Mobile home lenders set very low expectations on customer credit scores yet enjoy very low default rates. This seems to be contrary to all the physics of extending credit but it’s supported by fact. In this Mobile Home Park Mastery podcast we’re going to dig deeper into the topic of why a low FICO works just fine when it comes to customers buying mobile homes.
Episode 284: Why Credit Scores Don’t Mean Much In Affordable Housing Transcript
Websters defines a credit score as a numerical expression based on a level analysis of a person's credit files to represent the credit worthiness of the individual. Now, despite all those lofty words, it doesn't seem to mean much when it comes to mobile homes. This is Frank Rolfe, the Mobile Home Park Mastery Podcast. We're gonna talk about why credit scores just don't seem to represent much when it comes to the act of selling mobile homes. Let's first start off with an acknowledgement that most people who live in mobile homes have very low credit scores. Now, why is that? Well, because when you're flying the airplane at 500 miles an hour a foot off the ground as most mobile home park residents are, it's very, very easy to destroy your score. All you have to have happen is an uninsured medical claim. And of course, most people, many if not... The majority of Americans who earn the lower 20% of incomes traditionally don't have health insurance. They can't afford it. So all they have to do is break an arm, have an appendicitis, whatever, and next thing you know, their credit is forever ruined by a giant hospital bill that they can't possibly pay.
Or maybe they had a car and they've been making the payments since so maybe they lost their job or the car broke down and they couldn't make their payments. And so once again, their credit score is skewered. But here's the reality of the mobile home park business. Even though lenders of mobile home debt are set with very low expectations of credit scoring, they have a very low default rate, typically around 5% per year, which is right in line, if not superior to many other groups that give out credit. So how can we succeed when we don't put that much emphasis on credit scoring? Well, let's look at that for a moment. First off, mobile home parks are all about low price. We are the low cost leaders. We are the dollar tree of housing. And housing is the most basic necessity there is on earth. Having a roof over your head is more important to most people than anything else, than having a car, even having a television, you can't have a big screen TV if you're outside. So people have to pay their housing cost because if they don't, they have no roof over their head. So it goes to the very top of the list of things to be paid.
If you go in most mobile homes in America, you'll see that there's a virtual stock exchange going on in the kitchen where they lay out all their bills each month and they organize them by necessity, what's the most important to what's the least important. Typically, it's on the kitchen counter or a kitchen table. It happens typically once a month. So they lay out all those bills as they decide which ones to pay and in what order. As long as you're the one on the top left, which is the highest priority, you're gonna get paid no matter what. But if you're a magazine subscription, something like that on the lower right corner, well then you certainly will not get paid. So mobile homes have a huge advantage because we are at the very top of that pile. Normally the top two bills are housing, and the second is car payment because they know if they don't pay their housing, they won't have a roof over their head, and if they don't pay the car payment, the car will be repossessed. So it doesn't matter how many bills they have or how much income they have to pay them. The key item is you've gotta be at the top of the pile. And fortunately, mobile homes and all housing is at the top of that pile.
Next, credit scores don't truly measure a very important item. That's what we call FAKO verses FICO. So we all know FICO is a credit score. What's FAKO ? FAKO means a willingness that customer has to fight to keep that roof over their head. So a credit scoring is great and everything till somebody has that catastrophe, lose their job, get divorced, whatever the case may be. And then many people who had very, very high credit scores, well, the scores just immediately collapse. They don't have much fight in them, but people in mobile home parks can be pretty scrappy. They're willing to work extra jobs, they're willing to do jobs most people won't. That's where the cashier comes from at The QuikTrip at night and the person who mans the window at Jack in the Box in the 24 hour shift. So that degree of fight is in many mobile home park residents. And that gives them the edge of making those payments. So FAKO, I would argue is probably as or more important than really, than FICO.
Next, mobile homes are inexpensive, and that means really anyone can afford them. When I used to do my own evictions court appearances for my parks in the early days, the most painful evictions I saw were when you had an executive who was already in a huge amount of money, 20 grand a month, and now they've lost their job and they're being evicted from their custom home that cost 7000 a month. Because you sit there in the audience, you think, "Well, what could the person do? How could he replicate overnight 7000 a month to make that payment?" The mobile homes are completely different. When the cost of the mobile home and the lot rent is typically in the US $700 or $800 a month total, that's attainable. That's a number that virtually anyone can make if you can just get a minimum wage job. So because of that, mobile homes, because they have a low price tag, it's a price tag that most people can pay in good times and in bad times.
Next, everyone has a fear of living with family or living in downscale apartments. But that's the reality. If you don't make your payment in the mobile home park on your mobile home, that's where you end up. You either have to drop a notch down to types of apartments no one wants to live in or living with mom and pop, grandma and or uncle. And because those alternatives are so unpleasant, once again, mobile home park people make those payments because they don't want to have to face those alternatives. And in a similar vein, the family doesn't want them to move in with them.
We have many occasions where someone who's fallen behind on payments suddenly pops up with them via credit card from some family member. Why did that occur? Well, they called the person and said, "Hey, I guess I can't make my payments. I'm gonna have to move in with you, Grandma Jones." And she says, "Wait a minute here. Let me see what I can do." And she calls us up and says, "Hey, do you all take credit cards?" "Yes, we do." And she goes ahead and pays it up in full. Because just as much as they have a fear of moving in with family members, family members also share that fear of people moving in with them, and as a result, they're willing to go ahead and cough up the money to keep them not living with them. Another important point is that, people who live in mobile home parks typically are backstopped by two key items, one, minimum wage. And I think this is a very important point.
If you go back to my example of the executive, with the lofty income, with the lofty expense on their home, the problem is that it's really hard to replace a $10,000 a month job. But in the US, when you make in the lower echelons of income, there is one thing that can happen, and that is no one can pay you less than the minimum wage. Now, the minimum wage is different in every state. I would say the average state in the US is typically, today somewhere between $10 and $15 an hour. And if you take 2000 hours typically of employment time per year, that means you are guaranteed $20,000 to $30,000 a year based on your minimum wage in that state. But you can't go down from there. So if you're working at Jack in the Box and you're making minimum wage, one thing is for sure, you can't take a big wage concession, it's illegal.
They can't come back and renegotiate you and say, "Okay, well, you know what? We've got so many applicants here at Jack in the Box, we're gonna drop you down now to $7 an hour." Nope, can't do it. So mobile home park residents enjoy a nice safe zone there, where the much that they earn is pretty much consistent at all times. Additionally, a lot of people who live in mobile home parks are on government programs such as Social Security or Disability. And once again, they're backstopped. They have a nice fixed income from that. And many are on Social Security and yet earn a little money on the side, working at such jobs as Walmart, as a greeter, that's a classic.
But nevertheless, what it means is, they've got income that is backstopped. So when times get tough or they lose their side hustle, what happens? Well, they cut back on other luxuries. Cut back on that casual dining dinner out. Cut back on going to the movies. But they don't cut back on their housing. So unlike most Americans, people living in mobile home parks actually have a safety net, a very strong safety net, which is created by the simple fact that you can't get paid less than minimum wage. And the simple fact that there's a lot of programs out there, social programs, which do kick in and support people who live typically in mobile home parks. The bottom line to it all is that you don't have a correlation really in the mobile home park industry with credit scores, and that's not to say credit scores are not hugely important, they are important in many, many other niches.
I can't imagine a rental car company renting to you if you have a horrible credit score, they'd be concerned you'd never get the car returned. I cannot imagine somebody in Bass Pro Shops selling you a boat if you have a terrible credit score. What will happen if you don't make your payment on the boat? But those aren't necessities. When you look at mobile home parks and the structure and the cost format and the fact that it's housing, and at the very top of the list, it's easy to see why, although credit scores are usually important, in non-necessities that they really are not a big part of what you need to evaluate customers in affordable housing. This is Frank Rolfe from Mobile Home Park Mastery Podcast, hope you enjoyed this. Talk to you again soon.