By CHRISTINE RICHARD
of  DOW JONES NEWSWIRES NEW YORK --

In a bid to clamp down on inflated appraisal values and legions of bad loans in the manufactured housing sector, Fannie Mae (FNM) has issued  Industry Guidelines
 which take effect this week.

The new rules apply to the manufactured housing loans Fannie Mae buys directly and reflects the agency's concern that the sector needs to be kept on a shorter leash than the general housing market.

"We found default, performance and losses were very different for manufactured homes," said Deborah Tretler, vice president for single family business at Fannie Mae. "More and more borrowers were defaulting and losing homes."

Fannie Mae's counterpart, Freddie Mac (FRE) is planning to introduce similar regulations at the end of the year. The two government-sponsored housing finance companies are the largest mortgage lenders in the U.S.

The new guidelines from Fannie Mae, which apply to all loans taken out on or after Aug. 24, hold appraisers to stricter procedures, require larger down payments and lower the amount of equity that can be taken out on a manufactured home in a refinance transaction.

"For the transaction with the right amount of down payment and the proper underwriting, they are providing much needed liquidity," said Pramila Gupta, a managing director in structured finance at Moody's Investors Service.

During 2002, the industry's biggest retail lenders, Conseco Inc. and Oakwood Homes (OKWHQ), filed for bankruptcy protection while other lenders, including Greenpoint Financial Corp. (GPT) and CIT Group (CIT), exited the retail market. Deutsche Bank (DB) discontinued its dealer financing.

Jo Ann Meyer Stratton, an appraiser in a small community outside of Phoenix, Ariz., said the guidelines are needed to help stem years of unethical business practices by some lenders and appraisers.

"Manufactured homes started to suffer as a result of all the predatory lending," said Stratton.

A common practice among some manufactured housing dealers was to inflate the value of a unit by the amount of a buyer's outstanding credit card bills. That allowed the buyer to get a loan without having to account for the credit card bills and then pay off the bills with the loan.

Other tricks of the trade, and one that Fannie Mae cracks down on in its new guidelines, are arrangements whereby dealers include everything from home entertainment centers to backyard barbecues and aboveground swimming pools in the price of a home. If such items are used to help sell a unit, the price has to be deducted from the sale and not be financed as part of a mortgage.

Such practices are coming back to haunt the market as borrowers walk away from outsized loans.

In Stratton's area, as many as 50% to 75% of comparable sales she obtains when appraising a manufactured housing unit are sales of repossessed units by financial institutions.

The entire market is suffering from a glut of second hand units, due to the jump in repossessed units, and some units are being liquidated in wholesale transactions for as little as five cents on the dollar.

Real Estate Conversions
The new Fannie Mae guidelines are key because they herald a sea of change in the financing of manufactured housing.

Fannie Mae previously supported the market mainly through the purchase of asset-backed bonds rather than direct mortgage purchases.

That's because most manufactured housing is classified as personal property, like a car or a boat, rather than real estate. That's been the case even if the manufactured housing unit is located on owned rather than rented land.
But that needs to change if liquidity is to be restored to the market, because Fannie Mae can't directly buy personal property loans and the companies that once made these loans are largely out of the picture.

"A couple of years ago when there was a pretty robust financing market," said Fannie Mae's Tretler. "It's not that borrowers didn't buy on land they owned, but there was no driving impetus to change to a real estate transaction versus a personal property transaction."

Now, Fannie Mae is seeing an increase in manufactured housing loans classified as real estate.

Earlier this month, South Carolina, which has the highest percentage of manufactured homes in the nation, passed legislation that allows manufactured home owners to combine the land and the home on it into a single piece of real estate, qualifying the owner to take out a mortgage.

And, given the ongoing poor performance of bonds backed by personal property loans, the move to classify manufactured housing as real estate is likely to continue.

In the last week alone there have been three downgrades of transactions backed by manufactured housing loans: Fitch Ratings downgraded three classes of Lehman Manufactured Housing; Standard & Poor's lowered five classes of Home Equity Mortgage Loan Asset-Backed Trust, citing loan delinquency rates ranging from 23% to 33%; and Moody's Investors Service downgraded 27 classes of United Companies Financial Corporation's manufactured housing deals.

Earlier this month, Standard & Poor's lowered its outlook on the Federal Home Loan Bank of New York because of a deterioration in its portfolio of manufactured housing loan-backed bonds.

"It's a stew that's been simmering for twenty years and has come to a full boil," said Stratton.

By Christine Richard;
Dow Jones Newswires;
201 938-2189;
christine.richard@dowjones.com
Updated August 29, 2003 10:41 a.m.