Affordable housing, unaffordable credit? Concentration and high-cost lending for manufactured homes

Summary

Focus

Expanding homeownership has been a prominent goal of public policy, as homeownership allows families to build wealth and provides financial security. The acute housing shortage and rapid rise in house prices, however, threaten this objective in the United States. One proposed solution is manufactured homes, which are prefabricated, permanent residences that are factory-built and then installed on a lot. Their sales price is often less than half of what it would cost to build a similarly sized home on site, reflecting substantially cheaper construction costs. While manufactured homes currently house about 17 million Americans, the market structure and lending conditions for manufactured home loans have received little attention.

Contribution

We provide novel evidence that the market for manufactured home loans is characterised by substantial market concentration that contributes to high interest rates when compared with mortgages for site-built houses. Using public application-level data on manufactured home loans collected under the Home Mortgage Disclosure Act, we first provide a series of stylised facts on the manufactured home loan market. We then show that market concentration is a key driver of higher interest rates on manufactured home loans. Our results also highlight the role of integrated (or captive) lenders in explaining the link between market concentration and interest rates.

Findings

We find that the loan market for manufactured homes is characterised by much higher local market concentration than the market for site-built home mortgages and that borrowers in counties with higher lender concentration face substantially higher loan rates. To provide additional evidence on the nexus between market concentration and rate spreads, we exploit the Home Ownership and Equity Protection Act (HOEPA) threshold for rate spreads. Under HOEPA, high-cost loans are defined as having a rate spread exceeding 6.5 percentage points and come with higher administrative and compliance costs for lenders. We find a positive and highly significant effect of local market concentration on the probability of a loan having a rate spread just below the HOEPA threshold, consistent with lenders having market power. Finally, we show that integrated lenders, which play an outsize role in the manufactured home loan market, charge particularly high rates, and we provide evidence suggesting that these lenders exploit their market power over borrowers.

Abstract

Policy makers place high hopes in manufactured homes - the largest source of unsubsidized affordable housing in the US - to alleviate housing supply shortages. This paper shows that high market concentration in the multi-billion-dollar manufactured home loan market allows lenders to charge significantly higher interest rates than for site-built homes. Loan-level data indicate that borrowers in counties with higher lender concentration face significantly higher rates. Evidence from bunching at the regulatory HOEPA rate threshold, an instrumental variable analysis, and a difference-in-differences analysis around HOEPA's introduction suggests a causal link. We further show that integrated lenders, which play an outsized role in the manufactured home loan market, charge particularly high rates, and we provide evidence suggesting that these lenders exploit their market power over borrowers.

JEL classification: G21, G23, L13, R31

Keywords: manufactured homes, mortgage market, competition, household finance, HOEPA