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Posted by on Mar 4, 2011 in Market Conditions, Modular Homes, Mortgage News, Thinking of Building? | 11 comments | Print Print

Buffett’s Modulars & Mortgages

Hat tip to Clearfund for sending this along, from Forbes.com:

Last weekend after Berkshire Hathaway released Warren Buffett’s annual letter, there were a flurry of  articles and blog posts hanging off Warren’s every word.  One part of his long letter that didn’t get a huge amount of ink was the section on Clayton homes, a big manufactured home company that Berkshire owns.

Here is Buffett’s excerpt on Clayton Homes:

At Clayton, we produced 23,343 homes, 47% of the industry’s total of 50,046. Contrast this to the peak year of 1998, when 372,843 homes were manufactured. (We then had an industry share of 8%.) Sales would have been terrible last year under any circumstances, but the financing problems I commented upon in the 2009 report continue to exacerbate the distress.

To explain: Home-financing policies of our government, expressed through the loans found acceptable by FHA, Freddie Mac and Fannie Mae, favor site-built homes and work to negate the price advantage that manufactured homes offer.

We finance more manufactured-home buyers than any other company. Our experience, therefore, should be instructive to those parties preparing to overhaul our country’s home-loan practices. Let’s take a look.

Clayton owns 200,804 mortgages that it originated. (It also has some mortgage portfolios that it purchased.) At the origination of these contracts, the average FICO score of our borrowers was 648, and 47% were 640 or below. Your banker will tell you that people with such scores are generally regarded as questionable credits.

Nevertheless, our portfolio has performed well during conditions of stress. Here’s our loss experience during the last five years for originated loans:

Year Net Losses as a Percentage of Average Loans
2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.53%
2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.27%
2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.17%
2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.86%
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.72%

Our borrowers get in trouble when they lose their jobs, have health problems, get divorced, etc. The recession has hit them hard. But they want to stay in their homes, and generally they borrowed sensible amounts in relation to their income. In addition, we were keeping the originated mortgages for our own account, which means we were not securitizing or otherwise reselling them. If we were stupid in our lending, we were going to pay the price. That concentrates the mind.

If home buyers throughout the country had behaved like our buyers, America would not have had the crisis that it did. Our approach was simply to get a meaningful down-payment and gear fixed monthly payments to a sensible percentage of income. This policy kept Clayton solvent and also kept buyers in their homes.

Home ownership makes sense for most Americans, particularly at today’s lower prices and bargain interest rates. All things considered, the third best investment I ever made was the purchase of my home, though I would have made far more money had I instead rented and used the purchase money to buy stocks. (The two best investments were wedding rings.) For the $31,500 I paid for our house, my family and I gained 52 years of terrific memories with more to come.

But a house can be a nightmare if the buyer’s eyes are bigger than his wallet and if a lender – often protected by a government guarantee – facilitates his fantasy. Our country’s social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford.

http://www.claytonhomes.com/our_homes.cfm

11 Comments

  1. Much too sensible to be taken seriously. With Buffets model how are Real Estate agents and Loan Officers going to make quick money fast? Sounds like he controls the entire sales and financing process.

  2. Having a 47% market share, even in a declining industry, is pretty impressive. The low default numbers are even more so. Buffett doesn’t screw around.

  3. “..Our country’s social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford.”

    True. True. True.

  4. Might as well say don’t aim to high Americans. You might fail. Know your place.

    Warren Buffet is a risk taker. No risk, no reward.

  5. It’s somewhat interesting that you bring up Clayton Homes as they just recently lost a case for fraud and racketeering in Texas. While is admirable that they feel they are providing lower class americans with affordable homes they seem to be engaged in some of the same questionable activities that we vilify the banks for.

    http://www.caller.com/news/2011/feb/28/federal-judge-finalizes-judgment-in-clayton-case/

    “A federal jury in November found Vanderbilt Mortgage and Finance Inc. liable for collecting payments on a home for four years after it filed a release of the lien on the home.”

    Vanderbilt Mortgage is the financing ARM on Clayton Homes.

  6. Wow, he’s right even as he’s talking his book… Sensible to invest in feel-good things but difficult to believe from the guy who has the government financing and guaranteeing many of the “investments” he made in the last few years like Goldman Sachs. As a rule of thumb, any time a large investor or CEO type speaks, be skeptical — as cali points out just one of the many reasons why.

  7. Two paragraphs from the caller.com article cali posted:
    “Under the final judgment, Vanderbilt Mortgage was ordered to pay about $216,000 in damages and prejudgment interest to each of the two men who had purchased the mobile home, for a total of $432,000.”

    “The case began when Vanderbilt Mortgage, the financing arm of Clayton Homes, sued in 2009 to foreclose on a mobile home bought by Cesar Flores and Alvin King of Jim Wells County. They bought the home in 2002 for $73,600 from CMH Homes Inc.”

    A $432,000 award for collecting payments for 4 years after they released a lien on the land, when they paid $73,600 in 2002? Plus $127,000 for the landowner. Wow, what a system!

  8. If home buyers mortgage underwriters throughout the country had behaved like our buyers underwriters, America would not have had the crisis that it did. Our approach was simply to get a meaningful down-payment and gear fixed monthly payments to a sensible percentage of income. This policy kept Clayton solvent and also kept buyers in their homes.

    Fixed that for you, Warren. HTH. HAND.

  9. My interpretation of the article I posted is that we aren’t seeing everything that happened here. I get the sense that there’s a bit of a “free house” scenario because of some poor records management by the mortgage company, but if your company is dumb enough to release a lien on the property you get what you deserve.

    My point was to prove the hypocrisy of Berkshire and Clayton homes. Look how we’re helping people yet we’re getting convicted of Fraud and Racketeering. What happened to honest business dealings. Everything has become a bet and when you lose you don’t have to pay.

  10. Interesting….I wonder if anyone will ask him a question about that at this year’s meeting. Can’t wait to go…6 weeks left.

  11. Well I am one of the people they talk about with the credit score bellow the 640 that was questionable but they finaced me even when I was well below the 640 credit score like a100 points below they inflated my income at the originator level and never once did the underwriter stop the loan at vanderbuilt wonder why he don’t want to talk about it

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