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Comment

NBD Bank’s affiliated mortgage company had a manufactured home chattel loan program from about 1986 to 1995 which ran very successfully. Late payments and defaults were commensurate with the percentage of late payments and defaults for conforming mortgage loans. Some of the features which made this loan program successful included:

· Only homes placed in the highest quality parks and on good quality private lots were included in the program. The quality of the park added value to the home upon resale. Sales occurred on average only three years after the loan was originated (these are starter homes and most owners “moved up” by buying a “stick built” home as soon as possible).
· Homes lose value when removed from a park. Moving and storing a home is expensive. Hence, the bank had an agreement with the park to continue to pay rent for the pad and sell REO homes in place. The park also gave preference for a pad lease (or allowed an assumption of a lease) to the person who agreed to buy a home from the owner to facilitate the sale of a home by the owner.
· The bank offered adjustable rate loans when interest rates were falling. Most loans were fully amortizing fixed rate loans.
· The borrower was asked what amount the borrower thought that he/she could reasonably afford in monthly payments on the loan. That became the amount of the payment, and the term of the loan was adjusted accordingly (the maximum term was 30 years).
· Incentives were given (a lower interest rate) to encourage the borrower to make automatic payments from the account into which the borrower’s paycheck was deposited. The payment timing was set according to the borrower’s pay schedule. The agreement for automatic withdrawals allowed a withdrawal of up to three or four times the amount of the payment, to allow the bank to recover late payments through automatic withdrawals.
· Biweekly payments were permitted if the borrower made automatic payments. I seem to remember that the biweekly payment agreement also permitted the bank to re-amortize the payments to monthly, and cancel the automatic deduction if the borrower defaulted.
· The manufactured home dealer entered into a dealer agreement that required a multi-year (3 year?) holdback on dealer profits on the sale of the loan to the bank. The holdback was used to cover certain losses on the loans sold by the dealer. An assignment clause (printed in a box on the loan agreement) contained substantial representations and warranties, and indemnification provisions, to protect the bank.
· The loans were serviced on a mortgage servicing system. The amount of interest did not vary based on the date of the month that the payment was received. The one drawback of this system is that most chattel loans are serviced on a bank retail loan system that charges daily interest. This made the eventual sale of the loans difficult (the portfolio was sold by the bank that purchased NBD).
· Escrow accounts for payment of insurance were established.

I was on the legal staff of NBD Bank at the time, and I wrote the documents for this loan program.