Manufactured-housing communities, or MHCs, are an increasingly popular and lucrative option for commercial real estate investors and the mortgage brokers who work with them. In order for these properties to be profitable, however, investors should understand how their tenants finance a home purchase. This is commonly achieved through a chattel loan, which is a personal-property loan that is not backed by the underlying real estate.
Dennis Smith of Freddie Mac and Corey Aber of Freddie Mac Multifamily spoke with Scotsman Guide about the trends and challenges they’re seeing within the MHC financing sector.
How is Freddie Mac trying to use manufactured housing to address affordability issues?
Aber: Nearly 90 percent of the rental units that we finance are affordable to low- and moderate-income renters. … We got into the MHC business in 2014. Since then, through December of 2018, we have provided over $5.2 billion in financing for 524 communities, and that’s covering nearly 140,000 pad sites. … Owning a manufactured home and renting space in a community tends to be a bit more affordable on an ongoing basis than renting an apartment or owning a home and land together.
Smith: Manufactured housing today is a lot different than it was 20 or 30 years ago, and that really needs to have a paradigm shift as far as the perception. … Maybe [lenders] think about the losses that they took on [manufactured-housing] properties and how those homes depreciated in value as an asset class. But new research from the Urban Institute really shows that manufactured homes are appreciating [as well as site-built homes].
We’re trying to tie energy efficiency into manufactured homes. We recently announced that we have launched a CHOICEHome program, to kind of offer a home in that price range where site-built [homes] left a vacancy, and help with that affordability inventory crisis that’s out there.
Freddie Mac is in the midst of a chattel-loan pilot project. How is that going and how will it contribute to affordable-housing production?
Smith: We’ve spent 2018 really trying to gather some data on what a chattel program would look like and what is currently offered out there by lenders who are putting [these loans] on their portfolio. … We’ve taken that data and we’ve really looked into modeling and analytics of, “What does that look like?” — and trying to match that up with, “How does that fit into the secondary market, and what can we look for from a securitization perspective?”
We’re looking forward to the end of the second quarter of this year when we would actually begin to purchase some chattel loans for the pilot program. … Some of those we may purchase through a bulk initiative and some we may do through more of a flow basis. That way, we have a view into some seasoned loans as well as into some newly originated loans in the chattel space.
Do you think resident-owned communities (ROCs) are part of the affordable-housing equation?
Aber: A ROC does not alleviate the need to finance the home as chattel, so an individual homeowner in a ROC can’t get a loan on a home titled as real property, because the homeowner only owns a share in the co-op that owns the land.
One of the things worth paying attention to is the difficulty in converting from an investor-owned community to a resident-owned community. … A community must be put up for sale to begin with. The residents must want to own the community. They need to have sufficient equity or equity-equivalent financing. Specialized debt-financing products might be part of the equation as well.
Many states have not adopted Freddie Mac’s Duty to Serve tenant protections. Is this a big problem?
Aber: The presence or absence of the Duty to Serve-specific tenant protections doesn’t really affect the ability to create MHCs. Each state uses the tenant protections differently, which is one of the main things that we found in our research paper on the topic. … Not one state has all [regulations] in place but many of them have some.
[We are looking] for ways that we could help a market develop for MHCs that have that specific complement of Duty to Serve tenant protections, either through state law and regulation, or through a sponsor’s or owner-operator’s voluntary inclusion of Duty to Serve protections in leases. The research that we did [in 2018] was our first step in that effort.