Should GSEs be aggressive in buying chattel loans?

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WASHINGTON — A battle is brewing over how far Fannie Mae and Freddie Mac should go in their pilot programs to begin purchasing manufactured housing not secured by land.

Both government-sponsored enterprises have announced plans to buy so-called chattel loans under their regulatory-mandated “duty to serve” plans.

Fannie has said it intends to purchase 350 to 425 chattel loans a year starting in 2019, totaling roughly $20 million to $25 million a year, as part of its pilot program. Freddie has not specified its level, but says it doesn’t plan to buy any loans in the first year of its own program as it studies the market.

But players in the market are divided over whether the GSEs are being too aggressive or too cautious.

"The enterprises should not be able to receive a satisfactory rating without a significantly more meaningful commitment to purchase chattel loans," said Lesli Gooch, senior vice president for government affairs and chief lobbyist for the Manufactured Housing Institute.

The group is pushing for each GSE to buy 830 chattel loans, totaling around $50 million, in the second year of their pilot programs and double that level in the third year.

The $50 million target is 0.000167% of Fannie’s total loan purchase volume in 2016, according to the manufactured housing group.

Yet the National Association of Federally-Insured Credit Unions and others argue that the GSEs, and Fannie in particular, should move more cautiously. It wants Fannie to delay purchasing chattel loans for at least a year.

"Ideally, Fannie Mae would not purchase any chattel loans in the first year and instead, like Freddie Mac, plan to spend the time conducting outreach, research and analysis of the market," wrote Ann Kosachev, the regulatory affairs counsel for NAFCU, in a July 7 comment letter.

Others are criticizing Freddie’s approach, however, saying it needs to be more active.

"This is a significant market opportunity and NCRC would encourage Freddie Mac to be more aggressive in entering the market,” wrote John Taylor, president and CEO of the National Community Reinvestment Coalition. “It is also important for both GSEs to take the lead in establishing responsible lending standards for the chattel market that has been plagued with abuses targeted towards vulnerable consumers."

The manufactured housing industry produced over 81,000 homes, or approximately 9% of new single-family home starts, in 2016, according to the Manufactured Housing Institute. Roughly 80% of those homes are titled as chattel loans.

Supporters of chattel loans are hoping that Fannie and Freddie’s entrance to the market will help boost the availability of such loans.

Yet there are also fears the GSEs are entering a risky area.

David Stevens, the president and CEO of the Mortgage Bankers Association, said there are “unique risks” in the chattel loan market, which justifies the GSEs' taking time to conduct research and market outreach before buying loans.

“Successful development of these pilots will require particularly strong communication and collaboration with lenders and investors," Stevens wrote in the group’s comment letter.

Stevens also said the GSEs need to "pay close attention to the potential incentives and returns for market participants, as these will determine lender involvement in the pilots and, ultimately, whether the pilots succeed."

The Manufactured Housing Institute, meanwhile, argues that Fannie and Freddie are dragging their feet when it comes to buying chattel loans on a flow basis, which is key to securitizing these loans.

“MHI is disappointed that neither plan makes a commitment during the three-year plan period to purchase chattel loans on a flow basis — instead limiting their goals to the bulk purchase of loans,” Gooch said in a May 9 press release.

The manufactured housing group also targeted Freddie’s effort to expand its financing program that turns privately held manufactured housing communities into resident-owned communities.

These so-called resident-owned communities, or ROCs, depend on community development financial institutions and banks using specialized loan products to purchase the manufactured housing facilities. The residents generally used chattel loans to purchase their individual manufactured homes.

Freddie has completed two ROC loan transactions totaling $5.4 million as part of its community program. "To our knowledge, we are the only GSE to have purchased ROC loans," Freddie said in its “duty to serve” plan.

But that did not impress the Manufactured Housing Institute.

"Both plans include objectives to promote loans to manufactured home communities, which do not increase the availability of manufactured home loans to very low, low and moderate-income borrowers,” Gooch wrote in the group’s comment letter.

“Ultimately, it is imperative that ‘soft’ activities and purchasing loans for manufactured home communities should not be a substitute for activities that have a tangible impact, using objective metrics like chattel and real property loan volume.”

However, the National Community Reinvestment Coalition supports the GSEs' efforts to provide liquidity for manufactured housing communities owned by government entities, nonprofit organizations or the residents.

Fannie Mae is new to this business of financing MHCs. Yet it is planning to purchase at least five loans with resident owners in year two and at least seven in year three, which exceeds Freddie's goals.

"Freddie Mac, being the only GSE with experience in this market, should be more aggressive in setting their future goals," Taylor wrote in his comment letter.

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