Alex: Hello everyone, and welcome to our webinar today entitled Grow Your Lending Portfolio: Manufactured Housing Loans. Thanks for joining us, my name is Alex Gregg and I'm the content marketing manager for NAFCU Services.
Our webinar is presented today by Triad Financial Services, our preferred partner for indirect consumer lending. We have just a couple details to note before we begin. The first is, we are recording this presentation, so following the webinar a link to the recording and a PDF of the presentation slides will be emailed to you. We will also post these items on the Triad page of the NAFCU website. Please use the panel on your screen to submit questions at any point during the presentation. We will answer several questions during the Q & A portion today. However, if we don't cover every question, Triad will respond after the webinar.
I am pleased to introduce our expert presenter today, Keith Stayer. Keith is a Senior Vice President of Lender Development at Triad Financial Services. Keith's responsibilities include assisting credit unions grow and diversify their loan portfolios while expanding membership. He has over 25 years of experience in finance and has held leadership positions with the NOVIS Financial, NetBank, RBNG, and Maryland Credit Corporation. He has a broad background in commercial lending, mortgage banking, consumer finance, and loan portfolio management. Keith's a graduate of the University of Florida. Keith is a great friend to the credit union community and we're glad to have him with us today. So with that, I welcome Keith to our webinar.
Keith: Thank you very much for your introduction, and thank you, everybody, for coming into the webinar. As Alex said, I'm Senior Vice President in charge of lender development retention, and my responsibilities include working with credit unions to grow and diversify their loan portfolio.
So, just a little bit of background about Triad Financial Services, who we are, and then we will go into why the manufactured housing lending could be a very valuable asset for your loan portfolio. Triad Financial Services is a specialty finance company. We've been around since 1959. Our headquarters is in Jacksonville, Florida, with offices just outside of Chicago, Illinois, Wichita, Kansas, and our west coast divisions based out of Irvine, California. And who we are, we are the nation's top lender for manufactured homes for prime, well-qualified buyers only. So we're prime credit specialists and we're currently servicing over 1.3 billion in outstanding manufactured housing loans with over 125 lending partners. And those lending partners being banks and credit unions. And we offer financing programs in 42 states.
So, a question when we originally speak with credit unions or financial institutions is really, "What is today's manufactured housing?" So today we will talk a little bit about what manufactured housing is, as well as the advantages of manufactured housing. We'll take a quick snapshot of what the industry looks like, and we'll hopefully address any perceptions that people have regarding manufactured housing, as well as what financing options are available for borrowers who are seeking to purchase a manufactured home. We'll also take a quick look at what the CFPB regulations, the recent CFPB regulations that were implemented and how they affect the originations of manufactured housing loans, and really we'll conclude by how manufactured housing finance can help grow and diversify your credit union's loan portfolio.
So what is manufactured, or quite simply factory-built homes that are built according to strict HUD standards. They have a very distinctive business model. These homes are built indoors in a climate controlled setting. They are built by very seasoned professionals and craftsmen, and these construction adheres to very strict QC standards at the factory and through HUD. These homes are typically purchased through a retailer network, and then they are constructed in a factory, and they are completed and delivered and installed by professionals.
But another way to look at manufactured housing and factory-built homes, which I observed at a recent plant visit is really homes are built from the inside out, meaning that these homes, the foundation is delivered first within the factory, and then from the foundations, the walls are erected, the closets are built, the cabinets, the countertops are built, and really, one of the last items that go on are the roof. So it's almost a complete opposite of what is site-built single-family home is how they are built.
So what are some of the biggest advantages of manufacturing housing? There's the cost. New construction cost per square foot averages considerably less than site build homes. And part of the reason for that cost advantage is all the construction materials as well as all the interior appliances and finishes are purchased in volume by the factory, which provides significant savings which are passed on to the consumer.
A misperception is manufactured homes do not appreciate like site built homes, but we have found that they do appreciate like site build homes, very much like site build homes, because of the affordability as well as the quality of the construction. Another way to compare a manufactured home vs a site-built home is if you look at the average sales price for a manufactured home in 2014, the average sale price is $65,300, and the average square foot is 1,438 or $45.41 per square foot. Compare that to the average sale price of a site build home of $261,000 or 2,690 square foot, you'll see that the cost per square foot is $97.10. Almost double the savings for purchasing a factory build or manufactured home vs a site build home.
The advantages in quality. Also, when you are building a manufactured or factory built home, the QC oversight is continuous, with multiple layers of oversight administered by HUD. And all of the aspects of the construction process are controlled because the weather does not interfere with any construction timing, unlike a site build home, if you're delivering materials to a site and there's any type of weather delays, the materials will frequently sit on the site until that process is able to take place due to weather delays. So for factory build housing, you do not have these type of weather delays, and all the technicians, craftsmen, assemblers, they work as a team, they are all professionally supervised, and the typical time frame it takes for a plant to construct a home is approximately 5 days. In a typical plant will produce anywhere from 5-6 homes per day.
Another point is that they are very eco-conscious and efficiently built, meaning that there's minimal waste and recycling which makes the factory inherently green, but even more so, these factories are able to leverage technology in many cases robotics in order to construct the home, which significantly reduces the waste, thereby reducing cost. Personally, I've observed a 1,700 square foot home being constructed in a factory, and by the time it was ready to be shipped, the waste as a result of the home fit into a small garbage can. So they have a very efficient way by leveraging technology to build these homes in order to keep the price low.
Other advantages in quality - There's multiple amenities that you can choose from which range from very basic to very elaborate, really depending on what the borrower or the buyer's preferences are. There's awnings, there's patio covers, there's decks, site-built garages and permanent foundations are available for upgrades. Of course there's other upgrades available such as granite countertops, drop lighting, oak cabinets, etc. So it's really up to whatever the home buyer's preferences are.
Also, the safety standards. These homes are engineered for wind safety and energy efficiency based on the geographic region which they are sold. So for example, in the state of Florida, they're built to very strict hurricane force wind standards, in some cases exceeding site-built homes. So, really, manufactured homes are among the safest housing choices available due to the strict federal laws requiring, administered by HUD for the construction of these homes.
So if you look at some of the industry data. Right now, there's 37 corporations producing homes in 122 plants throughout the United States. 53% of these homes are multi-sectional plans, whereas 47% of the homes are considered single-wides or double-wides section plans. And nearly 12% of all new single-family homes sold in 2015 are factory build or manufactured homes. 67% of these homes produced are placed on private land, whereas 33% are placed in communities. If you look at the geographic regions, as to where these homes are, not just built, but where they are shipped, you'll see certain areas throughout the country having higher concentration levels of factory-built homes than others. The highest being the west south region - North Florida, Texas, Louisiana, Arkansas consistently has the highest concentration of factory built or manufactured homes in that area, followed by the south and the south Atlantic.
So really, if you look at Triad Financial Services, where we originate loans from, the concentration levels are very consistent with the previous slide. Most of our business is in the Texas area. Most of it's in the Southwest region, with heavy degrees of concentration in the Southeast. So the opportunity for credit unions is certainly if you are a credit union within this geographic footprint, there are significant opportunities to grow and diversify your loan portfolio with this asset class. So geographic diversification is one thing to keep in mind when you're considering growing your loan portfolio with manufactured housing.
Unfortunately, in the past, there's always been myths or perceptions for manufactured housing, and quite honestly, quite a bit of it is from media-fed type images. One of the perceptions are these homes are poorly constructed trailers, that these homes do not appreciate in value, or they are undesirable trailer parks. There is a perception that all of these homes have axels, wheels, and they can be moved at any time, and these loans have high delinquency and default rates because these borrowers have lower credit scores. What we have found in our over 50 years of originating manufactured housing loans.
This is a battle that we are constantly fighting because the perception is not reality. Some of the homes that, there are homes that are out there pre-1976, pre-HUD codes that are not new constructions, such as this particular home. That is not a type of home that we would finance, and many finance companies would not finance. You can see that this is not properly affixed to a foundation. This is a trailer, for lack of a better word. This is not the type of collateral that Triad would originate nor is produced by today's factory.
This is another home the perception is that these homes are always built in some remote area with minimal amenities, and poorly constructed homes. Again, this is not the type of collateral that is out there in today's manufactured homes. The reality is that Triad and other finance companies finance new homes. This is a new multi-sectional home which was constructed in a factory, delivered, and permanently affixed to a foundation. And over 70% of the homes that we originate loans on are new constructions.
And most look like this. This is a home that was built, delivered on a flatbed, assembled at the site, where the amenities include the porch, the sidewalk, the landscaping. And this is a home that is a very affordable housing option for the customer.
So who lives in these homes? Who are some of the manufactured homeowners? The borrower profiles are typically gray collared workers. These are your firefighters, these are your police officers, your city workers, your teachers. Or, they are retirees who are seeking a cost-effective, high quality housing option, which are typically in a age-restricted, well-maintained community. Or else these are private landowners who prefer the privacy and flexibility that comes with manufactured home ownership, or even these are professionals in your communities that live in high-cost areas where traditional site-built homes are not affordable. I put the example as California, which has very high property values, but manufactured housing finance is a key component because of their affordability when compared to site-built homes. But if you look at this slide, and you look at who lives in these manufactured homes, these are your members. These are credit union members, these are people who are members of your credit union and take advantage of other products and services that your credit union offers.
So, something to keep in mind is, who are the profiles and who lives in these homes? But further demographics without getting too deep into this slide. As you'll see, over 70% of the residents are between the ages of 18 and 59. If you look at some of the trends in the financing market, and the history of manufactured housing finance, that what happened in the late 1990's and the early 2000's is really the overly aggressive underwriting standards, meaning that companies were originating loans to people who did not qualify. Quite honestly, fortunately we did that again later in the 2000's with the site build market, but the overly aggressive underwriting standards contributed in the late 1990's and drove industry decline. With that industry decline, there was a lack of securitization markets with limited liquidity, and a number of finance companies able to offer loans on manufactured homes. Certainly some small community banks and some credit unions will originate manufactured housing loans on a case by case basis, but it is a very specialized program, and I'll get into what the product mix looks like and it's helpful to have a partner who has that expertise and knows what they're doing when originating manufactured housing loans. Certainly, VA and FHA loans are available through certain lenders, but really, there's a limited financing options are concentrated amongst a handful of Specialty Finance Companies. But as the GSEs evaluates ways to support affordable housing, it's very likely that more lenders will start to enter this market as the GSEs become more acceptance and realize that as part of their duty to serve, they need to support this asset.
And just a graph to illustrate where the industry decline happened, again it was the late 1990's that underwriting standards which led into the 2000's, with shipments being declined and because there was just not any buyers, and finance companies and markets are starting to dry up. You'll see that until January 2000 you'll see a peak of shipments of 300,000 shipments per year. That means that homes that are built in the factory and shipped. So that shipment went from a little less than 300,000 dipped all the way down in November of 2010, but what you're seeing now is during that time, a lot of the finance companies that had the overly aggressive underwriting guidelines that were originating loans without carefully evaluating the borrower's ability to repay, they've left the industry.
So now you're having players that know what they are doing, and know how to do their business. They're starting to see a gradual uptick in shipments. Which, if this slide by the Census Bureau goes through March of 2015, but through September 2015 you'll see the shipments actually are starting to approach 80,000 units per year, so the trend line continues. But the key being hopefully, that the key being that a lot of players who contributed to the demise are no longer in this business.
If you look at some of the finance programs that are out there, most of what you'll see is what's called a Chattel Loan. These are homes that can be financed as a personal property, on leased land, in a manufactured home community, or on privately owned site.
A Chattel Loan, from a assets-last standpoint in your credit union, is considered a consumer personal property loan, because you're not encumbering the underlying real estate, it's just a home only is what your collateral is. The borrower does own the underlying real estate, they would either typically pay rent to a community owner, or if it's on private land, they'll pay rent to that landowner. So financing that, it's a title, it's not a mortgage. Other programs are land and land-home loans. You have a land plus program whereas homes, the loans is originated using the underlying collateral, the underlying land as collateral in lieu of a cash down payment. But you also have a real estate transaction, which is subject to all the trade guidelines and you have that asset class in your credit union as well.
So, from an asset-less standpoint, you have two programs or three programs. A land home, which is real estate. You have what's called a land plus loan, as well as a Chattel loan. So there's multiple types of financing available, but mostly what you'll see within the industry today is a Chattel loan, or personal property consumer loan. Some of the loan terms, your typical loan terms for manufactured home loans on the newer homes, or the new homes, you'll see anywhere from 10 to 20 percent plus cash down payment from the borrowers. So it's nice that the borrowers do have equity in the transaction.
You'll see terms anywhere from 15 to 30 years, depending on the credit profile and the collateral type. Under the existing homes, you'll see a very similar down payment in 10-20% plus and terms up to 20 years.
For what we see in our transactions for Triad, is our average term is about 225 months, but these loans typically pay off in a portfolio in approximately 84 months. And our average downpayment is 18%. So, for the loans to perform exceptionally well if they are underwritten properly, because the borrower does have some equity in the game, and these are underwritten according to guidelines.
A couple of the CFPB regulations that impacted our business, and there's several that I'll talk about, a couple of them. The first being the Steering and the S.A.F.E. Act, as well as the HPML or High Price Mortgage Loan, evaluating the borrowers ability to repay according to appendix Q of the CFPB which makes it a qualified mortgages.
The biggest impact in our business is the Anti-Steering rule, which really restricts the retailer from assisting the borrower in selecting a finance company. The S.A.F.E. Act requires the loan originator who is taking the application, discussing, it requires a person who has taken the application and discussion rates and fees, they need to be uniquely licensed as a licensed mortgage loan originator in an NMLS system.
What happens is a lot of our retailers when a customer goes onto a retailer's lot, and they select a floorplan, and they decide the price, the next question they'll ask the retailer is who am I going to get to finance this home. The retailer is not allowed to direct that customer to a particular finance company, so really the customer is on their own to find the company that's going to finance their manufactured home, because there is a very limited number of companies out there who will finance a manufactured home. And typically these retailers are not licensed mortgage loan originators, they did not complete their 8 hours of S.A.F.E training and they did not take the NMLS nor should they, which really not their business.
But really, the borrower needs more guidance as to who should they select to finance their home, because it's not as readily available as it would be if the customer is buying a site build home.
The next item is the higher priced mortgage loans that are defined as loans that exceed the annual prime offer rate or APOR, plus 1.5% margin, which changes weekly. And most of the manufactured housing loans do exceed that APOR plus 1.5%, so they're considered a higher priced mortgage loans, as defined by section 35, which is fine as long as they have escrow for taxes and insurance, and they don't originate any type of exotic type of programs.
And according to appendix Q of the CFPB, we need to underwrite according to certain underwriting factors. I won't read each one of these, but mostly everybody who is originating a credit in the past or currently, these are typical items that need to be properly verified and documented in order for it to become a qualified mortgage.
Out of the qualified mortgages, which begin in January of 2014, which provides certain legal protections for lenders who follow certain regulations according to the Dodd-Frank Wall Street Reform and Consumer Protection Act. So, we have determined that the borrower, the lender has analyzed the borrowers ability to repay based on income, assets, and debts. That the maximum debt to income ratio will not exceed 43% of pre-tax income, and again, the qualified mortgage must not have any risky or overpriced loan features like negative-amortization, balloon payments, 40-year terms, or interest-only mortgages. All of the mortgages that Triad originates are considered qualified mortgages, they are qualified mortgages based on our underwriting standards, as well as evaluating the collateral.
So we touched on a few things, we touched on what manufactured housing is, the advantages of manufactured housing. We talked a little bit about the industry, we gave an industry overview. Hopefully, touched on the perceptions of manufactured housing and the CFPB rules and regulations that impacted our ability to originate qualified mortgages.
So how could your credit union participate in today's manufactured home market? You see that it is a growing type of industries, with a limited number of specialty finance companies out there.
So I like to start, as a real case study that we had through Triad that we helped a credit union build their loan portfolio, and what we found that this credit union was finding it difficult to expand their membership while increasing revenue. The compliance cost was increasing and a large percentage of their loan portfolio was low-margin automobile loans that were paying off at an alarming rate.
The CEO of this Credit Union tasked his management team to come up with recommendations to increase revenue while minimizing expense. So we all have those type of CEOs who have come up with that task, and this is what we have found that worked for our credit union partners. We realize that credit unions that attend the same conferences, so this Executive Officer at the credit union heard about Triad from a colleague at another institution and they contacted Triad for a presentation. And we have the referring party was actively participating in our program and recommended our innovative indirect lending program as an ideal way to originate high-quality, higher-yield loans with minimal effort and no FTE requirement.
After the program presentation, the credit union began their due-diligence process and presented their findings to the board, and the board recognized the value in authorizing the institution to begin investing loans from Triad. The credit union is currently an active participant in the program and finds the Triad portfolio geographically diverse, secure, and highly profitable, and they are also a reference for Triad to other credit unions.
So, because we're a specialty finance company and there's not a lot of manufactured home originators out there that have the expertise, it's really a small reference window whereas we work with credit unions who refer their colleagues to us.
So what this does is when you're partnering with a specialty finance company, it's imperative that that specialty finance company, and not just in manufactured housing lending, but any type of lending. They need to have the expertise in all facets of their business. They need to provide a proven turnkey business model and deliver so you can produce the best performing loans in the most efficient manner possible. And, it's important to have cash reserves to back the collateral, and certainly be with an industry partner that has over 50 years of experience.
But I mentioned earlier a couple times during the presentation about diversification, and diversification is critical when you're looking at this type of asset class. What we found is that many of our credit union partners do a lot of indirect auto lending, pretty much all indirect auto lending that these loans are very low margin loans, and they burn off the portfolio very quickly, so the credit union continues to run in place while they're trying to replenish which has already run out of their portfolio.
So, when you're looking at diversification, the key to our program is geographic diversification, and as your field of membership warrants, it allows you to enter other markets, so you can take advantage of other areas that you are unable to capture business in, such as auto paper or whatever type of lending you do.
When you're looking at the specific asset class, it's important to have diversification within that pricing, so what we do is that we price our loans based on a borrower's credit score, return of the loan, and how much down payment they are putting in, so if a borrower has a lower credit score, but are still considered prime, they have a longer term, but a low down payment. That will generate a higher yield to the credit union than the other end of the spectrum which is the prime, super-prime credit borrower.
So, diversification and pricing is very important as is geographic diversification, but I touched on the assets-last diversification. These Chattel loans are considered consumer personal property loans, but blending that in with Real Estate loans will provide even more diversification. In loan duration - these loans do not burn off like credit like auto loan paper. The average life of loan lasts from about on average 84 months, so they are a valuable asset to have on your books because of the duration of the loan, and not just that but because of the yield that they produce.
If you look at the credit union yields for auto paper used and new and other asset classes within the credit union, you'll see that a manufactured home loan could be anywhere from 45 basis points and yield higher than auto paper, so really, it's important to partner with somebody who knows their business and knows their programs, and if the loans are properly underwritten and properly placed, you'll look at the performance of the portfolio, which if you look at the delinquency rates and default rates, and if you look over a period of time, certainly in the 2007, 2008 range, the loans perform exceptionally well during the most trying economic times that we've had in the recent history of the United States.
And the reason is simple. These people bought the home that they can afford. These people have put cash down payment. These borrowers realize these borrowers years ago could have bought a site build home for $500,000 and interest-only payments or option arms or whatever the program, but these people bought the home that they can afford and in some cases these homes are more affordable than rent. So the people, these borrowers, or these members are very responsible people, they maintain their credit score, and they pay their bills. So these are good asset classes to have on your books.
That concludes that part of the presentation, and would certainly like to open it up to any questions that anybody has.
Alex: That's great, thank you so much, Keith, for a great presentation. Personally, that last slide, the loan yield report, it really shows the opportunities that are there. So, we are going to open it up for Q & A from the audience now. For all of you on the line, just type your questions into the chat panel on your screen. Even if we can't address all questions during the session, Triad will be sure to respond after the webinar. There were a couple that came in already, so the first one was from Jay, and his question is: "Are manufactured housing loans considered mortgage loans, and thus subject to recent trade requirements?"
Keith: The Chattel loans, no. They are considered personal property loans on the land-home loan, on the real estate loans, then yes, they are considered real property real estate loans and subject to trade requirements.
Alex: Great, thanks. Second question is from Eric, who asks: "How do your manufactured housing borrowers then become credit union members?"
Keith: Well, it depends on what the credit unions feel their membership requirements are. What we do is that when we receive a loan application from a retailer, from a customer, then what we do is that we present a snapshot of that loan to the credit union upfront. If that loan meets your credit union's criteria, then we will process it, underwrite it, close it, and then at closing, we will have the customer complete your membership application, and then we send the entire loan package to the credit union with the membership application, and then we'll even pay the credit union membership fee for the borrower, and then that's how they become a member of your credit union. So, it really depends on what your field of membership requirements are.
Alex: Thanks, Keith. Next question is from Dan, who asks: "Are the homes Triad finances modular homes or manufactured multi-wide homes? From the description and photos, it seems as though they're more modular in nature than manufactured. Can you clarify this?"
Keith: Well, the main, most of what we do are manufactured or HUD homes, so that's different from modular homes, but we also offer financing on modular homes. The modulars are built in the factory and delivered in sections and by a crane, once it gets to the property, whereas a manufactured home, which is subject to HUD guidelines, is built in a factory and delivered on a flatbed and then assembled at site. So the answer is, we do both manufactured, which are HUD coded, or modular, which are according to local building codes.
Alex: Next question is from Becky: "Are there certain areas in the country where you see the most opportunity to enter the MH market?"
Keith: Yeah, in the Southwest regions throughout the country, specifically Texas, Arkansas, Louisiana. We see the highest degree of manufactured homes. But, in the Southeast market, and also in the Mid-Atlantic market, we're seeing a less increase, or less concentration but a very high level. So the answer to the question is: Southwest markets, Southeast markets, and Mid-Atlantic you'll see the most, and in California is also become a very large market for us. But we do financing in 42 states, but those regions, Southwest, Atlantic, Southeast, and California are producing the highest.
Alex: Great. Next question is from Renee, who asks: "How does the indirect lending program work? Does the credit union enroll local MH dealers in the program?"
Keith: No, the credit union has nothing to do with the MH dealer. We are the, we have the relationship with the manufactured home dealer. We employ regional managers out in the field who contact manufactured home retailers and provide borrower-facing educational information to them for financing. So, our relationship is with the manufactured home retailer, not the credit union.
Alex: Alright Keith, well thank you so much. That is all the time we have today everyone. If your question wasn't addressed, we will be sure to respond directly after the webinar. Keith, thank you very much, it's always a pleasure. Many thanks to all of you who joined us today, we hope that you enjoyed the webinar and we will send you a copy of the slides as well as a link to the recording. Hope to see you next time!
Keith: Thank you Alex. Thank you, everybody.