Outdated mobile homes that were built before the implementation of modern construction and safety standards in the 1970s can still be found across the country. Seniors living on fixed incomes often own these homes and don’t have a practical solution for replacing them.
That’s where Bill Smith comes in. For the past decade, Smith — a Southern California-based loan officer with Reverse Mortgage West — has worked with a handful of homeowners to replace their outdated properties through the creative deployment of a reverse mortgage.
Smith has been a reverse LO since 2002, when Financial Freedom “was the giant in the industry,” he said in an interview with HousingWire’s Reverse Mortgage Daily.
A few years into the job, he faced a dilemma when one of his client’s applications stalled due to an obscure regulation. The underwriter told Smith that the Federal Housing Administration (FHA) didn’t approve loans for manufactured homes in condominium communities, even though both types of properties are eligible for financing.
“It didn’t make any sense to me,” Smith said.
Not long after, Smith was at an industry conference and had the opportunity to speak with Margaret Burns, who was serving at the time in a key policy role at the U.S. Department of Housing and Urban Development (HUD). He explained the situation, asked Burns if the rule could be changed, and she agreed.
According to Smith, the regulatory change took two years to implement. In October 2008, he received an email from Burns stating that his bill was on the desk of President George W. Bush and ready to be signed.
“So, naturally, I took for credit for it in this market and in my work,” Smith said. “I met every dealer, I met every manufacturer, I met every manufactured park owner. Taking credit for that kind of launched me into that space — the manufacturer-owned (housing) space — and I did a lot of loans.
“And then I realized that a lot of times, if it was a pre-HUD [Code] home, June 1976 or earlier, (borrowers) still weren’t eligible.”
Research published earlier this year by the Urban Institute noted that while it’s “uncertain” how many pre-1976 mobile homes remain in use in America, a conservative estimate is about 1.2 million. Fifteen states had at least 20,000 of these homes, led by California (176,000), Florida (145,000) and Texas (76,000).
The Manufactured Housing Institute (MHI) reports that there are more than 43,000 manufactured home communities in the U.S., which encompass some 4.3 million homes. The bulk of these are land-lease communities in which residents own their homes but not the underlying land. Smith’s proprietary program is only for homes that are titled as real property.
Smith said that prior to the HUD Code, many of these units were built with a life expectancy of 15 to 20 years. By the late 2000s, he added, many of them were considered unsafe or an “energy sieve,” and they needed to be replaced.
“But that market is a middle-income to lower-income market, even among seniors, and they generally didn’t have the cash to buy the new home,” Smith said.
That’s when he came up with the idea of building new homes and repaying the builder or investor through the proceeds of a reverse mortgage. The process works like this:
- The property must be free and clear of debt, although small forward mortgage balances can be accommodated.
- A price to build and install the new manufactured home is established, and an appraiser determines a post-installation value.
- The net principal limit for a Home Equity Conversion Mortgage (HECM) is established based on the future value.
- If the principal limit sufficiently covers the cost of purchase and installation, a prequalification letter is obtained from the reverse mortgage lender or broker.
- The manufactured-home dealer signs a purchase agreement with the homeowner and the transaction is secured with a lien and deed of trust.
- Once the home is recorded as real property, the homeowner proceeds with the HECM transaction and the dealer is paid from these funds.
“We’ve been doing that over the course of the years — not a whole lot of volume, but we’ve done somewhere between 90 and 100 of those transactions,” Smith explained. “We’ve never, ever been off by a dime. Nobody’s ever caused us to foreclosure. And all of my investors who put up the front money have been paid every cent they were promised.”
Smith has kept this small proprietary product option a virtual secret over the years, saying that he’s had to refuse inquiries from others who wish to obtain the process documentation. But now that he’s closing in on retirement age, he said he’s more willing to share details on the purchase contract and deed of trust in order to keep the option alive and potentially expand it outside of California.
Manufactured homes and accessory dwelling units (ADUs) are eligible for Smith’s program. For current retirees who are commonly outliving their savings — and with the next generation of retirees struggling to put enough in the bank — this type of housing may be the most viable.
“Communities are beginning to relax their restrictions — certainly in states where they’re promoting accessory dwelling units, or ADUs — and manufactured housing fits in there because it’s more affordable, it’s faster and less permitting is required,” Smith said.
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