On Saturday, at the Berkshire Hathaway annual meeting, Warren Buffett kicked off the question-and-answer session by defending its subsidiary Clayton Homes and its practices, which happens to be the largest manufacturing housing company in the United States.
Clayton Homes, which sells, leases, finances, insures and builds the homes that it manufactures, has recently come under scrutiny by the shareholders last April in an article by the Center for Public Integrity as well as The Seattle Times newspaper due to alleged high fees and predatory lending and collection practices, as well as many other problems at the company. In the article it said that these practices will lead an unsuspecting borrower to be entrapped into a loan that he or she cannot afford.
Clayton Homes tells us that the story is “misleading.”
“I make no apologies whatsoever for Clayton’s lending practices,” said Warren Buffett in a response to a Berkshire Hathaway shareholder question. The shareholder said that he was “disgusted” that Berkshire Hathaway would support these unethical practices. “Clayton has behaved very well.”
Only roughly 3% of the $12 billion worth of mortgages that Clayton Homes initiates on 300,000 homes go bad, said Mr. Buffett. The rest of the borrowers are capable of paying off their loans within the 20 year time period on average. “When a mortgage goes bad, two people lose, both the person who owns the house and the person who owns the mortgage,” said Buffett. Clayton does not “securitize” its mortgages – which ultimately means it does not sell pieces of the mortgage to multiple investors – but it instead holds on to them on its books, which adds more risk to Clayton Homes from a financial standpoint when a customer does default.
Last year in the United States, Clayton Homes actually sold 45% of all of the manufactured homes, according to information from the company. But unlike traditional homes, that are built on the site, the manufactured homes are built in factories. Then they had transported to the location and installed. Homes like this are usually priced for a lower amount than homes that are built on site, and they typically target low income people who would not normally qualify for government insured mortgages.
“It’s true that manufactured housing hits the lower end of the market… The question is, can you lend intelligently to people [so that they can continue] making those payments and keeping their house?” said Warren Buffett. Buffett says that Clayton Homes has been exemplary in this regard.
The United States House of Representatives recently passed a vote that will remove some of the safeguards for individuals that have loans with steep interest rates, and will scale back the financial protection rules that the 2010 Dodd-Frank Act put in place.
Berkshire Hathaway paid $1.7 billion in cash for Clayton Homes back in 2003. The company has done better than many of its peers in the housing industry during the financial crisis because of its more stringent lending standards said Warren Buffett.
Buffett also mentioned that the company, which was founded in 1956, looks to help customers get Federal Housing Administration loans whenever it’s possible. But many of the Clayton borrowers do not meet the FICO credit score threshold of 620 and they will often frequently get hit with a high interest rate loan.
Buffett also refuted the allegations in the article that says that Clayton offers 30 year mortgages, stating that the loans from the FHA will only extend that long. Buffett also mentioned that the average monthly interest payment for Clayton borrowers that did not default will typically be about $600 per month.
The article also mentions that because Clayton Homes owns lending companies and works under multiple names, it misleads buyers into believing that they had more of a choice in lenders than they actually did.
Warren Buffett, who earlier stated that he had prepared a rebuttal to the story that he would share during the meeting, said that each of the 1000 retailers from Clayton mention clearly that they provide a variety of lending options including credit unions and local banks, and that the terms are succinctly listed.
Buffett also mentioned that the story confused profit margin and gross profit, and therefore made a mistake in its conclusion about how profitable Clayton Homes actually is.
He then acknowledges that people will get upset when they lose their homes to default, but also mentioned that “in the past three years, I have received not one call from any party in connection with a Clayton home.”