Federal Housing Administration:

Agency Should Assess the Effects of Proposed Changes to the Manufactured Home Loan Program

GAO-07-879: Published: Aug 24, 2007. Publicly Released: Aug 28, 2007.

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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.

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.

Status Legend:

More Info
  • Review Pending-GAO has not yet assessed implementation status.
  • Open-Actions to satisfy the intent of the recommendation have not been taken or are being planned, or actions that partially satisfy the intent of the recommendation have been taken.
  • Closed-implemented-Actions that satisfy the intent of the recommendation have been taken.
  • Closed-not implemented-While the intent of the recommendation has not been satisfied, time or circumstances have rendered the recommendation invalid.
    • Review Pending
    • Open
    • Closed - implemented
    • Closed - not implemented

    Recommendations for Executive Action

    Recommendation: 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, the Secretary of Housing and Urban Development should 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 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.

    Agency Affected: Department of Housing and Urban Development

    Status: Closed - Implemented

    Comments: According to FHA, in April 2009, it issued revised underwriting guidance based on changes to the FHA Title I Manufactured Home Loan Program, as revised by the Manufactured Housing Loan Modernization Act of 2008, of the Housing and Economic Recovery Act (HERA) of 2008. In June 2010, additional guidance was issued that provided additional clarifications of underwriting verification requirements. Although the revised guidance included a review of credit scores, it did not include any consideration of land type in its underwriting. Officials explained that land ownership type does not affect FHA?s credit policy guideline; however, HERA implemented specific requirements for homes placed on lease land, such as the lease cannot expire before three years after the loan origination date and the lease is required to be renewable in successive one year terms. Additionally, FHA now collects information on land type to determine if the manufactured home is located on owned or leased land.

    Recommendation: 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, the Secretary of Housing and Urban Development should 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 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.

    Agency Affected: Department of Housing and Urban Development

    Status: Closed - Implemented

    Comments: According to FHA officials, in August 2007, FHA's Office of Evaluation completed a study of the actual loss recovery rates in the Title I manufactured housing program. Officials explained this was done in order to recalculate the credit subsidy models used for the program instead of relying on previous management assumptions. In addition, officials explained the purpose of the study of actual loss recovery rates would be used to test pricing options, among other things. In fiscal year 2009, officials explained the credit subsidy baseline for the revised Title I manufactured housing program included adjustments made to the historical experience in the Title I program to reflect changes, as revised by the Manufactured Housing Loan Modernization Act of 2008, of the Housing and Economic Recovery Act of 2008. The new credit subsidy calculation was approved by Office of Management and Budget in May 2009. Officials also explained that the analysis was conducted to evaluate the use of risk-based pricing for the Title I program; however, a management decision was made to not incorporate risk-based pricing.

    Recommendation: 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, the Secretary of Housing and Urban Development should 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.

    Agency Affected: Department of Housing and Urban Development

    Status: Closed - Not Implemented

    Comments: FHA originally told us that it planned to implement our recommendations once legislation was passed. The Housing reform bill was passed on July 30, 2008 which included changes to FHA's Title I program, but this recommendation was not implemented. FHA officials explained they were unable to articulate which borrowers would be served if the program were expanded, including the financial condition and creditworthiness because they did not have historical data to perform the analysis.

    Recommendation: The Secretary of Housing and Urban Development should 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.

    Agency Affected: Department of Housing and Urban Development

    Status: Closed - Implemented

    Comments: According to FHA, in April 2009, it contracted with a provider to assist FHA in revamping its data system to process loans to incorporate changes from HERA. FHA officials explained they now collect data on credit score and land ownership type.

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