A delegation of MHARR Board officials and staff met on December 14, 2011 with Government National Mortgage Association (GNMA) President Theodore W. Tozer and other senior GNMA executives to address GNMA’s securitization requirements for Federal Housing Administration (FHA) Title I manufactured housing loan originators and the negative unintended consequences of those requirements for both the manufactured housing industry and consumers of affordable housing. This meeting was not only highly productive, but also exposed previously undisclosed information relevant to the securitization requirements — the heart of the bottleneck that has kept vital FHA Title I originations at minimal levels.
Current GNMA requirements for the securitization of FHA Title I loans – in effect since June 2010 — require a minimum net worth of $10 million for issuers and a reserve of 10% of all outstanding Title I manufactured housing loans (hereinafter referred to as “10-10 rule”). Because these requirements are so high (especially as compared to the securitization requirements for site-built home loans, which require a net worth of only $2.5 million), this “10-10” rule, which is actually a GNMA policy and not a formal federal regulation, has effectively limited FHA Title I loan originations to one or two large finance companies. This has eliminated genuine competition and consumer choice from the FHA Title I financing market which, in turn, has kept FHA Title I originations artificially low, has placed smaller, independent producers of manufactured housing, as well as independent retailers and finance companies, at an extreme competitive disadvantage and, most importantly, has led to the unnecessary and unjustified exclusion of large numbers of consumers from the manufactured housing market. All this is happening, moreover, at a time when FHA Title I financing – which helps consumers buy the industry’s most affordable homes – is critically important, given the extreme downturn in the housing market, a glut of foreclosed site-built homes and many consumers who cannot qualify for other financing.
GNMA officials acknowledged at the December 14, 2011 meeting that the 10-10 criteria and particularly the 10% reserve requirement are based primarily on old FHA Title I loan performance data from the 1980s and 1990s. While this particular piece of information – and GNMA’s invitation to submit more recent and relevant information — is not new, what is new is a series of revelations by senior GNMA management regarding the $10 million net worth requirement. Specifically, the GNMA officials conceded: (i) that the $10 million net worth requirement is a subjective, policy-based number designed primarily to ensure that FHA Title I originators are “committed” to the manufactured housing market; (ii) that because the $10 million net worth requirement is policy-based, GNMA is willing to be flexible, take a “second look” at this issue, and potentially amend the benchmark downward based on information from potentially interested lenders showing the “critical point” below $10 million that would encourage more lenders to enter the Title I market; and, most importantly, (iii) that GNMA, in a 2010 meeting with industry finance companies and their national association, the Manufactured Housing Institute (MHI), had requested and invited such information and feedback on ways to allow more lenders to obtain GNMA securitization and enter the FHA Title I market, but had received no response.
MHARR officials methodically explained at the meeting that current-day manufactured home loans perform as well as — or better than – parallel site-built loans. As a result, qualifications for GNMA securitization of FHA Title I manufactured home loans should actually be more flexible than the present $2.5 million net worth requirement for site-built housing loan issuers, although the industry would welcome parity with the site-built market in accordance with federal housing policy as repeatedly expressed by Congress.
However, because MHARR is an association comprised solely of HUD Code producers, it lacks access to the type of detailed loan performance and finance company capitalization information that GNMA is looking for and needs in order to assess — and potentially amend — the 10-10 rule, one of the critical chokepoints that currently stands in the way of the revitalization and re-birth of the industry. As a result, MHARR strongly urges the post-production sector, and specifically potentially interested finance companies, not currently serving the FHA Title I manufactured housing market (and/or retailers who possess such information), to directly provide GNMA with information that would support and justify a lower net worth level, including, possibly, information supporting a sliding scale net worth requirement tied to business volume (i.e., a lower net worth requirement as volume of Title I business decreases), as addressed by MHARR with GNMA officials at the meeting. Obviously, based on the information provided by GNMA, this could have been done much earlier with quicker positive results for consumers and for an industry mired at a 50,000 unit annual production level, if such information had been collectively available from finance companies, retailers, communities and other sources.
Nevertheless, if the 10-10 criteria are to change, GNMA needs to hear directly from as many finance companies as possible that wish to participate in this market, but are currently excluded by the 10-10 rule. Relevant information should be provided to both:
Mr. Theodore W. Tozer Mr. Gregory A. Keith
President Senior Vice President/Chief Risk Officer
Government National Mortgage Association Government National Mortgage Association
550 12th Street, S.W. 550 12th Street, S.W.
Washington, D.C. 20024 Washington, D.C. 20024
Based on the comments of GNMA officials at the December 14, 2011 meeting, it appears that there is a window of opportunity for the industry and interested finance companies to advance a liberalization of the 10-10 rule, and especially its net worth requirement, that would allow more issuers to obtain GNMA securitization, expand the number of FHA Title I originations and begin to restore normal competition to the Title I market. All of this is summarized in a December 16, 2011 MHARR follow-up letter to GNMA (please see copy attached).
MHARR will continue to actively pursue this GNMA 10-10 rule matter and will advise you accordingly.
As an aside, and for your information on a closely related matter, the U.S. Bureau of Consumer Finance Protection (CFPB), on December 19, 2011, issued interim regulations in the Federal Register to implement the SAFE Act pursuant to the transfer of regulatory responsibility for the SAFE Act from HUD to the CFPB under the Dodd-Frank law. The interim rule becomes effective on December 30, 2011. A copy of the interim rule can be obtained at www.regulations.gov (enter keyword “CFPB-2011-0023”).
According to the Federal Register Notice, the interim CFPB rule does not change the substance of the SAFE Act rule previously issued by HUD. Significantly, though, the notice invites public comment, among other things, on any elements of the interim rule that are either “outdated, unduly burdensome, or unnecessary.” We trust and assume that the post-production sector and state associations, both individually and collectively, will analyze this invitation and submit appropriate comments to the Bureau of Consumer Finance Protection by the February 17, 2012 deadline.
Manufactured Housing Association for Regulatory Reform