Back in the late 1990s – a period in which few investors gave a second thought to mobile home parks – there occurred perhaps the industry’s greatest failure. Known as the “Great Chattel Collapse”, this horrific event resulted in a roughly 70% reduction in mobile home manufacturing and bankrupted many home lenders. In this Mobile Home Park Mastery podcast we’re going to explore what lead to this event and what the industry learned as a result.
Episode 424: What We Learned From The Great Chattel Collapse Transcript
Back in the 1990s, the mobile home park industry was very different. Virtually nobody gave it much respect. There were not many people looking at entering, investing in a mobile home park. They were frequently called trailer parks. Sam Zell was just buying his first mobile home park back in the mid-90s. But we had one thing going for us. Even when lenders weren't really into the product type, investors didn't give it any credibility, and that was that mobile home manufacturing was soaring. It shot from about 150,000 units a year being shipped in the early '90s all the way up to 375,000 homes shipped by the late '90s. And then suddenly the rug was pulled out from under us and it all came crashing down. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. we would revisit the event known as the Great Chattel Collapse. What it was, what the impact was, and what we learned from that. So back in the 1990s, when I got into the mobile home park industry with my first park, Glenhaven, back in '96, and subsequently I bought some more parks. And of course, I was always buying normally heavy-lift turnaround properties, often with a lot of vacancy.
And we noticed a certain trend in the mobile home park business in the late '90s, which was dealers, those street dealers which today provide almost no customers into mobile home parks. Back then, they were filled with people buying single wides, going into manufactured home communities. I had dealers that were bringing in four or five homes a month into some parks. And we all looked like geniuses in the business back then because if you bought a park with a lot of vacancy, you could simply fill it by going to the dealer saying, Hey, I have vacant lots. And over time, they would gradually eat them all up and bring in brand new homes with brand new customers. But I noticed something odd was going on, because I used to do my own evictions. And suddenly out of nowhere I noticed I was getting more evictions coming from these new homes that had been brought in. And the one that let me know we were all in a lot of trouble was an eviction down in Corsicana, Texas. And I knew the dealer who'd brought in the home. And I normally went to all my own evictions back then.
I was the person who was the plaintiff. And in this particular case, when I got to court, all that was there was a Hispanic woman who spoke no English and three or four kids. So the judge said, Hey, I can't do this eviction because I don't speak Spanish, but we're going to bring in an interpreter. So you're going to have to go to the back of the docket. So I said, "No problem, I'll wait." So when they got done with all the other evictions, they brought in the interpreter. This woman tells the judge under oath, "I got no money, I have no job, and my boyfriend has moved out and as a result, I can't pay the rent, I can't pay the mortgage, I'm just toasted." And the judge gave me the eviction. And I got on my cell phone, I walked out of the courtroom and I called up the dealership and I said, "Hey, you guys got a problem." The guy that you sold this mobile home to, he's run off and left in it a woman with a bunch of kids. And they said, well, actually, she's our client.
I said, how is that possible? I was just in court, and she said that she has no job and no income. And they said, "Well, yeah, we kind of fudged that a little." See, what we did was we put on the application that she did have a job and she did have an income, and that's how we got her approved. And I knew right then and there something terrible was about to happen. Because who in the world would ever think of falsifying a document on a purchase of a mobile home, back then they were 30, $40,000 in that manner. So I thought, wait, if this could happen, how many more of these other homes that the dealers have been bringing in are effectively falsified? And pretty soon all of us mobile home park owners found out when, in some properties, 20, 30, 40% of every new home that had been brought in went into default. And that collapse is known as the Great Chattel Crisis. What had happened you might say, "How did this occur?" Well, lenders had been very conservative in olden times in the mobile home biz, because the typical strategy was you got a good amount down and a very short term loan.
And as a result, people built a lot of equity in the home quickly and therefore they wouldn't possibly walk off in default. But some genius somewhere by the late '90s came up with the idea of the zero down, no income documentation 30 year mobile home loan. And that allowed manufacturing to soar. How much did it soar? It shot up from about 150,000 units in 1990 up to about 370, 380,000 units manufactured and shipped annually by the late '90s. So that's a pretty big jump, that's more than a 200% increase. And it was all done on the back of this crazy financing concept. If you wanted to buy a mobile home at those dealerships, all you had to do is simply say, "I want to buy one," and it was yours. Now, when the crisis reached its zenith, things were so bleak in mobile homeland that when you crossed the border, on I-35 between Texas and Oklahoma, you saw an ocean of foreclosed on mobile homes sitting in fields. They designated this one little drop-off spot just over the Texas border in Oklahoma. And it was mind-boggling. I had people ask me frequently, cocktail party or something when they heard that I was in mobile homes, they'd say, what is that mobile home ocean just over the Texas border? And I'd say, "Well, that's where they're parking all these foreclosed on mobile homes." And it wasn't uncommon to have in a given park 20 or 30 or 40% of all of those new homes that the dealers had just brought in suddenly go into foreclosure. It was pretty bleak for a while. Mobile home manufacturing fell starting in May of 1999. It fell from that lofty 375,000 units down to about 100,000 units.
It eventually got down all the way down to about 60,000 units shipped a year. Massive, massive fall-off. About 80% fall-off from the peak as far as mobile homes being shipped. And on the lender side, some of those lenders just absolutely got destroyed, many of them went into bankruptcy over their mobile home losses. And it took a while for mobile home parks to recover, who had done a lot of heavy fill work. We did, of course. One way, in fact, that we kind of mediated the issue was on a lot of those homes that had defaulted, we went to the lenders and they would sell them to us for nearly nothing because I had nowhere to even store them. But what were the great lessons learned from the chattel crisis? The first thing I think we all learn is that a zero down, no income documentation loan just doesn't work. It's the same lesson the single-family home industry learned only about a decade later. But we learned it first in the mobile home park business as we saw manufacturing and financing of mobile homes just completely go down the drain.
That was the first issue. But another issue was that if you don't vet customers properly in the kind of industry category that mobile home parks sit as far as demographically who buys them, you can get yourselves in a lot of trouble. And that's one reason we've never seen a chattel collapse since is simply because after that fiasco, lenders today who do mobile home loans are extremely cautious in their underwriting. Today, if someone wants to buy a mobile home, it's not zero down, it's not no income documentation. The lenders verify that the buyer has a certain income enough, it's typically about three times their debt obligations to make sure they have plenty of wiggle room to make the payments. And they're certainly going to want to have the buyer with skin in the game, back to the old days of 10 or 20% down, typically. And that's how the industry has escaped any further collapses. But some might say, well, but now that we have this new system, how come we haven't seen massive sales again? Why have we not gone from 50, 60 or 100,000 units a year back to about 300 to 400,000 like we saw in the mid-90s?
My only response would be that simply there aren't enough people looking at buying mobile homes today that meet the rigorous underwriting guidelines of those who make mobile home loans. Clearly, we're in an affordable housing crisis, so it's not a demand issue. But instead, it's the simple fact the lenders have very smartly kept very tight restrictions on who they allow to move into those homes. Today, the default rate on new mobile homes is running around 5%. That's actually pretty spectacular if you look at all of the statistics of others who deal in mobile home and mobile home park demographic customers. It's perhaps as much as 100% better than those who are making car loans to the same group. And that is the defensive armor that the industry has today, which keeps it away from ever falling back into the Great Chattel Collapse territory. Now, clearly, as a mobile home park owner, I'm very separated from the success or failure of mobile home manufacturing and mobile home financing. When your mobile home park is full, you don't care if there are any mobile homes ever produced. It means nothing because normally the homes that are moved into your park, they never leave.
And once you attain 100% occupancy, probably the worst that would ever happen is someone might pass away and then the family gives you the home for you to resell. So we're very much separated as an industry from the fortunes of the manufacturers. But at that same time, we all learned some serious lessons from the Great Chattel Collapse on the absolute importance of vetting customers and requiring them to have skin in the game. That is what allows you to have the confidence when you sell a home and finance through a mortgage company that it doesn't come back upon you and that we're all able to make sure that our customers are going to be customers who can easily make the payments and not fall into default. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. Hope you enjoyed this. Talk to you again soon.