January 22, 2008 Manufactured Housing (MH) Notes from Conferences I attended in September and October 2007.

The following are my notes to the conferences I went to. These notes are merely my interpretations, thoughts, brainstorms, etc. It would be helpful for you to read the links I provided, and get a feel for the boom, and then depression the entire industry has been in for nearly a decade now. Many have said to me over the years, “If you want to see what Housing will do, look at Manufactured Housing Companies.” If you look at this chart from 1999 peaks till October 18, 2007, you will notice that most MH companies have lost 50% (give or take) off of their 1999 highs.

We currently indirectly probably have close to 15% to 20% of our portfolios, long in the manufactured housing and/or related Manufactured Housing finance industry. We recently filed form 13G (we filed last year also with 7.4% control or ownership) and indicated that we “owned or controlled” 7.1% of Origen at December 31, 2007.

Here are a few links that might be helpful:
http://www.manufacturedhousing.org/default.asp

http://www.census.gov/const/mhs/shipment.pdf

http://www.census.gov/const/www/mhsindex.html

companies/orgn_notes.html (not up to date, our thesis has not changed)

http://www.manufacturedhousing.org/admin/template/subbrochures/399temp.pdf (shipments since 1980)
What have we been doing in the industry?
I have been exposed to the industry for a few years now. Steve Percoco, CFA, introduced me to the industry. We actually took a road trip to Bryn Mawr, PA, as we went to a value investor’s sub-group. He discussed a lender Origen Financial (ORGN). As of December 31, 2006, my company owned 7.40% of ORGN. We filed an SEC Form 13G in February 2007, indicating our December 31, 2006 “ownership position.” Our average cost is typically (but not always) between $5.50 and $6.50 per share. Our first purchase was on January 19, 2005 for $7.70 per share. Our least amount paid was $5.50 on October 3, 2006. I won’t discuss our 2007 activity, or lack thereof. We expect to file our 2007 position on or before the 13G reporting deadline. I believe that date is March 15, 2008.

I recently attended two Manufactured Housing Conferences. The first conference was “Robotti & Co. 4th Annual Manufactured Housing Conference.” The other conference I went to was, “Manufactured Housing Finance Forum.”

We have indirect or direct ownership of the Manufactured Housing via direct or indirect investments in ORGN, Berskshire Hathaway and Palm Harbor Homes.

Some Companies I track:

 

ANL	AMER LAND LEASE
CAV	CAVALIER HOMES INC
CHB	CHAMPION ENTERPRISES
COA	COACHMEN IND INC
CVCO	CAVCO INDS INC
DW	DREW INDUSTRIES INC
FLE	FLEETWOOD ENTERPRISE
MNC	MONACO COACH CP
MNRTA	MONMOUTH REAL INV
MODT	MODTECH HLDGS
NOBH	NOBILITY HOMES INC
ORGN	ORIGEN FINANCIAL
PATK	PATRICK INDS INC
PHHM	PALM HARBOR HOMES
SKY	SKYLINE CP
SUI	SUN COMMUNITIES INC
THO	THOR INDS INC
UMH	UMH PROPERTIES, INC.
USB	US BANCORP
WGO	WINNEBAGO IND INC

I keep this track list and refer to it from time to time to get a feel for the industry.

These notes are hardly thorough. I was focused on speaking with Origen Financial (ORGN). I should have taken better notes, but I thought I could get a copy of ORGN presentation. My request of copy was politely and respectfully denied.

Origen Financial, Ron Klein CEO (September 25 and October 4, 2007)

http://www.origenfinancial.com/

Ron Klein, Chief Executive Officer, Origen Financial

The following are some quotes of Ron during the 2 days I spent with him.

“Not sure about Palm Harbor Homes, but the Clayton (think Berkshire) boys should be making good money.”

“McMansion buyer will come back to Origen.”

“Secondary market buyers of quality paper feel like kids in a candy store.”

“Want to see what housing sector will look like, look at Manufactured Housing since 1997.”

“We gotta do what we gotta do.”

Notes of presentations, discussions from both conferences

1. Growth is outpacing market. For 2007 through July 2007, year over year growth is up 133%. Pretty good in a market that is contracting and not expanding. ORGN would like to say that is happening because “ORGN is better than others.” ORGN claims that competitors merely disappeared. Less pie to share, but bigger pieces for those still eating.

2. 92% of loans are Chattel. This means home without land. MH owner will typically rent the land.

3. Manufactured Housing Institute’s lender of the year 2007. I think, but could be wrong, that ORGN actually received this award for at least 3 of the last 5 years.

4. Considered toughest lender out there. They are trusted and known on their reliant data and technology. I will mention that I spoke to many a customer, supplier and competitor of Origen. The only complaint I have really ever heard was that “Origen is too strict on lending policies. They should relax their requirements.” Origen is quite cognizant of our desire for them to continue with the strictest of lending disciplines.

5. Lucky if industry ships 100,000 units this year. Annual units from 1994 through 1999 always exceeded 300,000 units. (Source MHI)

6. You can buy a 2100 square foot home for less than $100K.

7. Wants retailers of MH to have “skin in game.” “Everyone needs to be part of the process.” Things stay more sane when all participants, like dealers have long-term financial incentives. One such example is “recovery rewards.” ORGN claims that half of their business is on this program. I meant to ask if these costs were being accrued.

8. All metrics on origination side are improving since original 2001 vintages.

9. Reputation for being tough. I found this quote to be rather tough. “If someone screws us, we go after them.”

10. Won’t lend in specific communities. These might include trailer parks, very small developments that call themselves communities.

11. Their credit scoring proprietary program is being credited for their excellent credit results on all post 2005 vintages. The same vintages that are failing nationally seem to be excelling at ORGN. The platform is their TNG platform. You can see the performance of their loans on their website. It is important to understand that ORGN needs to securitize to be able to continue to lend. ORGN, unlike Countrywide, does not use “Gain on Sale” accounting. Upon numerous discussions, and to be mentioned later in these notes, ORGN claims they can stop funding, lay off, and continue to be profitable until the loans were sold or wound down. The last two securitizations were Ambac AAA wrapped. The most recent securitization was announced last week for a $127M pool. The interesting part, and what I am still not privy to is the “securitizer” of the pool. The securitization was a 144 activity. I believe the securitizer to be Freddie Mac.

12. Estimates 2006 vintage to have a 0.4% default rate. These appear to be industry lows, and typically this performance is showing “non-existent early indicators” with typical 2006 vintages. ORGN claims their strict lending requirements are responsible for this.

13. “I don’t think anybody can sell BBB paper now – period!” “The capital markets are in disarray.”

14. Claims that Berkshire, via their Clayton subsidiary just floated $750M in AAA paper at 5.13. Supposedly Clayton is expected to pay Berkshire 6.13%. If I remember, I will post later what Clayton told me part of the money was being used for.

15. Previous securitizations, ORGN had to “Over-Collateralize” (OC) 18%. This was reduced since 2002 to 8% in 2007. The securitization last week was announced with an OC of 9.5%. ORGN claims they will be profitable “in the teens” even with double digit OC’s. They claim “teens” because of leverage.

16. Keep in mind these notes are prior to their securitization. Origen asked, “How can we execute a securitization today?” They responded by saying ORGN hopes the ratings agency has “hospitable ears.” I will go off the track here, and just mention that Berkshire (the largest MH lender and MH manufacturer) also owns I think 10% of Moody’s (a ratings agency). Come to think of it, Berkshire also owns > 10% of Wells Fargo. Wells Fargo was listed as a top 5 holder of ORGN as of June 30, 2007. Next reporting is due on or before November 15, 2007.

17. The net margin in 2007A loans was 2.42%. ORGN speculates if they had to securitize in today’s environment, the net interest margin would be around 1.87%. ORGN claimed even with Net interest margin of 1.87%, that they would still have ROE’s in the “teens because of leverage.”

18. In 1999 – 2000, many MH lenders “blew up.” Origen, then known as Bingham Financial was no exception. You would have to check our website and see if we detailed this situation in our notes. I know the past situation fairly well. Origen claims things are different this time. I believe them, but time will tell. Why so many failures including Bingham back then. Origen claims, and makes sense to me the reasons were “loose credit, loan to everyone and gain on sale reporting.” Again, look at the comparisons to housing and finance today of stick builts. He claims that even then at the blow-ups, Origen was known as “we suck less.”

19. Each loan pool since 2002 has been better and better. Keep in mind, bad loan pool were what appears to be conservatively reserved, and rather immaterial now to Origen’s operations.

20. “Storm not going away any time soon.” Everything has tightened up. Spreads are tighter. Origen claims originations are okay, yet keep in mind, they need to securitize about once or twice a year to continue originating and funding.

21. I asked about their relationship with Clayton’s lending subsidiary and competitor, Vanderbilt. Vanderbilt is under the Berkshire umbrella. Vanderbilt only lends to Clayton buyers 21st Century, also a Berkshire sub, lends like Origen (much less strict than Origen). Origen in response to my question about Vanderbilt relationship said, “Good relationship”, “they love us”, “they are our back up servicer,” Ron Klein then went onto discuss relationship with 21st Century. Apparently 21st Century is not a fan of Origen. I heard that 21st Century, run by Tim Williams and Rich Ray (spelling?) claim that Origen will be going out of business. I need to investigate that one.

22. This is a quote I found about Ron Klein from 2005 at http://www.claytonbank.com/News/Marty082005.pdf “3A. (Tie) Ron Klein, President and CEO of Origen Financial of Southfield, Michigan. An attorney brought in to lead the Origen group. Quick study, caught on quickly, built Origen into one of the leading MH lenders. Frequently asked to give speeches and roundtables on chattel lending, where his knowledge is extremely refined. Big industry contribution? Almost single-handedly kept the Wall Street money window open, making endless trips to analysts and investors to tout the ability of MH chattel paper to perform as represented. If the window opens on Wall Street again, which it partially has, the credit must go to this man.”

23. Origen originates and services loans for Sun Communities. Interestingly enough, Sun Communities allegedly writes their own loans when borrower fails to live up to Origen requirements. ORGN services these loans. Typically the fee is 1.25%. Origen actually originates all Sun Communities loans, and sells them back to Sun on the same day.

24. I asked Ron on October 4, 2007 the following, “If things continued to stay tight, and the capital markets remained inaccessible. If your warehouse line was no longer giving you liquidity, and perhaps even giving you margin calls, because of marked down assets that are being used as collateral. What would you do? Would book value suffer material impairments? Could you stop funding and still stay profitable?” Ron Klein mentioned they could certainly stop funding and remain profitable. If that were to occur, and he doesn’t expect such a scenario, he would expect that Origen would lose a couple hundred thousand, and would have to make a decision on what to do. They would not want to exit business, and then when things got better, decide to go back in. Hence, under real bad circumstances, there would be some minor cash drain, but ultimately most of tangible book value would remain preserved.

25. Origen seems to be operating with excellence, yet capital market is very constraining. “We are at a disadvantage right now.”

26. I asked, “What would happen if OC went to 10% and spreads tightened?” With leverage would still expect 17% returns. Origen claims they were using 15% returns as projections when they went public. Klein mentioned this would be the case in a horrible market, but assuming securitization still gets done. Again, these were notes pre October announced securitization.

27. Scuttlebutt at the conference was that August was not so bad for Origen.

28. I asked Ron Klein about Capital markets and Origen currently. He mentioned that Citi was still lending. There is still a liquidity provider. He claims to have never seen a market like this, speaking of the capital markets. He said, “Good credit and performance have value.” No business in MH with FNMA yet. AMBAC seems willing to wrap a deal. Bond investors for they’re past paper were over-subscribed. Ron Klein claimed that Origen’s bond buyers said, “We wish we only bought MH paper. Versus the other garbage we bought.” He discussed Thornburg and how liquidity issues made them sell fine paper at a material discount. I scribbled in my notes, “Ron Klein’s game is on.” I also scribbled, “Berkshire dude looks bored, and CountryPlace looks impressed with Origen.” Ron said, “there is a dislocation between expected and reality, everything is scrutinized.” He also said, “Capital markets will take a while to re-calibrate. I am optimistic on the future.” As he talks, Berkshire fidgets. I scratch my head, and say to myself, “Holy Dilly Bars, it ain’t supposed to be like this.”

29. Was questioned about Title 1 and FHA reform. Ron said, “as long as it was actuarially sound.” “If the Government is willing to subsidize, we are on board, all the way. Loans would need to stay structurally sound.

30. “Housing is the new internet.”

31. Repossessed recoveries are going well. 65% to > 100% recovery rates. Incidentally, this seems to be a common theme amongst many of the discussion groups.
Assorted Random notes from non-Origen section of MHI conference on October 4, 2007

1. Regina M. Lowrie, CMB – I took notes, and did not necessarily agree with many of her comments. Nevertheless, here are my notes.

a. MH costs 10 – 35% less per square foot than conventional home.

b. 22M people living in MH. 50k communities. 4K to 5K MH retailers.

c. “Well positioned in emerging markets. The emerging markets are immigrants and the elderly. Both are new buyers.

d. Indicates that if you look at headlines, there is more gloom than reality. Claims numbers aren’t so bad. She cited foreclosure percentages, immaterial use of sub-prime, etc. Claims only 1.4% of sub-prime will foreclose. I can’t print what I scribbled in my notes. I think she is totally misunderstanding, misapplying, and not thinking at all about the excess leverage of “Assets to Equity.”

e. Then she goes on, “white population estimated to decrease in USA.” And “African Americans see housing as an opportunity.” “Hispanic population growing.” This sounds so wrong. I shouldn’t have even typed it.

f. Claims average selling price of MH home in 2006 was $64K. A single unit average was $34.5K and a multi was $70K.

g. “Sub-primes should have prudently bought MH, instead of the McMansions.” “This could help FHA return to MH.

2. Tom Beers – Vice President/Chief Economist for the Manufactured Housing Institute (MHI). I was very impressed with his presentation and knowledge.

a. “I am realistic and optimistic at the same time.”

b. MH is built on steel frame and dragged in. They have special roofs, which are modified.

c. Mentioned similarities of MH in mid to late 1990’s and housing over the last 5 years.

d. His greatest concern is a stick built inventory glut. This would push down housing prices, and once again, give no value proposition to the MH buyer. Feels foreclosure rates will grow.

e. Industry Outlook – 2007 started below a run rate of 100K shipped. The last 4 months, this shot up, and it looks like > 100K might happen. First positive trend in many years. Tom would like to see a consistent 120K or 130K units shipped before optimism set in.

f. Urged people to go to web site, “lots of good information.” http://www.manufacturedhousing.org/default.asp
g. I asked if he agreed with Mr. Landy (Sam’s dad) of UMH properties, when he spoke at Robotti conference, if Tom agreed that 250K shipped units are sustainable. He said he wouldn’t want to get too exuberant. He mentioned that Mr. Landy has been in the business for a long time, and probably should be listened to. On my way to the break, Mr. Landy was obviously appreciative of my question.

3. Don Glisson Jr., President & CEO, Triad Financial Services – Claims they are the 2nd largest retail lender behind Berkshire. Just for the record, it looks like ORGN will originate more mortgages than Triad this year. Triad claims that ORGN originates a lot of loans for others. Ron Klein corrected him, and I forget the figure, but even without originations for 2nd parties, it seemed like Origen would be funding more than Triad.

Says that Triad’s buyers choose to live in MH. It is not an affordability issue. They like the ease of the community. They like spending less and keeping the rest in savings.

Hilarious joke, “What do you call someone with a FICO score of less than 600? A renter.”

4. Paul Nichols, President, Vanderbilt Mortgage & Finance (Berkshire Subsidiary)

a. Annual originations > $1B.

b. Full documentation loans, fixed rate and term.

c. Portfolio is $11.4B

d. 1,166 members of the team.

e. 332,000 loans serviced.

f. 55% are land/ home.

g. Goal is to deliver a customer a resalable unit. Previously resales didn’t occur, because of depreciation. A few have claimed that resale’s and even repos are being sold profitably. If MH is really starting to appreciate, we should see fewer defaults.

h. Claims average loan is $117K, not including land. I asked if average industry selling price is $64K, how could average loan be $117K. He really didn’t supply me with what I consider to be a satisfactory answer. I am not saying he is wrong, I just didn’t understand his answer.

i. Says Vanderbilt measures everything.

j. This next section, in the words of Charlie Munger, sounds insane. Paul claimed that “D buyers would be considered C, C would be considered B, B would be considered A.” This sounds like stuff that got us into the credit mess. A = A, B = B, right?

k. Chattel is important, yet you have to watch terms. Losses will be higher in Chattel.

l. Vertical Integration works. He was referring to Berkshire Corporate, Clayton and HomeServices of America.

m. They have 3rd party inspections and “post funding inspections.” They hold dealers responsible if they deviate from norms.

n. “We found a more efficient method than securitizing.” That was a joke referring to Berkshire.

o. Thinks Title 1 passing would be excellent for Berkshire. Thinks Berkshire would be able to do a lot of FHA’s and issue them in GNMA pools. Hopes GNMA designates more lenders. Hopes they would be one of those designated lenders. This would create industry liquidity.

p. Credit tightening to lower levels. Says they can’t charge big enough fee, because of predatory lending rules. Origen agreed with this.

q. Has demanded higher credit scores over the last 5 or 6 years. They have a competitive rate and land helps the rate. Aggressively going for the 620 FICO, with reasonable household income and good credit. “They should have a chance.” Sounds like George Bailey in ‘It’s a Wonderful Life.”

r. “Great need for rural communities, and a great dream.” “Can structure as a winner.”

s. I asked, “Why did Clayton borrow $750M?” A strange answer, and for some reason I am not certain this is accurate. I have no basis for any such inference, but anyway, the answer was, and “we bought some seriously discounted sub prime paper with it.” I guess we will find out soon enough. Of course, soon enough might not be till next March J

t. We both wondered at lunch, why was Pepsi being served, rather than Coke 😉 (Coke is a large Berkshire holding.)

5. Lyle Zeller, Executive Vice President, CountryPlace Mortgage (subsidiary of Palm Harbor Homes)

a. 30 states and 100 retail sites.

b. Originations of $80m to $100M.

c. Fixed rate, full doc, and full amortizations. Average FICO > 700.

d. 40%+ secured by land.

e. Less than 15% are in “parks.”

f. Servicer of $250M

g. Securitized $220M since 2005.

h. Sees very little FHA business currently. Would like that to grow.

i. I was impressed with Mr. Zeller.

6. Samuel Landy, President, UMH Properties – Claimed the problems of 1999, were a “once in a lifetime event”. NJ location is excellent, strong economy. I asked what industries they served and why such a good economy compared to what we are hearing from other states. He said, diversified industries, including Health Care, Government, Education and Finance, to name a few. “No shortage of Demand in Good markets.” I asked why Origen feels affluent wouldn’t live in MH, whereas Triad felt affluent would certainly live in MH. Samuel explained how he has a ski chalet, in between Okemo and Killington, and it is MH. He feels affluent would certainly consider MH as a potential alternative.
7. Bill Wilson, Director, Single-Family Lending, Fannie Mae – Thinks Title 1 reform will pass in 2008.

a. Claims MH models are still built to sub-prime world. They are paying the sins of the past. Conseco is always brought up.

b. Claims that Origen and PHHM are not sub-prime. Yet, they are often treated as sub-prime. This is more perception than reality. Time and performance would change that.

c. Not enough data for FNMA to prepare models. Tough job, but they are working on it.

d. Looking to help industry over the long term. Looking at Chattel. Feels Chattel needs to be “fixed.” His goal is to fix it. “Am I close, on the Chattel side? No way.”

e. Why is MH different today than 1999- 2001? Answer is verifications, fixed rates, fully amortizing loans. He does worry about high default portfolios.

8. Richard Peach, Vice President, Macroeconomic & Monetary Studies -Federal Reserve Bank of New York. He recited some government statistics. The most interesting thing he said was, “Many of the foreclosures we are reading about, are investor owned property, hence displacement and such, not as bad as we see in the media.” I really didn’t take notes. I asked him, “What are your daily or frequent required reading lists?”

a. Daily reads include all major financial newspapers.

b. The Economist

c. Each of the Fed Reserve issues. He especially enjoys San Francisco Fed and their Economic Notes Series.

9. Michael Berman, Executive Vice President/CFO, Equity Lifestyle Properties – Said hired CountryPlace to service portfolios. He was asked why they didn’t choose Origen. Michael claimed they have a long-standing relationship with Palm Harbor Homes (parent of Countryplace). Claims 80% of the homes are purchased from Palm Harbor (PHHM). They were PHHM’s first client, hence greater influence of PHHM, than someone new.

He was asked his most surprising part of the business, and why he likes it. He said, “because it’s not rocket science and it is profitable.” He is also surprised that industry is still in a depression. He said it’s a great time to be a lender, because of high ROE’s. “To securitize today you need the insurance wrap.”
10. Stephen Braun, President, Hometown Homes & Financial Services, said average FICO score was 590. Claims discount to securitize are too great today. I asked what were the discounts? He said “. 50 to .60, but keep in mind these are 590 FICO’s with a 20% default rate. They also do same day origination and payback to Origen. Says they should sell 1,800 homes this year. Revenues have been growing at 25% for the last 4 years.
11. One un-named industry insider said, they typically finance through 21st Mortgage and Dominion Ventures. Says they like working with Origen. Just wishes they were less strict on credit requirements. Said 21st is difficult to deal with. Claims they are disorganized and does not return phone calls.
12. Gary Gal, First Vice President, Consumer Asset-Backed Securities Group, AMBAC Financial Group –

a. Said only two public companies have data that can be seen. They are Origen and PHHM. Hence, very little sharing of data.

b. Claims this makes it difficult for Origen to explain themselves to other rating agencies.

c. Claims that Origen and PHHM models are “conservative to actual.” Feels this is because of the beating of 2001 and 2002.

d. Says Origen newer vintage bonds are trading at par or premium.

13. Rod Dubitsky, Managing Director, Asset-Backed Securities, Credit Suisse. He likes the Origen alternative scoring system, along with using FICO. Thinks investors will come back in.

14. Paul Humphrey, Director, Citigroup Global Markets

a. Mentioned he sometimes sees 40% OC. Some deals should be even higher than that.

b. Citigroup does not lump “good MH” into sub-prime.

c. I asked him to please describe the climate for your lenders, including their warehouse lines, your knowledge about their need to securitize. Have collateralized assets that are fine quality, been marked down, solely because of capital market turmoil, forcing the prospective borrower, to actually pay you, instead of receive money, because of margin calls? He said they are funding. He just didn’t answer the question. He said, there are liquidity issues, “but we fund every day.” He said, “Loans and securitizations are both performing well” in his MH customers. Incidentally, I am fairly certain that Origen is a MH customer.

d. Citigroup wonders if recent data really is historically good? You need to look long-term.

e. Investors are requiring greater ratings.
Prepared by Ronald R. Redfield, CPA, PFS. Any errors are inadvertent.