August 17, 2020
During an economic downturn, people tend to cut spending and postpone big purchases, like cars and homes. But even though we're currently facing a decline in economic activity, many people are planning to buy a home within the next few months. Conversely, many financial institutions are originating fewer auto loans despite rock-bottom interest rates.
Although an impending recession may seem like an odd moment to buy a home, some people are confident about their job security. However, it's worth noting that the vast majority of potential homebuyers tend to gravitate toward more affordable housing options, such as factory-built homes. That's because affordability becomes top-of-mind for the consumers who intend to purchase a home in a declining economy.
Because manufactured homes are more affordable than conventional site-built homes, this type of housing typically outperforms other segments of the residential real estate sector during uncertain economic times. In order to understand why the number of indirect auto loans has decreased, while the manufactured home loan originating volumes have increased, we'll analyze a few factors responsible for this market shift.
Indirect Auto Lending: A Rough Road Ahead
Historically, auto loans have been the second largest category of debt after home loans. But over the past few years, the number of auto loans at credit unions has been fairly stagnant. Moreover, the current economic downturn is expected to have large negative effects on auto loan origination volumes, which may decrease even more.
During the 2007-2008 financial crisis, most borrowers were surprisingly resilient in making their monthly car payments. As people needed their cars to get to and from work, many of them prioritized auto loans over other expenses. Unfortunately, this time may be different. With non-essential businesses still shut down, many people working from home, consumers staying home to practice social distancing, and car dealerships closed temporarily, it's no wonder that auto sales and loans have decreased significantly.
Currently, state governments and financial institutions are doing their best to encourage more people to get auto loans. Some states, for instance, have suspended vehicle repossessions for the time being. As well, financial institutions are granting forbearance that temporarily suspends or reduces the payments on auto loans.
But in the current economic context, which is characterized by increasing unemployment rates, a trustworthy borrower can turn into a risky borrower overnight. The delinquency rates on auto loans, which have remained relatively high despite the current government relief programs, confirm this aspect. As a result, many financial institutions—particularly those that have experienced borrowers needing to skip auto loan payments— have decided to tighten their auto lending standards. Because stricter lending standards shrink the availability of credit, one of the biggest challenges many potential buyers face nowadays is getting the loans they need in order to purchase the cars they want.
Manufactured Home Loans: All Steam Ahead
Not only does manufactured housing deliver a more affordable alternative to traditional houses; conventional home loans are also getting harder to come by. Besides the fact that many mainstream lenders have stopped issuing certain types of loans, most of them don't provide smaller loans for factory-built homes. Moreover, they expect to take in less money because of potential defaults on existing and future loans as well as of mortgage forbearance programs, which allow borrowers to delay mortgage payments. It is for this reason many lenders currently require higher credit scores, larger down payments, and lower DTI ratios.
Unlike mainstream lenders, manufactured home lenders continue to issue different types of loans to the applicants who meet their requirements. In an effort to extend the availability of manufactured home loans to more consumers, most manufactured home lenders still apply the same lending standards and approval criteria as before. Under certain circumstances, they might perform additional credit checks, require larger down payments, and request additional documentation that proves an applicant's ability to repay the loan. Considering all these aspects, manufactured homes deliver a viable solution not only to the affordable housing crisis but also to the current recession that is expected to affect the housing market in the not-so-distant future.
The sharp decline in auto sales and loans could spell trouble for the credit unions that offer indirect auto lending. For a credit union, developing new investment strategies to enhance profitability is critical especially asliquidity continues to rise. If your credit union has strong loan demand from different categories of potential borrowers, opting for manufactured home lending as an alternative to less-profitable loan products could help you increase your indirect profitability. For more details about how manufactured home lending could help you keep your loan portfolio afloat during stormy economic times, feel free to contact our experienced professionals today.
