Although this may surprise some people, manufactured-home communities (MHCs) have for years represented a stable asset class within commercial real estate in terms of occupancy rates and loan performance. Although the COVID-19 pandemic placed stress on this sector, causing some pullback and tightening of lending parameters, MHCs have performed fairly well relative to other commercial-asset types.
Commercial mortgage brokers should keep their eyes on this sector as manufactured housing is expected to remain a growth industry during this downturn and beyond. It also represents one of the long-term solutions to the nation’s affordable-housing shortage.
In a traditional manufactured-home community, the landlord owns the land and infrastructure along with any related amenities, such as clubhouses, swimming pools and playgrounds. The residents within the MHC own their homes and pay rent on the sites that their homes occupy.
Once a manufactured home is placed in a community, it is unlikely that it will ever be relocated. So, the typical MHC has a lower tenant turnover rate than apartment complexes and other multifamily properties. If a resident wants to move out, they will usually sell their manufactured home to a new resident rather than incur the expense involved in moving the home.
The new resident pays rent upon move in with little if any collection loss. So, many MHC owners enjoy stickier cash flows at their properties relative to apartment owners, whose tenants can more easily pack up their belongings and leave. In cases where a tenant abandons their home, the MHC owner usually takes possession of the home, then refurbishes and resells it to a new resident.
Given the solid performance of manufactured-home communities, the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, conduit lenders, life insurance companies and banks have found MHCs to be attractive from a risk standpoint. These lenders have traditionally offered competitive terms and low interest rates to MHC owners.
Fannie Mae and Freddie Mac are the two largest financiers in this sector, and in 2019 provided a combined total of $3.9 billion in MHC financing nationwide. One of the reasons for this is the exceptional performance of these loans.
Fannie Mae, whose MHC lending platform has been active since 2000, this year reported a 0% serious-delinquency rate with no loans 60 days or more past due across its $14.1 billion MHC portfolio. Freddie Mac, meanwhile, has reported no losses or delinquencies since rolling out its MHC lending program in 2014.
The GSEs are expected to remain active financiers within this space. The Federal Housing Finance Agency (FHFA), the GSEs’ regulator, includes MHCs within its definition of “mission-driven business.” This is an important designation because the FHFA mandates that at least 37.5% of the agencies’ business be mission-driven. In other words, the GSEs are motivated to lend on MHCs in order to meet their mission-driven goals, which translates into lower interest rate pricing relative to conventional market-rate apartments.
When the COVID-19 health crisis hit this past March, Fannie and Freddie kept lending while other commercial mortgage lenders paused their activities. It has not been business as usual for the agencies, however.
As the nation went into lockdown, millions of Americans were furloughed from work or lost their jobs. This raised major concerns about the ability and willingness of MHC tenants to pay rent. Also, many states placed a moratorium on evictions, which gave landlords few options.
To address these concerns, the GSEs tightened their lending requirements on all multifamily properties, including MHCs. They implemented an upfront debt-service reserve (DSR) requirement of anywhere from six to 18 months, depending on the loan-to-value (LTV) ratio, debt-service-coverage ratio (DSCR), sponsorship and loan size.
Only transactions with exceptionally low LTV ratios and high DSCRs could avoid an upfront debt-service reserve. Depending on the specifics laid out by each GSE in their loan documents, the DSR must remain in place until all government actions related to COVID-19 are lifted and/or the property satisfies the defined DSCR requirements for a specified period of time. If these requirements are not satisfied, the DSR will remain in place for a maximum of one to three years, subject to certain conditions.
In addition to implementing new DSR requirements, both agencies have focused on rent collections. This requires borrowers with loans in the closing pipeline to provide real-time information on their rent-collection statistics. The borrower also may have to report the amounts they anticipate collecting in the near future based on their discussions with tenants who request rent-payment deferrals or relief. Depending on the information that borrowers provide, the upfront debt-service reserve — and sometimes even the loan amount — can be modified to address additional perceived risk.
Although complete statistics are not yet available, rent collections for MHCs appear to have held up quite well during the first few months of the coronavirus pandemic. This is to be expected for MHCs restricted to residents ages 55 and up, as many residents in these senior communities receive Social Security payments as their main income source.
All MHCs, regardless of age restrictions, appear to be experiencing similar results. For example, in a survey conducted by MHInsider of more than 200 MHC owners and operators throughout the country, more than 90% of rents due in May 2020 were paid on time. There was little difference between 55-and-over communities and all-age MHCs.
Should favorable rent-collection trends continue in the MHC sector, it is reasonable to believe that the agencies might consider moderating their upfront DSR requirements. There is, however, much uncertainty in the market. If a second wave of COVID-19 hits and the federal government does not step in to provide relief, it is quite possible MHC owners will face challenges collecting rents. This may result in more conservative MHC lending parameters and/or more stringent DSR requirements.
Although many borrowers may not like the new upfront DSR requirements, this condition doesn’t appear to be slowing the demand for these loans. Even in this risky environment, buyers of MHCs do not appear to be demanding higher capitalization rates. One reason for this could be that interest rates have dropped to all-time lows during the health crisis, and interest rates typically play a key role in determining the cap rates that investors are willing to pay.
In terms of refinance activity, MHC owners continue to pursue discretionary refinances in order to replace their existing interest rates with lower ones. These borrowers also are simultaneously extending loan maturity dates and cashing out equity that has built up over the years through increased cash flows and property-value appreciation.
Despite the pandemic, the GSEs have remained aggressive in their underwriting and loan sizing parameters for MHCs, with the occasional exception of large cash-out refinances. These larger cash-out loans may be underwritten at a slightly higher DSCR due in part to exceptionally low interest rates.
As the nation continues to work through the health crisis, the multifamily sector and MHCs in particular will likely remain attractive to lenders and investors compared to other types of commercial real estate. At the outset of COVID-19, the Federal Reserve supported and stabilized the multifamily market in general by purchasing agency mortgage-backed securities, and it has signaled a willingness to continue providing additional support in the future, if needed.
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The longer-term future of manufactured-home communities is bright. MHCs should benefit from the sizable demand for affordable housing and a lack of new supply, as well as through the continued support of regulators within the sector that promote duty-to-serve mandates for Fannie Mae and Freddie Mac. ●