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Very negative article on Clayton


abitofvalue
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Looks like a series of negative articles are about to be coming Berkshire's way, Re: Clayton Homes

 

http://www.seattletimes.com/business/real-estate/the-mobile-home-trap-how-a-warren-buffett-empire-preys-on-the-poor/

 

http://www.publicintegrity.org/2015/04/03/17024/warren-buffetts-mobile-home-empire-preys-poor

 

Hard to know what to make of it - if the examples are true and actually representative of even a tiny tiny percentage then this could get a little ugly..

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I didn't read the seattle times article, but I don't think the public integrity article makes  much sense.  It seems like they're accusing clayton of deliberately writing loans so that they could later repossess the borrowers' homes.  I think it would be unlikely that clayton wants repossessions because they're generally pretty unprofitable.  Is this what everyone else is getting from the article?

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The articles are very similar.  It makes sense to me.  They are saying Clayton is abusing the poor.  They sell them overpriced mobile homes at high rates, often with last minute substantial rate changes, push them (or build it into the loan) to use related Clayton companies for overpriced insurance, etc.  Of course Clayton hopes the buyer makes every payment on their depreciating home, but if they don't they get the benefit of having done the loan as personal property instead of real estate.  This allows for quick repossession.  They fix it up and try and sell it to another sucker at a much higher price.  Wash, rinse, repeat.

 

So in other words, what Buffett says about Clayton doesn't match up at all with how Clayton operates. It presents itself as helping the poor person get a an affordable home, but in reality it is further impoverishing them.  The graph on Clayton's rates versus competitors is pretty damning.  To charge on average 7% points (~ 11%) higher than a typical home loan (~4%) for a house that depreciates at about 3% per year, entraps the poor.  Based on Berkshire's annual reports I would have assumed that Clayton was benefiting form a lower cost of funding, and issued loans at similar rates.  These articles paint a much different story.

 

I too would love to hear Berkshire's response.

 

BTW I will go on record as predicting that Buffett's reputation is going to take a huge swing for the worse over the next 20 years.   

 

 

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I am not going to justify Clayton.

 

One thing to note though: if they cannot sell their mortgages to Fannie/Freddie, they might have to charge quite higher rates for 20+ year loans. This is the same argument people make about 30 year mortgage availability and rates that would be much higher if Fannie/Freddie would not buy them with government backstop.

 

This does not justify some other things in the articles if they are prevalent.

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How to put a slant on the numbers ...

 

When Vanderbilt was required to obtain appraisals before finalizing a loan, company officials wrote, the home was determined to be worth less than the sales price about 30 percent of the time.

 

In other words, 70 percent of the time the appraisal was higher.  :o

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The articles are very similar.  It makes sense to me.  They are saying Clayton is abusing the poor.  They sell them overpriced mobile homes at high rates, often with last minute substantial rate changes, push them (or build it into the loan) to use related Clayton companies for overpriced insurance, etc.

It wouldn't shock me if it came out that they were using bait and switch tactics, but it's a lot harder to do in the mortgage area than with vehicle loans or something because mortgage lenders have to deliver a reliable estimate of loan costs well ahead of the mortgage closing.  To bait and switch it seems like Clayton would be violating federal respa laws which seems crazy. 

 

Of course Clayton hopes the buyer makes every payment on their depreciating home, but if they don't they get the benefit of having done the loan as personal property instead of real estate.  This allows for quick repossession.  They fix it up and try and sell it to another sucker at a much higher price.  Wash, rinse, repeat.

 

My understanding of federal laws is that this practice would not be allowed except in the case of a 2nd home or a rental property.  Your personal residence should be protected by the federal repo rules even if you lived in a title vehicle or a boat

 

 

To charge on average 7% points (~ 11%) higher than a typical home loan (~4%) for a house that depreciates at about 3% per year, entraps the poor.  Based on Berkshire's annual reports I would have assumed that Clayton was benefiting form a lower cost of funding, and issued loans at similar rates. 

The points seem on the high side, but 11-15% contract rates doesn't seem excessive to me for the level of risk based off the credit scores they're talking about

 

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How to put a slant on the numbers ...

 

When Vanderbilt was required to obtain appraisals before finalizing a loan, company officials wrote, the home was determined to be worth less than the sales price about 30 percent of the time.

 

In other words, 70 percent of the time the appraisal was higher.  :o

 

I don't think you can put a positive spin on it.  This isn't a transaction between two "unsophisticated" private parties where it may be more likely that the price is higher than appraisal.  How many traditional home builders have 30% of their sales come in below appraisal?  Probably none.  How many manufactured home sellers?  That would be interesting to know.

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In many ways this goes right to the question of whether sub-prime financing should exist at all.  When you are dealing with a certain tier of borrower or consumer, some of the debt collection tactics or lending terms are almost unavoidable, because if the lender doesn't behave that way, he will be out of business in no time.  12% interest rate actually implies a population that's not quite that terrible, with default rate maybe in the low teens.  I'm sure you can dig up many sympathetic cases against a company that's involved in this business for as long as they have.

 

Also note that this came out not long after Buffet said on TV that "Elizabeth Warren would be more effective if she's less angry", a perfectly rational statement.  From a policy perspective though, it's a more serious question.  If you outlaw this sort of behavior, sub-prime financing go completely underground.  These will show up as the same population that's abused by their landlords, or some local kin pin.  Is this a more desirable outcome?  To think that you can lend and service this population in the same way you do an American Express customer is too naive.

 

I think Buffet stepped in this investment thinking he can be part of a better industry in the aftermath of the manufactured housing wipe out in the late 90's and early part of 2000's.  But the nature of the business is such that it molds the behavior of all the participants and absorbs them, rather than the other way around.

 

The way Elizabeth Warren's crowd want it, the only entity that can and will lend to this population becomes the government.  And maybe that is the right solution for those moral purists.  But I'm not sure it's the outcome that maximizes benefit to the society.  But then again, efficiency was never the purpose of the purists.

 

http://www.bloomberg.com/news/articles/2014-04-30/freddie-mac-to-start-filling-trailer-park-void-buffett-laments

 

 

 

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Hey all:

 

In regards to Clayton, I don't think there is a problem with sub-prime financing per se...it is a problem with the unethical "moves" that Clayton seems to be engaging in.

 

Problem #1 is the substantial "bait & switch".  You are quoted a 7% interest rate, and then at closing it is 12%.  That is simply no good.

 

Problem # 2 is the egging consumers on by having them prep a site for the home & then jacking up the rates/price.  Of course, the consumers should get the loan FIRST before doing prep work...but these are not exactly sophisticated consumers.

 

These articles seem pretty damning, that is for sure...

 

What about the "dirty" stuff that Berkshire has done in "for profit" education?

 

Who is surprised by Warren saying one thing and then doing another?

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I think Buffet stepped in this investment thinking he can be part of a better industry in the aftermath of the manufactured housing wipe out in the late 90's and early part of 2000's.  But the nature of the business is such that it molds the behavior of all the participants and absorbs them, rather than the other way around.

 

 

I am going to have to strongly disagree with you that "the nature of the business is such that it molds the behavior of all the participants and absorbs them, rather than the other way around."  I think you have it backward and are excusing their actions (i.e. greed, or if you will, sin).  The nature of the business reflects the nature of the people.  They put money before people. The reason usury is against the law in many places is precisely because it frequently impoverishes even if you are able to make the payment.

 

I am on the opposite end of the political spectrum as Elizabeth Warren, but it seems like the right thing to have the government put a limit of say 4% above average mortgage rates means that the lender they either make the loan or the person continues to rent, which is far better than a high interest rate loan.  To borrow in part from the Federalist #51 which says " If men were angels, no government would be necessary" I would amend to "If men were angels usury laws would not be necessary."  (The principle is also clearly taught in the Old Testament.)

 

One other thing that seems clear to me is that if it is not already required is that manufactured home sales should be required to have a disclosure with a graph showing the decline in vale of a typical manufactured home versus the stable or climbing value of a traditional home.   

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What is really needed is a GSE to facilitate loans to creditworthy borrowers.  I helped a relative look for homes in Arkansas and was really surprised at the difference in borrowing rates for great creditworthy folks in terms of buying manufactured versus stick built homes.

 

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Those who want others to act altruistically are the greedy ones, just follow the money.  I couldn't help but be reminded of this fantastic explanation by Milton Friedman. 

 

 

Here is the unintended consequence of Tim's idea of capping lending rates at 4%.  This comes from a payday lender's annual report.  So much for a free lunch. 

 

Federal law limits the annual percentage rate that may be charged on loans made to active duty military personnel and their immediate families at 36%. This 36% annual percentage rate cap applies to a variety of loan products, including consumer loans, though it does not apply to pawn loans. We do not make consumer loans to active duty military personnel or their immediate families because it is not economically feasible for us to do so at these rates.

 

 

I am going to have to strongly disagree with you that "the nature of the business is such that it molds the behavior of all the participants and absorbs them, rather than the other way around."  I think you have it backward and are excusing their actions (i.e. greed, or if you will, sin).  The nature of the business reflects the nature of the people.  They put money before people. The reason usury is against the law in many places is precisely because it frequently impoverishes even if you are able to make the payment.

 

I am on the opposite end of the political spectrum as Elizabeth Warren, but it seems like the right thing to have the government put a limit of say 4% above average mortgage rates means that the lender they either make the loan or the person continues to rent, which is far better than a high interest rate loan.  To borrow in part from the Federalist #51 which says " If men were angels, no government would be necessary" I would amend to "If men were angels usury laws would not be necessary."  (The principle is also clearly taught in the Old Testament.)

 

One other thing that seems clear to me is that if it is not already required is that manufactured home sales should be required to have a disclosure with a graph showing the decline in vale of a typical manufactured home versus the stable or climbing value of a traditional home. 

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Federal law limits the annual percentage rate that may be charged on loans made to active duty military personnel and their immediate families at 36%. This 36% annual percentage rate cap applies to a variety of loan products, including consumer loans, though it does not apply to pawn loans. We do not make consumer loans to active duty military personnel or their immediate families because it is not economically feasible for us to do so at these rates.

 

So in your opinion it would be better if there was no rate cap limit and military personnel was loaned money at over 36% APR?  :o

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My point is that you cannot defy the laws of economics.  If you want to shut certain individuals out of the credit market, then legislation will do the trick. 

 

Federal law limits the annual percentage rate that may be charged on loans made to active duty military personnel and their immediate families at 36%. This 36% annual percentage rate cap applies to a variety of loan products, including consumer loans, though it does not apply to pawn loans. We do not make consumer loans to active duty military personnel or their immediate families because it is not economically feasible for us to do so at these rates.

 

So in your opinion it would be better if there was no rate cap limit and military personnel was loaned money at over 36% APR?  :o

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I am going to have to strongly disagree with you that "the nature of the business is such that it molds the behavior of all the participants and absorbs them, rather than the other way around."  I think you have it backward and are excusing their actions (i.e. greed, or if you will, sin).  The nature of the business reflects the nature of the people.  They put money before people. The reason usury is against the law in many places is precisely because it frequently impoverishes even if you are able to make the payment.

 

The participants in this business are not just the lenders, but also the borrowers.  And what I meant by the business molding the behavior of all participants is that the behavior of both groups mutually reinforce each other.  The lenders behave a certain way because the borrowers behave a certain way, and vice versa.  Reality is this becomes somewhat of a percentage issue.  If only a handful of loan originators had some transgression in their behavior, I think most people would be willing to look beyond the couple of bad apples, and not blame the institutions.  What makes this a lot more objectionable is when the percent of time this occurs is more than trivial.  And when you deal with certain group of borrowers, this is exactly what happens and likely unavoidable.  So what would you rather have at that point?  No lending to that group at all?

 

I am on the opposite end of the political spectrum as Elizabeth Warren, but it seems like the right thing to have the government put a limit of say 4% above average mortgage rates means that the lender they either make the loan or the person continues to rent, which is far better than a high interest rate loan. 

 

 

The former loan brokers who originate these loans will just transform into landlords, taking out the low interest loans, (which may or may not benefit from government policy subsidy at that time), and charge a rent equivalent of the 12% or whatever they would have charged on the loan as rent.  Same problem will come with a different flavor.  With few people having ownership interest in their own home, a community more easily deteriorates into a slum worse than the generic trailer parks.

 

I think all of us feel an instinctive discomfort when reading about abusive behaviors, I just don't  know the solutions to this is simply outlawing certain things.  Most social experiments carry lots of unintended consequences. 

 

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