Tuesday, March 2, 2010

Warren Buffett as Oligarch Slickster Seeking a 468% Edge

Earlier this week, I published an excerpt from Warren Buffett's letter in the Berkshire Hathaway annual report, where he decries the government support given to traditional housing versus mobile homes. Buffett implies that the full differential between traditional housing and mobile housing of 375 basis points is the result of the guarantees by FHA, Fannie Mae and Freddie Mac.

It now appears that this anti-FHAFannieFreddie stance may be an attempt by oligarch Buffett to capitalize on the anti-FHAFannieFreddie sentiment in the country to promote cheaper rates for Berkshire Hathaway's mobile housing business.

FHAFannieFreddie do have an impact on traditional housing, but Kevin Jewell, who conducted research for Consumer Union (publisher of Consumer Reports) says the FHAFannieFreddie iimpact is only 80 basis points.

Here's Jewell's take:

On Friday Warren Buffett released his annual letter to shareholders of Berkshire Hathaway. Berkshire Hathaway owns Clayton Homes, a major manufactured home manufacturer. In the letter, Mr. Buffett laments that “very few factory-built homes qualify for agency-insured mortgages”

Mr. Buffett compares the market rates of 9% on manufactured housing loans to the current rate of 5.25% and states “If qualifications [on conforming loans] aren’t broadened, so as to open low-cost financing to all who meet down-payment and income standards, the manufactured-home industry seems destined to struggle and dwindle.” In doing so, he implies that the 375 basis points (bp) (3.75%) differential between manufactured home loans and conforming loans is due to market intervention by the “all powerful” FHA, Fannie Mae, and Freddie Mac.

Mr. Buffett is being disingenuous. The current market rate on “non-conforming” site built housing is about 80 bp (0.8%) higher than conforming loans. This 80 bp is the interest rate subsidy provided to loans purchasable by Fannie Mae. The other 295 bp is the market discount for manufactured housing.

Why does the market discount manufactured housing?

Research by Consumers Union, the publisher of Consumer Reports, shows that prices of manufactured homes over time have more volatility than conventional homes. (Full disclosure, I was the leader researcher on Consumers Union’s Manufactured Housing Research Project and author of the linked report.) This means that a greater percentage of manufactured home buyers are under water at some point in the life of a loan. Homes worth less than the loan balance have a higher risk to the lender. Ergo, they demand a higher interest rate.

But Mr. Buffett must know this, because he also owns Vanderbilt Mortgage, a manufactured home lender. And with $30.5 Billion in cash on hand, if he wanted to make cheaper manufactured home loans, he would do it. If the subsidy was the only difference, he could be making loans at 6.05% on all manufactured homes and profiting tidily.

But he’s not.

We should note that manufactured homes can be eligible for conforming loans. They generally have to have a permanent foundation and meet other guidelines. Even more subsidy is available through the USDA 502 loan program, which accepts new manufactured homes on permanent foundations, and offers highly subsidized interest rates for very-low, low, and moderate income borrowers. However, this program is almost never used: in 2008, USDA made or guaranteed just 9 loans in Texas.

The reality is most dealers and consumers don’t structure their purchase transactions to meet the lending requirements of these programs. For example, they may place the home on a short-term foundation and lease in a park rather than on a permanent foundation on owned land. Such homes are generally not eligible for subsidy.

Whether or not the government should provide an 80 bp subsidy to all manufactured homes would need to be the subject of a much longer blog post. (The short version: the answer depends on whether the purpose of the lending subsidy is to put roofs over peoples’ heads or to promote access to the asset building opportunity of homeownership. (see this report)) But what Mr. Buffett says the industry needs to stay alive is not an *equal* 80 bp subsidy, but a much larger 375 bp subsidy.

In short, he wants a 468% higher loan subsidy for manufactured housing than conventional housing. And that’s not leveling the playing field, that’s tilting the table.

Buffett's father is most assuredly turning in his grave, again.


  1. "Research by Consumers Union, the publisher of Consumer Reports, shows that prices of manufactured homes over time have more volatility than conventional homes."

    Did you take the time to read this? I did and here's what it says:

    The stereotypes of manufactured housing are built upon very real differences in appreciation
    experienced by the people who own them. The large proportion of manufactured homes in rental parks
    contributes greatly to the lower appreciation experienced by manufactured home owners as a whole, as
    land ownership is an important driver of appreciation. High variation in the individual appreciation rates
    of manufactured homes also causes a higher proportion of manufactured homes, even packaged with
    land, to lose value over time.
    Even so, average appreciation rates of manufactured homes packaged with owned land are statistically
    in line with the site built market, and there are few inherent reasons that a home built in a factory should
    perform differently than one built on site. Our analysis suggests that consumers can make decisions
    which can improve the appreciation of a manufactured home. Land ownership, location, purchase price
    and maintenance expenditures are among the factors that predict appreciation, and should be considered
    when attempting to increase appreciation in a particular unit.

    Own the land and you don't lose anymore value in a MH than you do in a site built home.

    That's what I'm talking about!
    John DL Arendsen

  2. Do the people know that the mortgage company Buffet owns DOES NOT work with people in trouble? NO LOAN MODS, they foreclose. They have law suits galore. My loan was sold to Vanderbilt. I was promised to refinance at around 6% and then I was sold. I pay 9.18% I am on the verge of losing my home on two acres, $80k I put down. 90 days and they swoop and foreclose. I am thankful I did not buy a Clayton home (sister company I believe) the horror stories of shoddy homes. They say they are not regulated by any government laws therefore they do what they want. In this economy does cutting off your nose to spite your face pay??????? People are buying stick built homes because of low prices. Mobile and manufactured homes sit vacant getting vandalized, when they could have been restructured , given a low interest rate, reduce principal and still have an asset and a family in their home. Hello? Who is watching Buffet? Sure he is rich ripping off the lower income families in this country and NO ONE is calling him on it. Hello America???? WAKE UP!!!!!!!!!!