News & Notes Archive - September 2007
Mississippi MH builder Cappaert Housing fined $50,000 by federal regulators for 43 safety violations, many serious. Incident the fourth time since 1989 citations have been issued following inspections.
In January inspectors from the U.S. Dept. of Labor’s Occupational Safety and Health Administration (OSHA), inspected the Vicksburg. Miss, facility of MH builder Cappaert Manufactured Housing, Inc. as part of a program that targets the nation’s most hazardous workplaces for inspection based on their histories of having high numbers of illnesses and on the job injuries.
Last month, the Department subsequently proposed penalties of $118,000 against the company for 43 violations, and $5,100, for four serious violations, against C&D Builders, Inc., a subcontractor that installs roofing and siding at the facility. Inspectors alleged that plant conditions exposed the workers to amputation, electrocution, falls and other injuries.
According to the Vicksburg Post, early this month, following negotiations, OSHA agreed to more than halve the penalties, to $50,000 for Cappaert and $2,100 for C&D Builders. The paper reported Miss. OSHA officer Clyde Payne as saying “there were a lot of violations here and they made a lot of progress.” Payne added, penalty reductions are regularly used as incentives for companies to improve safety conditions.
Under the terms of the settlement, Cappaert and C&D Builders agreed to conduct two outside safety audits by August 2008, to conduct monthly self-inspections and provide ten hours of safety training to all plant supervisors.
Comment: I find this report troubling, inasmuch as OSHA has identified Cappaert as having a history of safety violations going back nearly two decades. Apart from how this record reflects on the company’s concern for the safety of its 170 employees, potential buyers of Cappaert homes can’t be blamed for wondering if the construction quality of the homes may suffer as well. Cappaert builds low-end affordable homes for buyers whose need for decent shelter trumps designer appeal, and who aren’t expecting their home to appreciate in value.
The silver lining to the sub-prime credit meltdown and the housing downturn –Manufactured housing largely unaffected, financing for HUD homes still good. What this means for MH shoppers.
With all the news in recent months about the housing slowdown, the near collapse of the market in subprime mortgages and the subsequent global economic repercussions in credit markets, almost no attention has been given to how the manufactured housing sector is faring during the crisis. As it turns out, MH is holding its own quite well, actually.
The reason: during the 1990s the MH industry experienced its own boom and bust triggered by exactly the same forces: lax lending standards, easy credit, and a large infusion of Wall Street investor money from the sale of mortgage-backed securities. During that decade, annual sales of manufactured homes skyrocketed, reaching a yearly production total of 373,000 in 1998.
That figure far exceeded the demand, resulting in an over-abundance of inventory on retailer sales lots nation-wide. That same year, tens of thousands of homeowners who had obtained financing despite poor credit ratings began to default on their home loans, triggering an avalanche of foreclosures. Wall Street, having collectively lost hundreds of millions of dollars, pulled the plug on further cash for MH lenders to lend, sending the MH industry into the most severe downturn in its history.
Over the next five years the industry shrank nearly 70%. Today, annual home sales are hovering at around 100,000. Even so, some industry observers believe there are still too many builders for the current demand.
The good news is, the MH industry has already experienced its own credit crisis, and those lenders who are now offering loans to manufactured home buyers (both chattel and conventional home mortgages) have toughened their underwriting standards to reduce the possibility of high foreclosure rates. Yes, the days of easy credit loans are probably gone forever, but if you have good credit–which is to say, a FICO score of 700 or higher–you should have no difficulty obtaining a loan. Several national lenders offer packages to those with scores in the 650 range.
Please see the April 2007 News & Notes for a list of these national lenders and a description of each. In addition, always check with your local bank and/or credit union to see what they can offer before you shop for a loan from a national lender.
Borrowing locally is generally better, even if the interest rate is slightly higher, because you have the advantage of personally knowing your lender, which means if you run into a financial dry patch, they’ll be more likely to give you a break on any request for flexibility on your loan payment scheduling.
In sum, the availability of chattel and mortgage loans in the MH sector is quite good because MH has emerged from its own bust and has become more disciplined in its lending practices. See the following story for news of related interest.
Fannie Mae announces “MH Select” initiative, making qualifying manufactured homes eligible for conforming home loan mortgages at interest rates similar to site-built homes.
The Federal National Mortgage Association (a.k.a. Fannie Mae), the huge corporation backed by the U.S. government that buys home loans from banks to enable them to replenish the cash they need to continue lending, has just announced a new initiative aimed at helping some manufactured home buyers qualify for loans they previously couldn’t obtain. The program, developed in cooperation with the industry trade group, Manufactured Housing Institute, is expected to be available in the first quarter of 2008.
Byway of background, during the 1990s boom in MH, Fannie Mae had a sizeable portfolio of so-called affordable housing loans (i.e., HUD-code or manufactured homes, both single-wide and multi-section). Like many lenders, they got burned when MH tanked in 1998, and they pulled the plug on buying further loans. Because HUD-code homes no longer qualified, or “conformed,” to Fannie Mae’s standards, banks were no longer able to sell to Fannie their loans to HUD homeowners.
So, many banks stopped making new loans (or if they did, they kept them in their own portfolios). This freeze-out really hurt the financing picture for MH, contributing to the downturn. Note: The MH industry had no one but itself to blame–during the 90s run-up, most everyone looked the other way and took the money instead of following responsible lending practices.
With this new program, Fannie Mae is recognizing the fact that, while most manufactured homes are aesthetically unappealing, not particularly well constructed and actually depreciate in value (especially if not legally tied to the land), a percentage of HUD-code homes are entirely equal to conventional site-built homes in every category, and are thus deserving of the same treatment.
To qualify for financing under the MH Select initiative, the home must be:
- Multi-section
- Secured to the land as real estate
- Constructed to meet certain aesthetic and structural criteria, including:
- Minimum eight-foot sidewalls,
- Minimum 5/12 roof pitch (with coastal exceptions),
- Tape and textured walls throughout,
- Ground-set permanent foundation,
- Minimum ten inch eaves all around,
- Recessed front entry or covered front porch.
This initiative is terrific, and very much needed to help improve the lending environment that has seriously depressed the industry since its latest suicide binge. With conforming loans once again available to qualifying HUD code homes, banks that sell their loans to Fannie Mae will once again open up their purses and thus spur more home sales, resulting in an overall industry improvement.
If you’re shopping for a multi-section home, be sure to tell your lender about this program (chances are, they have yet to hear the good news), and when making your purchase decision, be sure your home has all the features needed to meet Fannie Mae’s standards. Your doing so could result in a lower interest rate, saving you literally tens of thousands of dollars over the life of your home loan.
Interview: 15 minutes with...Laurence “Lad” Dawson
Note: In my role as an industry observer and consumer advocate I speak with people at all levels of the manufactured home industry (MH) to gain insights I share with my readers to help them be better informed. Some I have interviewed for a one-page column that runs in an industry trade publication. In return the magazine runs an ad for the Grissim Guides. No money changes hands. I insist on this. Aside from book sales, I neither solicit nor accept a dime from the industry, and my readers have my assurance I intend to keep it that way. Here’s this month’s interview:
Lad Dawson, CEO and majority owner, Guerdon Enterprises, LLC
Who: Co-founder, CEO and majority owner of partner, Guerdon Enterprises, LLC, based in Boise, ID
Background: Age 63, born in West Palm Beach, FL (“My father was stationed there in the Air Force”), grew up in rural northern VA outside D.C., earned undergraduate degree in engineering from Carnegie Mellon University, Pittsburg, PA, in ’66, marrying that same year his high school sweetheart Sandee. Attended Harvard Business School earning an MBA in ’68 (“My focus was entrepreneurial studies”). Got his start in the housing business in ’71 in Ssouthern CA as a general . managermgr. trainee for K&B Home Systems, the mobile home subsidiary of national builder Kaufman & Broad. In ’72 became GM of company’s Glendale, AZ factory. In ’75 promoted to regional VP overseeing the company’s four western plants (all mobile homes). In ’77 returned to CA, promoted to exec VP and COO (“We had grown to 11 plants nationally, mostly in Florida, Texas and the west coast).
In ’83 moved to TX where he found investors (including Palm Harbor Homes) and foundedstarted Oak Creek Homes (“I’ve always had an entrepreneurial spirit”), acquiring several plants from Wick Building Systems. Built Oak Creek into a leading TX builder. When the oil bust came in the late 80s (“The manufactured home market went from fifty-plus plants down to six”), he steered Oak Creek through lean times and back to health. In ’93, merged with major retailer chain Nationwide Homes to co-found American Homestar Corporation, becoming co-CEO and Ppresident, with a vision to become a national vertically integrated MH company. In ’94 company went public, used its IPO cash to grow rapidlyexponentially through acquisitions, including Guerdon Homes, Inc., along the way taking a 50% owner stake in the ’96 start-up 21st Mortgage. In 1996, he was named one of the regional Ernst & Young’s Entrepreneurs of the Year. By 1998,’99 American Homestar had a presence in 28 states with revenue that year exceeding $650 million.
In early 2000 A year later, with the MH industry in free fall, Dawson, like many of the other industry CEO’s was “forced into early retirement”. He resigned as CEO, then in 2001, together with partners, he purchased from American Homestar (then in Chap 11) the Guerdon Homes plant in Boise, ID (and the rights to the Guerdon name), co-founding Guerdon Enterprises, LLC. The plan: transition from HUD homes into the mainstream home market, including large multifamily developments, using modular technology. That transition was completed by 2005. Last year the company generated $45 million in revenue, shipping modules from its 150,000 sq. ft. factory (20 acres, 300 employees) to clients in nine western states. Long active in industry affairs, he served as chairman of MHI (’98 — ’00) and currently serves on the MHI board as a director. The Dawson’s have two daughters, Cami and Stacy and one grandchild, Phyllis.
- Q: Phasing out HUD home building while trying to ramp up as an exclusively modular builder must have been a huge challenge.
- A: You’re right, it was very difficult. We had to retrain, build up tremendous capabilities with personnel and engineering capabilitiess to build these products–we have 18 engineers on staff–and increased staff in other departmentsthat increased overhead. And because 30% to 40% of the construction is done on site–something that very few of our HUD retailers were set up either to perform or project manage–we had to develop a new distribution system. We needed to find builders, then train them and support them. And that alone takes several years. Then, we discovered that if you’re going to do any volume, or large volume projects, you need to be able to provide directly certain on-site construction and installation servicestasks. So in our case we have affiliated companies that work with us pretty much on an exclusive basis providing those services.
- Q: Guerdon has been involved in some major projects. Can you give an example?
- A: We were involved in a 160 unit multi-family complex in downtown San Jose called Cahill South that was built and sold out in a 20 month period, completed last year. A very successful project for us, featuring custom products with featuring ten foot ceilings, granite countertops, custom windows, very upscale finishes. Prices were in the high fours to the mid-sevens. Over the past five years we’ve done 20 projects of significant size, including designing and building products for entire subdivisions. Most of the projects have been multi-family including , some condos, some for rent apartments, some town homes, duplexes, and other products in that range.
- Q: Northern California would seem an unlikely market for an Idaho builder.
- A: Actually it’s one of our largest markets. And it’s not that far–600 miles. Many of our primary markets are of equal distance.
- Q: What percentage of your market is the smaller individual builders doing one home at a time?
- A: n our presentations we specifically tell potential clients that modular does not necessarily mean cheaper but it could well mean better or faster, or other advantages. We focus on market areas where construction costs are high–due to union involvement, for example–or where the sites are tight or the building seasons are short. Being able to shorten a project construction cycle to one year instead of 18 or 24 months can be a big benefit. Plus, we’ve developed a lot of engineering expertise that enables us to offer solutions. In a sense, we’re a giant subcontractor who does 60 to 70 percent of the construction.
- Q: What benefits do you offer your big customers?
- A: Our strategy is to have a fifty-fifty mix of big projects and small builders. The needle swings from side to side. Having a few customers with large projects and a lot of builders doing individual small projects gives us a blend that allows us to smooth out the ups and the downs. With small builders we try to give them a chance to build an extra one or two homes a year on top of the eight or ten they already do. We do a lot of business in the mountain and resort areas where people are building second homes.
- Q: How is the current housing slump affecting you?
- A: Our business is down. We’re seeing the industry being impacted to an amazing degree all across our nine-state area. Small builders may have spec homes in inventory that haven’t sold. And big developers may be inclined to sit things out for a year. But we’re seeing more opportunity out there, and our book on future business continues to grow. Many clients are working with us on things that will be built in 2008 and later, and that’s keeping us busy. So while we’re seeing a bit of a flat spot right now, we see record years on the horizon, building on the momentum we’ve achieved. I’m very bullish about Guerdon in ’08 and beyond.