Comments on: Deconstructing Buffett A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: DavidMerkel Tue, 02 Mar 2010 17:26:16 +0000 The reason that conforming loans are so low versus manufactured housing, is that they are lending against the land, which is valuable, and doesn’t usually depreciate, versus the manufactured housing, which does depreciate rapidly. Also, the conventional housing borrowers are higher quality, and thus, the loss statistics on MH are a lot higher than that for conventional lending.

By: jeweke Tue, 02 Mar 2010 16:34:19 +0000 TxLIHIS’s ( response to Buffett’s discussion of the “punitive differential” on MH:

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.

(Version with links available at: tt-wants-to-tilt-the-market-towards-manu factured-housing/)

By: DavidMerkel Mon, 01 Mar 2010 19:41:21 +0000 Sorry, to finish — some of what I wrote got lost in the HTML — I downloaded it all to Excel and ran my own calculations.

The non-guaranteed debts of Berky are much longer — an effective duration of around 8.4 — three times as long as the holding company debt.

I’m not sure if any of this is significant, but it makes me wonder what Buffett’s philosophy is with holding company debt.

By: DavidMerkel Mon, 01 Mar 2010 19:18:56 +0000 Felix, for what it is worth, if Berky wanted to issue debt today, they would have to issue at around 0.75% +/- 0.15% over agency yields. More around 5 years, less around 30.

While I’m here, here are 2 curiosities — Bloomberg’s DLIS function doesn’t work with Berky, which gives a list of maturities, probably because of all the nonguaranteed debt, and EETCs [enhanced equipment trust certificates] from BNSF.

But, doing BRK , a list is easily available. Sorting it by size of issue outstanding, what is fascinating is that most of the holding company debt has a short tenor. My estimate is an average maturity of 4.4 and an effective duration of 2.8. 90% of it comes due by 2015.

Now, Berky doesn’t have that much debt at the holding company level, but it is remarkable that they are financing so much short. It is a negative arb, because he has a little more cash on hand than holding company debt.

By: karen2 Mon, 01 Mar 2010 00:47:36 +0000 Well, I’m not sure exactly what Mr. Buffett means by “meritorious”, but manufactured homes have a significantly poorer loan repayment record than site-built homes, on average.

So maybe Clayton buyers are “good credit risks” relative to other buyers of manufactured homes and, sadly, relative to many buyers of site-built homes during the boom, but they probably aren’t so good compared to the traditional, long-term average for buyers of site-built homes.

By: SGKingsley Sun, 28 Feb 2010 17:27:48 +0000 By the way, 300 basis points. Jesus Christ. That’s an amazing spread. I would kill for that.

Just unbelievable. I would kill for that spread.

By: SGKingsley Sun, 28 Feb 2010 17:18:17 +0000 I think this is one of those cases where Warren Buffet genuinely don’t see, or simply don’t want to see, what he knows perfectly to be true. Which is, his manufacturing business is making money from financing rather than from actually making the products, and on some intellectual level he’s not comfortable with that as he has been a fierce critic of the Wall Street economic model.

Which is all fine and dandy, except that the Wall Street economic model isn’t some nefarious scheme dreamed up in some corporate attic. The financialized economy is the reality wrought by the changes in economic structure.

By: dWj Sun, 28 Feb 2010 16:44:59 +0000 It’s easier to trust Buffett when he’s coherently arguing from the same principles as he always has than when he seems to be trying (badly) to justify a position instead, as he did as quoted in the Matthews post earlier.