking of moving the home to land they can buy, to start building equity. “I could enjoy the trailer better if we weren’t putting money down the drain,” says Brenda. If more owners follow their example, the industry will be on the road to recovery.