Comment Detail

Comment

March 17, 2016

Alfred M. Pollard, General Counsel
Attention: Comments/RIN 2590–AA27
Federal Housing Finance Agency
400 7th Street, SW
Eighth Floor
Washington, DC 20219

RE: Comments RIN 2590-AA27

Dear Mr. Pollard,

Next Step® Network appreciates the opportunity to submit comments to the Federal Housing Finance Agency (FHFA) on the Government Sponsored Entity’s duty to serve underserved markets, as identified by Congress, which includes rural housing, affordable housing preservation and manufactured housing.

Manufactured housing is the largest source of unsubsidized affordable housing in the United States. It is home to 22 million Americans in eight million homes with median household incomes around $30,000 versus $50,000 for residents of site-built housing. The industry is currently building 70,500 homes annually with only 11% certified as ENERGY STAR. Manufactured housing can significantly contribute to solving America’s affordable housing crisis, where subsidized housing is oversubscribed with four families waiting for one housing unit. Importantly, this can be done with little or no subsidy, making it an attractive vehicle for affordable housing production.

Next Step was created in 2010 with the mission to put sustainable homeownership within reach of everyone while transforming the manufactured housing industry in terms of quality, affordability, image and energy-efficiency. We developed a system for delivering quality, ENERGY STAR manufactured housing to homebuyers through a network of trusted nonprofits across the country to meet their local missions. Next Step calls this system Manufactured Housing Done Right® because it prepares and supports consumers to buy better homes with fair loans.

Next Step has impacted over 1,300 lower-income households with new manufactured homes and preserved communities through our 46 members and programs. Our members support consumers with comprehensive homebuyer education to buy affordable, ENERGY STAR homes with sustainable financing. Last year, the network provided support and education to 7,000 homebuyers.

Next Step is the first and only national nonprofit to bring quality, ENERGY STAR manufactured homes to nonprofits nationwide. Next Step’s primary goal is to build a value chain where manufactured housing companies work with nonprofit affordable housing providers to create more opportunities for families to achieve sustainable homeownership.

Next Step holds manufacturing partnerships with Clayton, Cavco, Champion and regional manufacturers who embrace our work and mission. These partnerships help the nonprofit and for-profit sectors work together in a model that benefits both industries, and ultimately the customer: lower-income homebuyers. Our manufacturers build the Next Step Home to our specifications, which is high quality and ENERGY STAR for an excellent homebuyer investment. These homes serve in new developments and replacement of low-quality, energy-disastrous pre-HUD Code mobile homes.

We believe that when a home is done right every single time – with the family and the home on the right foundation, providing comprehensive homebuyer support and with the right financing – we can create an opportunity for systemic change and a healthy manufactured housing finance marketplace.

This letter outlines a number of recommendations designed to make the rule stronger, both in terms of the duty to serve process, such as activities and underserved market plans, and in terms of the rules proposed for manufactured housing units and communities.

General Recommendations
The Government Sponsored Enterprises will be required to comply with increasing liquidity for the underserved market of manufactured housing by providing liquidity for mortgages. We applaud the development of loan products with more flexible underwriting guidelines and other innovative approaches to providing financing to the manufactured housing market. We have a thorough understanding of the difficulty that Next Step’s nonprofit members and their homebuyers have experienced in accessing manufactured home loans.

Next Step has taken every step needed to deliver an educated, qualified buyer and the highest quality homes on robust permanent foundations coupled with ENERGY STAR. However, loans are almost nonexistent in many of our members’ markets, particularly in rural, Native lands and persistent poverty regions. Banks, state housing finance agencies, credit unions and Community Development Financial Institutions need education on manufactured housing. When we engage these institutions, they are willing to open a dialogue, but cite many reasons why they will not make the loan.

In the affordable housing field, we see programs that allow higher loan to values, down payment assistance, automated underwriting, and staged construction financing. However, when the home is built in the factory, the home is not always eligible for these robust loan programs. We even hit barriers where least expected with programs at USDA, FHA and VA. Barriers include lack of staged financing, appraisals, and varying foundation requirements between programs. Manufactured housing could provide lenders community reinvestment opportunities and consumers would benefit.

To go deeper and grow manufactured housing mortgage opportunities, the Enterprises must address systemic market failures in this space, and FHFA must give them credit for doing so.

First, we must address consumer education because 65% of chattel loans are made for loans on owned land. We recognize that many homebuyers will opt not to offer their land for security, but we believe that good education helps buyers make an informed decision. Today, there is no manufactured homeownership curriculum that adequately prepares buyers to understand the pros and cons of mortgage and chattel financing. Next Step is working to change that because we believe that smart buyers buy better homes with better loans. In addition, there is no training for HUD certified homeownership counselors about manufactured housing. Support is available through the Next Step Network and its 46 members, all of which have housing counseling as core to their programs. However, nonprofits and counseling agencies need adequate grant investment to provide this service.

Second, lending products should incentivize ENERGY STAR homes to encourage consumers to choose a home that will ensure long-term affordability and better quality. In an effort to move the market toward this, Next Step launched SmartMH℠ in Kentucky. In this program, our membership of lenders offers loan products consistent with our mission, including lower rates, better terms and assistance with down payment or utility costs. We brand and market these loans through our partner retail sales centers while running a statewide consumer awareness campaign on the value of buying an ENERGY STAR manufactured home. This has increased the likelihood and results of buyers getting into ENERGY STAR manufactured homes while simultaneously educating retailers about the benefits of Manufactured Housing Done Right.

Third, because the market is tilted toward chattel, it also leans towards a different valuation standard. Full appraisals are a challenge with appraisers that are often undereducated or misinformed about manufactured housing. In particular, too few appraisers recognize the value of lower energy bills in appraising homes, leaving such appraisals inaccurate. In appraisals, we need credit for energy efficiency and flexibility with site-built comparables.

Fourth, mortgage loan products must have advantages similar to chattel in regards to speed, access and interim financing. If there is no staged financing with an upfront close with the consumer, a retailer assumes the risk until the permanent loan closing. Risks need to be mitigated with staged financing.

Fifth, we applaud and encourage blanket loans for mission-driven manufactured housing communities. Through our Next Communities program, members are purchasing manufactured housing communities, enhancing resident services, securing land tenure, improving infrastructure and replacing pre-1976 mobile homes. They need capital for community purchases and their residents need better loan options.

Overall, Next Step agrees with the proposed plan activities.

Request for Comments (FRC 1-3)
We believe the Enterprises should be given some discretion and flexibility over selecting Regulatory Activities as this is needed for innovation, but the direction and accountability should be maintained by FHFA. The GSEs can more adequately access the market dynamics and need the flexibility to respond.

RFC 4. Are the requirements for Objectives discussed above appropriate, and should there be any additional requirements?

We are pleased with the objectives presented, and have no additional requirements to propose.

RFC 5. Should Duty to Serve credit be given under the loan products assessment factor for an Enterprise’s research and development activities that may not show results in their initial phase, but which may be necessary for long-term product planning and development for underserved markets?

Yes. We think that additional research on manufactured housing is essential given the lack of data and studies in this field. There are specific areas that would benefit from more research.

These areas include:
• Manufactured homebuyer education
• Increasing ENERGY STAR manufactured homes and related loan products
• Manufactured housing appraisals and training of appraisers
• Valuing energy efficiency
• Pre-1976 mobile home census and replacement needs
• Impact of nonprofit and resident ownership of communities on home appreciation and related sales trends

RFC 6. Has FHFA adequately defined the scope of extra credit for the proposed residential economic diversity activities? Has FHFA chosen the correct activities that should be excluded from qualifying for extra credit for residential economic diversity activities?

We appreciate the FHFA for allowing duty to serve credit to be earned for affordable housing in areas of high demand and for promoting mixed-income uses in areas of low demand, i.e. concentrated poverty, but respectfully disagree with the decision to exclude manufactured housing community loans from receiving this credit. We also believe that energy efficiency should be given credit, particularly though incentives for ENERGY STAR manufactured housing.

Underserved Markets Plan (UMP) General Recommendations
Like with plan activities, objectives and assessment factors, we are supportive of using UMPs as the vehicle for describing how duty to serve obligations will be met and how the Government will evaluate Enterprise performance. We also want to highlight the value of replacing older homes with new ENERGY STAR homes.

New Products (Loan Products Assessment Factor)
To align with the Safety and Soundness Act, requiring that new products be eligible for use only after FHFA consideration is a reasonable process. We propose that the FHFA support the Enterprises in developing a new product that would increase the health of the manufactured housing market, improve the prospects for asset appreciation and, in many cases, reduce overall homeownership costs.

Under the proposed rule, homes built prior to 1976 are not eligible for duty to serve credit. We agree that these older models should be excluded. However, we believe that developing a means for old models to be replaced with new ENERGY STAR homes meets the spirit of the statute. Developing a product that encourages the replacement of older, less efficient homes with new ENERGY STAR homes is supported by evidence, including data on overall housing costs and health costs related to aging homes.

On a related note, the Enterprises should be encouraged to tailor lending products to short-term financing needs for manufactured homeowners, similar to construction loans for site-built homes. Under current practices, manufactured homebuyers face significant hurdles to fund site work and related upfront costs prior to home installation in fee simple transactions. Also, retailers are reluctant to carry financing and risk for the interim period prior to permanent closing. An upfront closing is recommended.

Request for Comment Recommendations (7-9)
RFC 7. Is there an alternative mechanism to an Underserved Markets Plan that would better enable FHFA to evaluate the Enterprises’ Duty to Serve obligations?

The Plan is a reasonable way to describe how the GSEs will meet and monitor their duty to serve responsibilities.

RFC 8. Should the Enterprises be required to prepare Underserved Markets Plans for terms with a period other than three years?

Three years is reasonable for the time being to ensure that market trends and new product developments are captured in the plans.

RFC 9. Should public input be sought on the Enterprises’ proposed Underserved Markets Plans and, if so, is there a more effective approach than the proposed approach?

We strongly support seeking public input for proposed Underserved Markets Plans, and are comfortable with the recommended approach.

Manufactured Housing Units - Proposed Section § 1282.33(c)(1)
General Recommendations
With respect to proposed section § 1282.33(c)(1) concerning manufactured homes, we applaud the agency’s continued support for manufactured housing titled as real property. We also endorse the proposed rule’s support for fee-simple manufactured home mortgages, a market segment that the Enterprises have ignored at the expense of developing low-cost homeownership options for low- and moderate-income households. The Enterprises must tailor their products to ensure that the manufactured home mortgage market is supported aggressively and that manufactured homebuyers are properly educated and have the financing tools to purchase, site and install a new ENERGY STAR manufactured home.

CDFI Credit
Duty to serve credit should be awarded for Community Development Financing Institutions (CDFIs) that invest in manufactured housing units. CDFIs and similar mission-driven investors work in markets that traditional financing often does not serve, particularly in places with high levels of economic distress. CDFIs have existed for decades and over this time have built up an impressive record of success. They are diverse and many are active in affordable and manufactured housing. They are also certified by the Treasury, lending them legitimacy as well as access to low-cost capital. The FHFA should make efforts to incentivize lending by these institutions through offering duty to serve credit for a CDFI presence in single-family manufactured housing markets. We are also in favor of extending credit for CDFI investment in manufactured housing communities.

Shared Equity Models
The shared equity model described in the proposed rule for affordable housing preservation should be extended to the manufactured housing space for both single and multi-family transactions.

Request for Comment Recommendations (10-15)
RFC 10. What existing Enterprise criteria (contained in Freddie Mac’s Manufactured Homes, Publication Number 387B and Fannie Mae’s Selling Guide, B5–2) for support of manufactured home loans titled as real property could be modified to expand support for very low-, low-, and moderate-income families, consistent with Enterprise safety and soundness?

With respect to the Freddie Mac guidelines (387B), three origination and underwriting requirements should be modified:

1. The land on which the manufactured home is situated must be owned by the borrower in fee simple.
a. A requirement of fee simple ownership of the land beneath the home would exclude homes titled as real estate in manufactured housing communities where states currently provide for such titling, like New Hampshire and Oregon. It would also negate any value that could be gained if states adopt the Uniform Manufactured Housing Act, as envisioned in the rule.

2. Mortgages secured by manufactured homes located in a condominium project are eligible if project eligibility is determined through reciprocal review.
a. Project-level reviews are vital to ensure that single-family loans meet quality requirements. For manufactured housing communities with mission-driven ownership where the blanket loan is funded by Freddie Mac, the due diligence required for these transactions is a sufficient review process and does not require reciprocal review.

3. The mortgaged premises must conform to all applicable use restrictions and be zoned for residential use.
a. Restricting the zoning to residential use is too narrow. There are some manufactured housing units not zoned as residential that should be eligible for duty to serve credit. For example, manufactured housing communities in Boulder, Colorado are zoned as manufactured housing communities. Such zoning regimes can be effective tools to ensure long-term use as housing. This should not prevent these communities or other alternatively zoned homes from accessing credit.

In terms of the Fannie Mae Selling Guide, two regulations should be revised regarding two types of homes that are ineligible for mortgage loans secured by manufactured homes:

1. Single-width manufactured homes, unless located in a Fannie Mae-approved subdivision, co-op, condo, or PUD project development.
a. Nearly half the manufactured homes sold nationwide are single–section homes. If left as is, this rule would exclude every single-section home located outside a Fannie Mae-approved development. This could have adverse impacts in rural communities and on efforts to develop replacement programs for inefficient homes on private land. Furthermore, some state housing finance agencies, such as in Colorado, have changed their program rules to fund the purchase of such homes. The GSEs should support such efforts.

2. Homes located on leasehold estates.
a. This provision is also overly prohibitive. Excluding leasehold estates eliminates all resident-owned or other mission-driven communities, which play a key role in preserving sustainable manufactured housing communities and tend to be safer investments. For the sake of homeowner security and Enterprise safety and soundness, we think it is critical that mission-driven communities are encouraged as much as possible.

RFC 11. Should Enterprise support for manufactured home loans titled as real property be a Regulatory Activity?

Yes. This approach is strongly favored. We support the expansion of Enterprise activity in manufactured home mortgages. Further support of this market by the Enterprises will encourage state housing finance agencies’ participation as well as that of local lenders and housing practitioners. As mentioned above, the GSEs should take advantage of their reach to promote the conversion of personal property loans to traditional real estate mortgages.

RFC 12. Should the Duty to Serve rule only give credit for support to manufactured home borrowers with specific needs, such as current borrowers with real estate mortgages with excessive coupon rates (and what should be considered ‘‘excessive’’), or current borrowers with chattel loans who could benefit from conversion to real estate financing?

The primary focus should be for new home borrowers, except for chattel pilots.

RFC 13. Should the Enterprises receive credit for purchasing chattel loans, on an ongoing or pilot basis?

Yes. We support a chattel pilot for mission-driven communities that will help determine which underwriting characteristics and consumer protections make personal property loans both safe and sound for Enterprise investment and appropriate for homeowners.

RFC 14. Should Duty to Serve credit be available for Enterprise support of chattel-titled manufactured homes where the units are sited in manufactured housing communities for which an Enterprise has purchased the blanket loan and the blanket loan purchase qualifies for Duty to Serve credit?

Beyond the pilot, this activity should be limited to ensure safety and soundness. As noted above, the FHFA may wish to consider limiting this to homes in mission-driven communities.

RFC 15. If FHFA allows Duty to Serve credit for Enterprise support of chattel lending, should the tenant protections as described in ‘‘Manufactured Housing Communities with Tenant Protections— Proposed § 1282.33(c)(2)(iii)’’ below also be required? How could compliance with borrower and tenant protections be implemented and monitored within the operational systems and capacities of the Enterprises and those of their seller/ servicers and other counterparties?

The use of a standard lease with viable tenant protections would be wise. We wish to balance a preference for strong tenant protections against making the process overly burdensome for Enterprise implementation.

Conclusion
We appreciate the FHFA taking the time and effort to thoughtfully construct a proposed rule that clarifies how Fannie Mae and Freddie Mac will honor their duty to serve obligations, and how progress will be monitored. We are grateful for the opportunity to provide the FHFA with recommendations and views on how the rule can be improved. We look forward to seeing how it will evolve after consideration of public feedback.

Sincerely,

Stacey Epperson
President & CEO, Next Step Network