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A review by the Federal Reserve Bank of Chicago Business Conditions November 1972 Contents Mobile homes and the housing supply Federal Reserve Bank of Chicago Mobile homes and the housing supply In each of the past four years, about onefifth of the new housing units produced in the United States have been mobile homes— factory-made, furnished, and shipped to the site as complete units. This proportion prob ably will be equaled, or exceeded, in 1973 and in years to come. Experience with high-rise public housing, rehabilitation of dilapidated inner city dwell ings, unfinished “shell” homes, and modu lar construction has not lived up to the ex pectations of enthusiasts and some conspic uous failures have been publicized. As a result, mobile homes stand out as the most successful innovation in low-cost housing in the past 20 years. Not only has this sector grown substantially, and almost continu ously, but it has developed through the ef forts of private businessmen and financial institutions with virtually no financial as sistance thus far from the government. The n atio n 's housing g o als 2 In the Housing Act of 1968, Congress, noting that the stated objective of the Hous ing Act of 1949 to provide “a decent home and a suitable environment for every Ameri can family” was not being achieved rapidly enough, established as a quantitative goal 26 million new or rehabilitated housing units by 1978. Last June, the President re ported that the nation was 8 percent ahead of the path charted toward that goal. This statement depends upon the inclusion of mobile homes. Despite vigorous industry efforts toward better understanding, mobile homes are still often confused with travel trailers, motor homes, or other recreational vehicles. (The head of a major producer of motor homes— built on a truck chassis and self-propelled— said recently, “a mobile home is an inexpen sive house. A motor home is an expensive toy.”) Manufacturers campaigned diligently for acceptance of the name “mobile home” in the 1950s because they wanted to differ entiate their product from the tarnished image of the “house trailer” that suggested flimsy construction, a gypsy life-style, and crowded masses of humanity in “trailer courts.” As mobile homes increased in size and durability in the 1960s—became less “mobile” and more “home” because once put in place they usually stay put—attempts were made to agree upon a more suitable name. None has been found to date. The typical mobile home produced in re cent years measures 12 by 62 feet with about 750 square feet of carefully planned living space. Many are substantially larger. They now cost $8.50 to $10 per square foot (under $7,000 for the average unit), com pared to $15 to $18 per square foot for on site construction—only half as much. Costs of mobile homes have remained relatively stable in recent years, while on-site con struction costs have risen sharply. More over, mobile homes are sold completely equipped with furniture, major appliances, drapes, and carpets. Neither price includes Business Conditions, November 1972 the cost of land and improvements, but the differential between the cost of a space in a high-grade mobile park and a building lot in a residential area may be greater than dif ferences in construction costs. 12-foot-wide units dominate the mobile home market percent The su rg e in output Almost 600,000 mobile homes will be pro duced and shipped in 1972, including gov ernment purchases and a few exports. Vir tually all of these units will provide an in expensive, year-round home for an Ameri can family. Units destined as offices, school rooms, or for other uses are not included in these data compiled by the Mobile Homes Manufacturers Association. A further rise in mobile home shipments is expected by housing experts in 1973, while starts on con ventional units are widely expected to de cline by about 10 percent or so. During and after World War II, shortages of conventional housing, especially in areas Mobile home shipments contribute to the housing boom thousand units SOURCE: Department of Commerce and Mobile Homes Manufacturers Association. * 12' 1957 SO U RCE: M o b ile * E x p a n d a b le s and 1962 H om es 1967 M a n u fa ctu re rs 1972 A s s o c ia t i o n . d o u b le w i d e s . near large defense plants, led to widespread use of travel trailers as living quarters. These units offered cramped living quarters 7 or 8 feet wide by 25 or 30 feet long that merely provided shelter with a minimum of amenities. The modern mobile home dates from the beginning of large-scale produc tion of the “ 10-wide” (10 feet wide) intro duced in the mid-1950s. These units ac counted for 69 percent of production in 1958. By 1962, the 8-wide had almost disap peared and the 12-wide was introduced. The 12-wide had superseded the 10-wide almost completely by 1967. In 1969, 14-wides came on-stream. Currently, a few 16-wides are being produced. Since the late 1950s, the mobile home industry has produced expandables (with one or more rooms sliding out from the main structure) and double wides. Double 3 Federal Reserve Bank of Chicago wides consist of two sections, now commonly 12 feet by 62 feet, that Mobile homes now account for are transported separately and one-fifth of new private housing are joined together at the site. percent Double wides often closely re 100 semble conventionally construct Bmobile ed homes. 80 In recent years, very few 8and 10-wide mobile homes have been produced. Seventy percent 60 of this year’s output are 12-wides, 17 percent are 14-wides, and 13 40 percent are expandables or dou ble wides. The increasing width of mobile homes has been con 20 strained mainly by state laws re stricting the widths that can be transported over highways. Al I960 '61 '62 '63 '64 ‘65 '66 '67 '68 '69 '70 '71 most all mobile homes are towed S O U R C E : D e p a r t m e n t o f C o m m e r c e a n d M o b ile H o m e s M a n u fa c t u r e r s A s s o c ia tio n . to the dealer’s lot, or the owner’s * E s t im a t e d . site, by motor trucks under spe cial license. From 1958 through 1962, mo Mobile homes average well under $10,000 bile home shipments averaged just over 100,in price, fully equipped. Almost no com 000 annually. In the 1963-67 period, output pleted new conventional homes now sell for averaged over 200,000. In 1968, output ex ceeded 300,000, and the 400,000 level was less than $20,000, and in many areas, includ reached in 1969 and 1970. Last year’s out ing most of the Midwest, the minimum is about $25,000, including the lot. put was 500,000, and the 600,000 annual level is now within reach. Forecasts of 15 Housing needs are expanding. Annual percent annual growth in mobile home out net household formations are averaging put are common in industry circles. If so, about 2 million in the 1970s as high birth the 1 million level could be reached by 1976. rates of the late 1940s and early 1950s are This year, total housing production, in reflected in marriages of young people. In cluding mobile homes, will be almost 3 mil the 1960s, net household formations aver aged only 1 million annually. Inner city lion, eclipsing the 1971 all-time record high housing is being abandoned or demolished of 2.5 million, and double the annual totals of the early 1960s. Mobile homes will ac at a rapid (although unmeasured) pace. count for 20 percent of all housing produc There are growing numbers of retired peo ple who often prefer to retain their own tion in 1972, and 30 percent of single-family living quarters, although on a reduced scale. homes. Ten years ago, mobile homes ac Finally, more married couples are choosing counted for less than 8 percent of the total to sharply limit family size. and only 11 percent of single-family homes. Business Conditions, November 1972 Young married couples, retired people, and childless couples of middle years com prise the bulk of the market for new mobile homes. These groups will be expanding sub stantially in the years ahead. Califo rnia and Florida have 18 percent of occup' ed mobile homes housands 3 Location of m o b ile hom es Revised Census estimates show 2.1 mil lion mobile homes used as year-round hous ing in April 1970—3.3 percent of all house holds. In 1960, the count was less than 800,000—less than 1.5 percent of all hous ing units. Total shipments of mobile homes have exceeded 1 million units since the 1970 Census, and allowing for units taken out of service, the number of occupied mobile homes must be approaching 3 million with over 7 million inhabitants. Virtually all mo bile homes are owner-occupied. The relative importance of mobile homes in the various states depends partly on local zoning regulations and local acceptance of this type of housing. But the most important factor governing sales of mobile homes in various areas in the past decade has been the rate of growth of households. As a gen eral rule, areas with the largest number of the nation’s new conventional dwelling units also have absorbed the largest number of new mobile homes. California had almost 200,000 occupied mobile homes in 1970, followed by Florida with 170,000. North Carolina and Texas each had almost 100,000. Michigan and Illinois were in ninth and tenth place, each with about 75,000 occupied mobile homes. Indiana, with 68,000, was eleventh. The other Seventh District states, Wisconsin and Iowa, had 29,000 and 24,000, respectively. Manufacturers’ shipments to dealers in the various states is a good measure of the number of new mobile homes delivered to customers in those states because dealers California 50 150 200 10% Florida 8 North Carolina 5 Texas 100 5. Pennsylvania 4 Ohio 4 New York 4 Georgia 4 Michigan 4 Illinois 4 1 N o t e : F ig u r e s in b a r s a r e p e r c e n t a g e s o f t h e U . S . t o t a l. S O U R C E : D e p a rtm e n t o f C o m m e rce . usually sell within local markets. In 1971, Florida led the nation in manufacturers’ shipments to dealers, with about 50,000 units, 10 percent of the total. Texas and California each accounted for about 7 per cent of shipments to dealers. Michigan, with 23,000, or 4.6 percent, was the only Seventh District state in the top ten. Nevada and Alaska had the highest pro portion of households living in mobile homes in 1970, almost 13 percent in each case, far above the national average of 3.3 percent. Arizona and Wyoming each had 10 percent. Among the populous states that had large proportions of occupied mobile homes were Florida with 8 percent, and North Carolina with 7 percent. California and Texas, each among the top states in 5 Federal Reserve Bank of Chicago Indiana, has claimed the title of “mobile home capital of the world.” Elkhart has re tained a concentration of manufacturers of components and suppliers, designers, con sultants, and financial and legal experts, as well as producers of finished homes. In most years, including 1971, the state of Indiana has led the nation in production of mobile homes, mainly because of the Elkhart activities. Although its production has increased substantially, Indiana’s pro portion of total output has declined in the past decade. In recent years, Indiana has accounted for 12 percent of mobile home shipments. In 1963, it had 21 percent. In 1971, Michigan was in tenth place among the states producing mobile homes with less than 3 percent of the total. Ten Location of m an u fa ctu rers years earlier, Michigan had been in first For more than 20 years, Elkhart County, place, before relinquishing the lead to Indi ana. Michigan’s out put has declined rela tive to other states Indiana leads in mobile home each year since 1961, output; Florida in dealer shipments and has declined in ac thousands shipments tual numbers in recent 0 20 to dealers production years. Florida Indiana Together, Michigan Georgia Texas and Indiana account ed for 35 percent of Texas California mobile home produc North California Carolina tion in 1961. Last Florida H Michigan year, they accounted for 15 percent. The Pennsylvania | Georgia great bulk of Indi Alabama Pennsylvania ana’s production of North Ohio mobile homes is ex Carolina ported to other states, Arizona Kansas while Michigan is now Michigan Alabama a net importer from N o t e : F ig u r e s in b a r s a r e p e r c e n t a g e s o f t h e U . S . t o t a l. other states. D a ta a re fo r 1971. Georgia was in sec S O U R C E : M o b ile H o m e s M a n u f a c t u r e r s A s s o c i a t i o n . ond place in mobile the number of occupied mobile homes and in the number of shipments to dealers in re cent years, were below the national aver age in the proportion of households living in these units in 1970. Indiana, with 4 per cent of its households in mobile homes, was the only Seventh District state with a higher proportion than the nation. In 1970, 54 percent of all mobile homes in the United States were located outside the counties or groups of counties that make up metropolitan areas. In the Plains states and in the South, the proportion ex ceeded 60 percent. The greatest number of mobile homes in metropolitan areas are in parks. Those outside metropolitan areas are mainly on scattered lots. S Business Conditions, November 1972 home output in 1971, followed by Texas, California, and Florida. The top five states had 48 percent of the nation’s output. There are currently about 360 manufac turers of mobile homes with more than 700 plants. The top four firms each now have an nual sales exceeding $200 million and are be lieved to have 25 percent of the market. The top 15 may have 50 percent. Larger firms have ten or more plants in widely separated locations, and a few have more than 30. Some of these companies are “in tegrated,” producing parts and components for their products. The typical plant of larger firms has 60 to 80,000 square feet and produced from ten to 15 units per day. Trends in m an u factu rin g Entry into mobile home manufacturing has always been relatively easy for new firms. A fairly small one-floor plant, a relatively unsophisticated stock of equipment, a semi skilled work force, and basic “know-how” (usually learned in existing plants) are all that is required. Producers of lumber, alumi num sheeting, appliances, and furniture— usually large firms—supply these compo nents on open-book credit for 30 to 90 days. Often, suppliers locate plants or warehouses close by mobile home plants. Manufacture of mobile homes is largely an assembly op eration on a moving line patterned after the methods of the motor vehicle industry. It may take only a few hours from the start of assembly to the finished product. Inventories of parts and components turn over very rap idly. As a rule, manufacturers have no in ventory of finished mobile homes. About 70 percent of the sales price of a mobile home represents materials, and only 10 to 12 percent represents labor costs. In conventional construction, as much as 40 percent may represent on-site labor costs. Wages paid in mobile home plants are similar to wages paid in other factories and are well below the union scales for the building trades. Many plants are not union ized, and commonly employed incentive pay systems tend to speed output and cut costs. Needless to say, factory production can proceed unhampered by bad weather. The market area served by a mobile home plant tends to be limited by costs of transporting mobile homes—50 cents to $1.00 per mile. Competition usually re stricts a plant to markets within 150 to 200 miles. But some units are shipped 700 miles or more. Transport restrictions, e.g., by states that bar 14-wides from their high ways, also constrict market areas. Despite ease of entry, the mobile home industry has witnessed a rather steady trend toward increased concentration in the past decade. Mergers have been frequent, and many firms have diversified or have been absorbed by a company that also produces lumber, other components, recreational ve hicles, or quite unrelated products. Larger mobile home firms usually have access to the capital and money markets at more favorable terms than small producers. Firms that buy components in large volume are able to obtain lower average prices be cause of quantity discounts. They are able to spread overhead over a larger volume of business. Moreover, size and reputation help in building and maintaining a strong deal er organization and in helping dealers to obtain financing for inventories and sales. Stricter enforcement of quality standards also favors large firms who can comply more effectively, again by spreading costs over a larger volume. Smaller firms also may have more difficulty in satisfying re- Federal Reserve Bank of Chicago quirements of OSHA (Occupational Safety and Health Act). Q u a lity sta n d a rd s 8 The “fly-by-night” producer of mobile homes who may offer shoddy merchandise is gradually disappearing. This trend is likely to continue, and help to improve further the industry’s image. Under the auspices of the Mobile Homes Manufacturers Association, a production code called “ANSI A119.1” has been de veloped for mobile homes by the American National Standards Institute. This code, over 100 pages in length, has been adopted by 37 states and by the FHA. More than three-quarters of all mobile homes are now produced under the code. Some states en force even more stringent standards. The ANSI code for mobile homes is a “performance code” covering four major sectors: heating, electrical, and plumbing systems, and the frame and chassis. Em phasis is on safety (including fire resistance), durability, comfort, and convenience. A number of public and private agencies help maintain quality through periodic inspec tion of factories to assure that materials and construction methods are adequate. Seals of compliance are affixed to mobile homes that pass inspection. Many producers would favor the adoption of a uniform na tional standard, believing it would simplify compliance and increase public acceptance. Every discussion of mobile homes con siders the question of longevity. The De partment of Housing and Urban Develop ment (HUD) has concluded that no firm statement is possible on this point. Rules of thumb for some lenders suggest deprecia tion of 20 percent the first year, and 10 percent annually for the next four years. Others believe this is far too rapid. Properly maintained and barring a catas trophe, a well-constructed mobile home can last indefinitely, like conventional housing. Experienced manufacturers insist they do not know how long their products will last. Many early models are still in use, and cur rent standards of construction are much improved. Well-sited and well-maintained, it is possible for mobile homes to appre ciate in value in certain cases. Many mobile homes of older vintage, especially 8- and 10-wides, have been re moved from the year-round housing inven tory and have been converted into vacation homes, offices, or other uses. Obviously, there are no data concerning the length of this second life. The d e a le r's function There are several thousand mobile home dealers in the United States, many of whom also handle recreational vehicles. Some dealers sell only a few units annually, while others sell hundreds. Although dealers usu ally are independent, a growing number of manufacturers own some of their own out lets. Mobile home service companies also sometimes have their own lots to resell re possessed units. Dealers usually comprise the only “mid dleman” between the manufacturer and the potential homeowner. Manufacturers sell through distributors to only a minor extent. Most dealers operate only one lot, but chains of five or more lots are not uncom mon. Multiple-lot operations permit cus tomers to choose from a wider selection for immediate delivery. Many dealers also own or control one or more parks to provide spaces for their customers. These parks may be “closed” to units sold by other dealers. Dealerships can be established with a rela tively small amount of capital, perhaps Business Conditions, November 1972 $25,000. But, as in any business, a knowledge of the trade and adequate access to credit are essential. Manufacturers normally build only to order and require cash payment, which the dealer usually obtains from the lending institution that finances his inventory. Many dealers carry inventories equal to three or four months sales, but some have a more rapid turnover. Customers may in spect a variety of models, and choose from as many as 15 to 20 floor plans. Most sales are from the lot, but 10 to 20 percent of all sales are custom orders that require three to eight weeks for delivery from the factory. Operation of a mobile home dealership resembles an auto agency, but with signifi cant differences. In contrast to auto dealers, mobile home dealers almost always carry products of more than one manufacturer— often three or four. Second, manufacturers are prepared to repurchase mobile homes from dealers under certain conditions. The retail markup on a mobile home averages about 20 percent from the manu facturer’s price—somewhat more on higherpriced models. The manufacturer’s invoice itemizes all the extras included in a given unit, and dealers may be advised on suit able markups on all items, i.e., “suggested list prices.” However, mobile home dealers do not feature the “sticker prices” that have been required for automobiles since the late 1960s. Out of his gross markup, the dealer must pay salesmen’s commissions, lot expenses, interest, overhead, transportation to the customer’s space, and the “set-up” costs required to put the unit in working order. An additional source of income to dealers is the rebate of a portion of the finance charge after the dealer’s loss reserve, held by the lender or service company, has reached a prescribed level. M obile hom e p a rk s About half of all mobile homes are lo cated in mobile home communities or parks. The other half are situated on scattered sites—often on farms, but often, too, on urban properties. According to HUD, there are now 15,000 mobile home parks that have 15 or more spaces. Newer parks have 200 to 600 spaces. Monthly rentals usually range between $35 and $70 but can exceed $100. At one extreme, the older mobile home parks are densely packed eyesores lacking lawns, curbs, recreational areas, or other redeeming features. At the opposite extreme are luxurious country club layouts with swimming pools, landscaping, and club houses. Some of these are found in the Mid west, but most are in such states as Florida, California, and Arizona. Some parks have strict rules prohibiting children and dogs. Others are largely restricted to retired couples. Many cities and counties familiar with undesirable parks refuse to allow the estab lishment of new mobile home communities. Zoning authorities also fear that mobile home residents will not pay their share of municipal taxes. State laws vary substan tially. Most commonly, mobile homes are taxed as motor vehicles or other personal property, but some states apply ad valorem tax rates. A trend toward taxation of mobile homes as the equivalent of real estate ap pears to be under way. The mobile home parks often are taxed under special rules. Some states have passed legislation to shift control of zoning from local authori ties to state authorities, at least for factorybuilt housing. There are no data showing the extent to which such laws have helped the construction of mobile home parks thus Federal Reserve Bank of Chicago 10 far. HUD has prepared a booklet of stan dards for construction of mobile home parks. This lengthy document outlines rules for spacing of units, and for the provision of pavements, parking areas, lighting, place ment of utilities, and landscaping. Growth in the number of showplace parks may en courage more local governments to relax restrictions on new projects. Spaces in mobile home parks are said to be available in most areas today—after rapid building in 1970-71. But the locations and nature of these parks may not be satis factory to all potential buyers. There are few mobile home parks, good or bad, in the great cities of the Midwest and Northeast because of restricted zoning and building codes. Prospects are not favorable that this situation will change soon. The scarcity of parks in and around big cities is one reason for the low representation of blacks among mobile home households. Other factors may be restrictions on the number of children, and the difficulty that many blacks have in qualifying for credit. Some investor groups have been develop ing a series of quality mobile home parks in widely separated areas. One such developer, also a manufacturer of mobile homes, op erates more than 40 parks. Often parks are developed and owned by mobile home deal ers to assure an outlet for their sales. FHA insurance is available for mobile home park loans with up to 40 years maturity and up to $3,500 per space, but most parks are con ventionally financed. Spaces in mobile home parks are not commonly sold to homeowners, although some trend in this direction may be under way. Rather, they are leased, or more com monly rented, on a month-to-month basis. These relationships tend to give the park operator considerable power over his ten ants. Periodically, reports are publicized spelling out complaints of tenants over al leged failings, overcharges, or sharp prac tices of park owners. A number of mobile homeowners’ leagues have been created to adjust such grievances. M obile hom e livin g Surveys of mobile home households show a relatively large proportion with heads of households under 30 or over 55—both groups that are expected to grow faster than the intermediate groups in the years ahead. The median income of mobile home buyers is about $8,500, compared to more than $13,000 for buyers of conventional new homes. But there are wide variations for both types of homes. Mobile home house holds average about 2.5 people, indicating relatively few children, compared to about 3.5 for families in conventional homes. Mobile homes range from about 700 square feet to more than 1,800 for large double wides. Conventional single-family homes average about 1,500 square feet. A few mobiles are placed on permanent foun dations with basements, but most are on concrete pads with underpinnings of con crete blocks. Owners often add vestibules, patios, storage sheds, and the like in keeping with their means and inclinations. Mobile homes come equipped with com plete plumbing, heating, and electrical sys tems. The frame is wood, using studs, joints, and plywood; the chassis is made of steel T beams. They usually have aluminum siding and galvanized steel roofs, and are insulated and sealed against the weather. Increasingly, these homes are securely anchored with “hurricane straps” to prevent turnovers in severe windstorms. Continuous efforts are made to procure flame-resistant materials. Larger units have two bathrooms and Business Conditions, November 1972 three or four bedrooms. New furniture, ap pliances, carpets, and drapes are installed in the factory. Mobile home designers have had long experience in utilizing limited space effectively. But the typical mobile home does not have adequate areas inside for large parties, children’s sports, or stor age of possessions of people who “collect and accumulate.” On the other hand, sim plicity of design makes for ease of cleaning and maintenance—attributes appealing to elderly people and working wives. Costs an d a v a ila b ility It is sometimes said that the rapid rise in construction costs has “priced the average family out of the market” for conventional new single-family homes, leaving mobiles as the only alternative. Actually, the income of most groups has more than kept pace with construction costs over the years, and Mobile home prices remain fairly stable, while conventional home prices soar thousand dollars 35 30 25 ^ .^ • ^ a ve ra g e sale price of new homes* 20 15 average retail price of mobile homes** 10 5 O 1963 '64 '65 '66 '67 '68 '69 '70 '71 ‘72 S O U R C E : D e p a r t m e n t o f C o m m e r c e a n d M o b ile government programs to aid the flow of funds to the mortgage markets have helped to keep funds available and monthly pay ments within reach. In any case, it is not valid to compare average family incomes with average prices of new homes. Typi cally, conventionally constructed new homes (annual production is seldom more than 2 percent of the existing stock) are purchased by families with above average incomes. Most families purchase existing homes, or they rent, or move in with relatives. But it is quite possible for a family of average in come (about $11,000 currently), or less than average income, to own a new mobile home. Although low relative to new conven tional houses, the costs of owning mobile homes are not inconsiderable. For example, the monthly payment on a 90 percent loan to buy an $8,000 mobile home can be upwards of $130 when costs of interest, amortization, property damage insurance, and credit life insurance are included. In addition, space rentals in a suitable home park can easily be $50 or more monthly. These payments may or may not include costs of utility services. One of the great advantages of mobile homes is their full availability as soon as they are brought to the site and “set up.” This attribute enabled the federal govern ment to give prompt relief to flood victims after last spring’s disasters in South Dakota and in the East, especially in Pennsylvania. In August alone, HUD purchased 9,000 mobile homes for shipment to flooded areas. These units were not included in figures on shipments to dealers. Many people rendered homeless by the floods are still living in the mobile homes provided by the government. H o m e s M a n u f a c t u r e r s A s s o c ia t i o n . * l n c l u d e s p r ic e o f l a n d . * ‘ I n c lu d e s f u r n i s h i n g s . Financing m o b ile hom es The expansion of the mobile home in- 11 Federal Reserve Bank of Chicago Mobile home loans to individuals increase sharply at banks billion dollars 12 dustry, in large part, has reflected the grow ing availability of credit to finance dealers’ inventories and retail purchases. Dealers usually depend upon lenders to advance the entire invoice value of mobile homes shipped to them by manufacturers. At least 80 percent of retail sales are on credit, and the typical deal on a new mobile home in volves an advance of 90 percent of the pur chase price. In addition, a large volume of credit is required to finance inventories and sales of used mobile homes. About $10 billion of mobile home retail paper was outstanding at the end of Sep tember 1972. Approximately 60 percent of this volume was on new units. The total in cludes the finance charge added to the basic amount borrowed, commonly adding 50 per cent or more to the total advance. Com mercial banks held $5.5 billion of the retail mobile home credit in September, finance companies held $2.8 billion, savings and loan associations held almost $1.0 billion, and other lenders, mainly credit unions, had up wards of $500 million. These totals have increased sharply in recent years. In Sep tember 1972, bank holdings of retail mobile home paper were up 31 percent from a year earlier, while finance company holdings were up 12 percent. No aggregate data are available on floor plan loans, but these run about 10 percent of the volume of retail paper held by insti tutions. Probably about $1 billion of whole sale mobile home credit is now outstanding. Many banks, finance companies, and sav ings and loan associations have a program of floor planning combined with retail credit extensions. Credit unions are not permitted to make floor plan loans. Banks may participate in mobile home financing in a variety of ways. Some banks, like credit unions, make only direct loans to their own customers. Others combine di rect loans with a full program of floor plan ning and retail loans. Some banks purchase selected instalment contracts from mobile home finance service companies. Some re discount blocks of retail paper for other lenders. Small banks sometimes participate in programs with their big city correspon dents. Similarly, city correspondents pur chase paper generated by banks in smaller towns. Other banks specialize in lending to finance companies that, in turn, operate a mobile home finance program. At Seventh District commercial banks, retail mobile home credit now accounts for about 6 percent of loans to individuals, about the same as for the nation. Of course, some banks specializing in the field have a much larger proportion of mobile home paper, while others have none at all. Many Midwest banks do mobile home lending in Business Conditions, November 1972 states as far away as Florida and Texas. One authority states that 1,200 commer cial banks now participate in mobile home financing “in a major way,” compared to about 200 in the late 1960s. Bank financing of mobile homes was pioneered in the early 1950s by a few banks in Grand Rapids, Michigan, which is close to the original cen ters of mobile home manufacture in Michi gan and northern Indiana. Major finance companies, operating on a national scale, also began to finance mobile homes in the 1950s. According to data compiled by the Mobile Homes Manufacturers Association, finance companies had a larger volume of mobile home loans than banks through most of the 1960s. Since 1968, however, banks have dominated the field, with an important as sist from mobile home service companies. They now account for 55 percent of mobile home financing, compared to about 28 per cent for finance companies, and 17 percent for other lenders. As competition for mobile home loans has increased, some banks, and some finance companies, have curtailed their operations in this field. Savings and loan associations were first given the power to make mobile home loans in 1969—up to 5 percent of their assets. In June 1972, the Home Loan Bank Board in creased this proportion to 10 percent. In mid-1972, S&Ls had less than one-half of 1 percent of their assets in mobile home loans. In the Seventh District, the proportion was even smaller. Most S&Ls have had little ex perience in financing instalment sales. Moreover, they usually lend most of their funds in their local market areas, and ample lending opportunities have been available in recent years. Nevertheless, a substantial increase in mobile home financing by S&Ls is anticipated in the years ahead. M o bile hom e lo an term s A relatively small number of mobile homes placed on foundations on land owned by buyers are financed as real estate mort gages. Usually, these are larger-size units. But the great bulk of both new and used mobile homes are purchased on retail sales contracts, also called “security agreements.” The retail sales contract represents a con ditional sale, similar to the contracts used in financing automobiles. Unlike real estate loans, where the mort gagor holds title subject to a lien, the lender retains title in a conditional sale. To obtain title, the buyer must honor in full the con ditions of the loan, including, and espe cially, the obligation to complete scheduled payments. In case of a default that cannot be remedied, the lender or his agent can repossess the merchandise, a legal procedure that is relatively quick and uncomplicated compared to the often drawn out process of a mortgage foreclosure. Up to 10 per cent of mobile homes purchased on credit are repossessed and resold. Floor plan loans typically are made for the full wholesale price, less freight, shown on the manufacturers’ invoice for each mo bile home. These loans usually are for 90 days, but successive renewals are made if the borrower-lender relationship is satisfac tory. Interest rates on floor plan loans made by banks currently are one to three points over the prime rate. Floor plan loans are usually profitable to lenders, but the main income in a mobile home finance program is from retail paper. A dealer is obligated to offer the lender carrying his floor plan first chance to ac quire his customers’ retail paper. Eighty to 90 percent of these contracts held by banks come through dealer referrals. 13 Federal Reserve Bank of Chicago Terms on instalment sales of mobile homes are now typically 10 percent down with ten years to pay at an “add-on” rate of 6 to 7% percent. This rate equals 11 to 14 percent simple interest—the “effective” an nual percentage rate. “Truth in Lending” disclosure regulations specifically prohibit quoting add-on rates and require that the annual percentage rate be clearly shown. While maturities on most new mobile home loans are for ten years, 12-year terms are available on double wides. The trend in mobile home lending has been to extend maturities as successful experience with these loans has accumulated. In the early 1950s, 36-month maturities were typical. Later in the decade, 48- and 60-month ma turities were offered. In the late 1960s, the 84-month (seven-year) maturity became the norm before yielding to the current tenyear contract. Recent-model used homes often can be financed on 84-month contracts. Experienced mobile home lenders believe that average net yields on these portfolios equal or exceed the returns on most other loans. The large size and long maturities on mobile home loans relative to other con sumer loans help boost net yields. Even so, earnings on mobile home lending are much less than gross earnings. Allowance must be made for losses and expenses of operating the program. A field fo r sp ecia lists 14 Articles on mobile home financing often state that this is “no business for amateurs.” No lending operations, of course, are safe for amateurs. These writers are pointing out that successful mobile home financing pro grams require specialized knowledge and experience that is not acquired automati cally in other fields of lending. Large banks and other lending institu tions sometimes have separate departments for mobile home financing with one or more officers and an adequate staff devot ing full time to this activity. These special ists are familiar with all phases of the mo bile home industry. They establish relation ships with dealers, arrange floor plan loans, inspect inventories, analyze financial state ments, check credit worthiness of retail customers, record documents, and handle collections. Recent years have witnessed rapid growth of mobile home service companies, which have existed for more than a decade. Ser vices offered by these organizations are especially useful to smaller lenders who do not have their own specialists. Service companies perform a variety of functions. They investigate dealers and mo bile home parks, contact lenders to encour age their participation, advise on market conditions, make retail credit investigations, check dealer inventories, handle collections and repossessions, and provide the several types of insurance essential to mobile home finance programs. Lenders may use some or all of these services on a fee basis. Service companies may furnish a com plete mobile home finance “package” for smaller operators who need only provide the funds for financing. In this case, they usually take two “points” of the add-on rate. On a 7*/2 percent add-on rate, for ex ample, the lender is left with 5 Vi percent. His net yield, however, is somewhat less than 5 Vi percent because the service com panies’ charge comes “off the top” at the time the loan is made. For this payment, the service company handles relations with dealers, collections from retail customers, and repossessions. It sets aside a finance participation reserve which is rebated to dealers periodically. Most important, the Business Conditions, November 1972 service company guarantees the retail pa per, usually by arranging for credit insur ance, often through an affiliate. Insurance commissions usually provide a substantial share of service company income. Until the late 1960s, most retail mobile home sales contracts were written with re course to dealers. “Recourse” means that the dealers are expected to buy back de faulted retail contracts. To help secure this arrangement, lenders hold a portion of the finance charge as a reserve against which losses are charged. If experience is favor able, and the loss reserve builds up to a pre determined level, rebates are made to deal ers. In addition to or as an alternative to the recourse arrangement, lenders may use a repurchase agreement under which deal ers buy back units that are repossessed for the amount of the outstanding credit. C o n tro llin g risk s In recent years, recourse financing of re tail mobile home paper has been replaced, in large degree, by credit insurance pro vided by a growing number of underwriters that specialize in the field. Since 1971, the FHA, which has insured residential mort gages as a federal agency since the 1930s, has offered mobile home loan credit insur ance. Relatively few lenders have used the FHA credit insurance program for mobile homes because downpayments are very low, interest charges are restricted, and insur ance charges are substantial. Recently, the Government National Mortgage Associa tion (GNMA) has encouraged financial in stitutions to buy securities backed by pools of FHA-insured mobile home loans. In addition to credit insurance, lenders are able to protect their interests by insur ance for collision, fire, and extended cov erage (both on the dealer’s lot and after sale to customers), dealer fraud, and Ven dors Single Interest (VSI) coverage. VSI in sures lenders (not usually vendors) against concealment, conversion, or disappearance of the mobile home that secures a instal ment contract. Customers may also carry credit life or disability insurance, with the holder of the contract as beneficiary. Lenders usually have a schedule of “cur tailment” payments for mobile homes in dealer inventories. Under the typical agree ment, a dealer pays the lender 10 percent of the value of each unit after it has been on his lot three months. Additional pay ments are required periodically. The full balance usually must be paid in nine to 12 months. Curtailment payments provide an incentive for dealers to move mobile homes fairly rapidly through price cuts if necessary. An added safety factor in mobile home finance are agreements of manufacturers to repurchase their products under various cir cumstances. Usually, the agreement is in voked when a lender finds it necessary to dissolve a floor plan arrangement with an unsatisfactory dealer. Manufacturers’ repur chase agreements are usually predicated on the understanding that curtailments will be paid as scheduled. Many mobile home loans are repaid ahead of maturity, because the homeowner either sells the unit or acquires funds to pay off the balance. In fact, the average actual life of ten-year loans is less than five years. Prudent accounting by lenders requires that adequate reserves be set aside to provide for rebates of prepayments of finance charges and insurance premiums. Experienced lenders have found that mo bile home financing requires trained per sonnel and constant vigilance. Insurance is no substitute for sound lending practices. Lenders must “know their dealers,” require 15 F ed era l R eserve B a n k of C h ic a g o that all payments be made promptly, elimi nate dealers who sell “out of trust,” make physical checks of dealer inventories, and continually scrutinize financial positions. To maintain control, most lenders will not share a floor plan with another lender. Some will not finance dealers with several sales lots. Floor plan arrangements should be filed under the Uniform Commercial Code, where applicable, and title documents should be properly recorded. Collections on retail paper should be followed closely, and repossessions must be ordered when the situ ation requires. A number of states have recently enacted legislation to amend the “holder in due course” doctrine so that customers can in certain cases withhold payments on debts held by third parties, if they have valid claims against manufacturers or dealers. Such legislation underlines the need for lend ers to investigate the quality of their dealers and the mobile homes they sell. Further g ro w th ex p ected Mobile homes are now a major element in the nation’s supply of new housing. The government’s Standard Industrial Classifi cation Manual, as revised in 1972, gives be lated recognition to the fact that mobile homes are dwelling units rather than recrea tional vehicles, as indicated in earlier edi BU SIN ESS C O N D IT IO N S is p u b lish ed m o nth ly tions. Each year, new units are larger and their quality and appearance improve. The soaring uptrend in on-site construc tion costs has moderated in the past year. Nevertheless, costs of building conventional houses continue to be about double the costs of building mobile homes. Capacity to pro duce mobile homes is being expanded, and could be increased further within a year. Private funds are generally available to fi nance mobile homes, and additional lenders are entering the field. The prevalent method of taxing mobile homes as personal property is often inequit able and a barrier to the development of new parks. Doubtless, this differential will gradually be eliminated. The main obstacle to more rapid expan sion of mobile home living is the availability of suitable parks—especially in the Mid west and Northeast. The commitment of the federal and state governments to the goal of better housing for American fami lies suggests that steps will be taken to en courage the development of more mobile home parks. A few years ago some analysts were pre dicting that the mobile home industry would level off at 400,000 units annually, and then perhaps decline. But output in 1972 is expected to approach 600,000. It appears reasonable that further substantial growth will occur in years to come. b y the F e d e ra l R eserve B a n k of C h ica g o . G e o rg e W . Cloos a n d E d w a rd W . B irg e lls , J r . w e re p r im a rily re sp o n sib le fo r th is a rtic le . Su b scrip tio n s to Business Conditions a re a v a ila b le to the p u b lic w ith o u t c h a rg e . For in fo rm a tion co ncern ing b u lk m a ilin g s , a d d re ss in q u irie s to the F e d e ra l R eserve B a n k o f C h ica g o , B ox 8 3 4 , C h ic a g o , Illin o is 6 0 6 9 0 . 16 A rtic le s m a y be rep rin ted p ro v id e d source is cred ite d .
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