Mar
11
Written by:
Guest Blogger
3/11/2010 9:14 AM
By Ken Rishel
President, Captive Financing
What happened to outside finance? That is a question that still gets raised, even today at industry meetings everywhere. At the Manufactured Housing Institute winter meeting, you could hear the anger in a voice as that question was raised yet again.
The answer is pretty simple. In the 1960s banks lost money financing trailers.
In the 1970s, banks, savings and loans, and insurance companies lost money financing mobile homes. In the 1990s, Wall Street investors lost money financing manufactured homes. People who put money into these types of loans have always lost their investments (with certain exceptions) so they aren’t about to do it again.
The reason for the losses is both complex and simple at the same time. Making and servicing these types of loans is complex if it is going to be done right. Very few people involved in finance have the right industry knowledge to make and service these loans properly, and very few people with the industry knowledge have the right finance knowledge and expertise to cross over into lending.
The lack of knowledge on the part of most lenders created the perfect opportunity for industry people to take advantage of the situation, and many did. Unrestrained greed caused the losses.
In the 1990s, one of the larger retailers who also had a background as a bank president, was asked if he couldn’t see what was happening to the industry as a result of the lending practices. He replied that it was very apparent to him the whole industry would collapse in less than 10 years, but he would continue to take full advantage of the situation until the last minute and then sell out to some unsuspecting buyer, and retire. What else is that but plain greed?
Don’t think the greed exited in 2000 either. Recently a pool of loans surfaced that had been underwritten by one of the “big four” and backed by a full recourse agreement by a community group. The loans were acquired in a bankruptcy purchase of the community in which they were written. In addition to the primary documents the lender created, were side documents between the community and the borrowers “forgiving the balance” if the borrowers paid for a certain period of time.
Naturally the community had no problem selling homes, given the borrowers were only paying for about 25 percent of the sale price if they performed during the specified period. The community owner had planned the scam down to a fine detail, taking millions of dollars out prior to the bankruptcy.
Owner funded financing works because it is unlikely that anyone would knowingly structure a deal to take advantage of themselves. The only hitch is learning how the other side of the operation needs to work. Once a captive finance operation is properly structured and run as a finance operation, there is no limit to what can be accomplished.
Ken Rishel is a principal partner in Precision Financial Corp., a company active in the manufactured housing industry. Many of the same lending problems that have plagued the RV industry in recent years, have impacted the manufactured housing industry much longer. Rishel feels the RV industry could benefit from the strategies manufactured housing dealers and community developers adopted to not only survive, but thrive.
Rishel can be reached at kennethrishel@captivefinancing.net
1 comment(s) so far...
Re: Why owner-funded financing works, when outside financing doesn't
I enjoyed reading your article. I started out in the early 60's as a Mobile Home Dealer. I was in business with my family. In those days we signed full recourse. That acted as a brake to greed. The banks required a reserve account-"just in case". Then greed appeared. Third parties appeared willing to "guarantee dealer paper" for a portion of the interest income. What happened is the inevitable. Everyone loaded up and eventually it collapsed. Then Banks said they would assume the risk for a fee. That worked for awhile until the banks decided they needed more profits and so they lowered the required down payments. They finally lowered them so low that you could buy something for nothing down. The inevitable happened. The other day I had three Bankers in my office and I asked them "Why did you make all those bad loans" (this bank is in trouble) Their answer was truthful " Because everyone else was" We have lost accountability in our Industry- We need it back!!!!!
By Dick Dixon on
3/13/2010 11:40 AM
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