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January 23, 2017

Manufactured Housing Community Lending Gets Creative

Daniel Din
Article By
Daniel Din, Underwriting and Credit Director

Manufactured Housing Communities (MHCs) are a critical source of affordable housing, especially in historically underserved markets. For many years, community owners struggled to access the liquidity necessary to finance this type of housing, particularly affordable communities in tertiary locations. At Freddie Mac, our mission has always been to provide liquidity, stability and affordability to all corners of the rental housing market—especially to those segments that need it most, like MHCs. When we launched our MHC program in 2014, we needed to get creative to meet borrowers’ financing needs in the affordable MHC market, while keeping risk management top of mind.

Manufactured housing is an important segment of the housing market, accounting for seven to eight percent of all one-to-four family housing units. The concentration is even greater in rural, non-metropolitan areas where MHC housing is perhaps the only form of affordable and easily-accessible housing available to many low-income and very low-income households.

Many factors make financing MHCs a unique challenge. The quality of MHCs spans a wide range. Some communities offer a variety of amenities, such as recreational facilities and pools, while others offer none. Some communities are serviced by public utilities, while others are serviced by well-water and septic systems. Some communities are stable with 100 percent occupancy, while others operate at 70 percent occupancy. Some communities are located in highly populated areas, while others are in less dense areas. There is no “one-size-fits-all” financing approach.

Since launching our program, we have funded communities across the spectrum and have seen many unique MHC features. Despite the differences, we have focused on the one thing MHCs have in common—they provide essential workforce housing.

Mission-Driven Ingenuity

When we began our MHC program, we created a product that would fund a large portion of the market. We altered our approach from what was historically accepted in MHC financing, while remaining credit-safe. For example, we accepted:

  • A higher percentage of rental homes within a community (25 percent)
  • Private utilities
  • Smaller loan requests, with a minimum of $1 million
  • Smaller unit count properties, with less than 100 units
  • Resident-owned communities, such as cooperatives

This creativity, and our commitment to problem-solving, allowed us to finance more than $1 billion each year since we launched the program.

Last year we brought further innovation to the market when we financed multiple MHC-only Revolving Credit Facilities. This product has helped experienced borrowers finance properties that are transitional and not entirely ready for long-term debt. It has also allowed sponsors to capture trapped equity, which they can in turn use to continue to improve the communities.

A recent example: Four Leaf Properties

West Olive Estates

This sponsor approached us, along with their Seller/Servicer, PNC Bank, to finance three transitional properties: Two refinance loans for communities in exurban locations around Dallas, Texas and an acquisition loan for a rural community in West Olive, Michigan.

These communities did not fit neatly into our traditional permanent-financing model due to their high ratio of rental homes and still-stabilizing operations. The flexibility and benefits of a Revolving Credit Facility were exactly what Four Leaf needed to finance these properties. It enabled them to capture equity to bring in more homes to sell, provided more time to implement their renter-to-homeowner business plans and gave them a way to continue financing these transitional communities. We were comfortable with the transaction due to Four Leaf’s proven ability to execute their business model, their stable and improving cash flow, and the quality and affordability of the communities.

West Olive Estates in West Olive, Michigan (shown in a slide show to the right) is a 741-unit family community in Four Leaf’s Revolving Credit Facility. Living in this rural MHC is more affordable than owning a comparable single-family house or renting an apartment nearby. A market affordability analysis shows that a $943/month outlay covers an estimated total monthly housing obligation for a manufactured home in West Olive Estates inclusive of financing assumptions, taxes, insurance and other home ownership expenses. Comparatively, the total monthly housing obligation of owning a single-family home in the neighborhood is $1,338/month and $1,000/month rent for a comparable three-bedroom apartment unit.

We ultimately financed the Revolving Credit Facility in August 2016, demonstrating flexibility, while still managing risk carefully and remaining focused on our mission. The three communities totaling $25 million in debt, including West Olive Estates, were used as assets to start the Facility that allowed us to provide $50 million in funding, with a five-year term, two one-year extension options and two $25 million expansion options.

Remaining a Leader

Since starting our program, we have become one of the top sources of funds in the MHC space. We have provided $2.1 billion in financing for MHCs, making housing available for more than 53,000 families in more than 265 communities across 31 states. The recent Duty to Serve rule from the Federal Housing Finance Agency mandates that Freddie Mac improve the distribution of investment capital and the availability of mortgage financing for three underserved markets: manufactured housing, affordable housing preservation and rural housing. Our MHC lending program will play a key role in fulfilling this requirement.

We know that 2017 will present new challenges. We intend to continue to grow our MHC offering through creative, problem-solving financing of affordable and rural communities, while continuing to effectively manage risk. We hope to provide financing for communities in all 50 states over the next few years, while continuing to provide liquidity to the market. We will remain a reliable capital source for MHC owners and our Seller/Servicers with the same high-quality level of service, risk management and certainty of execution that we provide on all multifamily loans. For additional information, please contact your Freddie Mac Representative.

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