While most manufactured housing customers obtain a chattel loan—a personal property loan—there are significant potential cost savings for them in the mortgage loan market, according to a report from the Urban Institute.
In fact, in the report, the researchers at Urban Institute suggested costly chattel loans could be partially responsible for the decline in this affordable housing sector in recent years.
Addressing the high cost of financing for this affordable housing sector could help ease the current affordable housing supply shortage, the researchers said in a report.
Manufactured housing was significantly more popular in the past. From 1977 to 1995; records show 240,000 manufactured home shipments per year. In 2017, there were only 93,000 manufactured homes shipped.
The Urban Institute estimated an average rate spread of 5.61 percent for loans from manufactured housing lenders, well over four times the rate at general lenders, which the institute estimated at 1.20 percent.
“At a minimum, we conclude the difference between chattel and non-chattel lending is 4.41 percentage points,” the researchers stated.
On an $80,000 20-year chattel loan, this would translate to a savings of $2,600 per year, according to the researchers.
However, the researchers noted, “this does not mean everyone who takes out a chattel loan could save 4.41 percent in interest by switching to a mortgage.”
Borrower credit scores, incomes, closing costs, and land ownership can also impact the equation.
The report pointed out that borrowers who obtained chattel loans may have lower credit scores and lower incomes on average. The median income for a manufactured housing lender customer was $45,000. The median income for a general lender customer is $51,000.
Also, closing costs were likely to be more expensive on a mortgage loan than a chattel loan. “Even so, the cost differential between chattel and mortgage financing is significant,” the researchers maintained.
Another factor to consider is that not all chattel borrowers have the option of a mortgage loan. Chattel loans function as personal property loans where the home itself is considered personal property. This allows borrowers who own their home but not the land on which it sits to obtain financing. For a mortgage loan, the borrower must own both the house and the land.
However, “Data show that most manufactured homeowners taking out chattel loans might have been eligible for a mortgage,” according to the report.
This could be the result of a couple major convenience factors that can lead borrowers to choose a chattel loan, perhaps even without considering a mortgage loan. The first is that manufactured homes are titled as personal property, regardless of whether the owner owns the land on which the property sits. To obtain a mortgage loan, the borrower would have to go through a potentially complicated process of transferring the property to “real property.”
The second is that there are often chattel lenders offering loans at the same site where the homes are sold. Customers can purchase their home and obtain their loan at a one-stop shop all in one day.
While conceding that not every chattel loan borrower would qualify or opt for a mortgage loan, the researchers maintained there were significant savings for some customers.
They suggested policymakers encourage borrowers at least to consider a mortgage and to look into simplifying the process of switching over a title for a manufactured home.
“The reduced costs and greater protections could stimulate demand for manufactured housing and hence the production of these homes, adding units to the scarce supply of affordable housing,” the report stated.