The Truth About Publicly Subsidized "Resident Owned" Communities - Resident and Community Financial Ruin

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Introduction and Key Issues

Manufactured homes are often clustered into manufactured home communities and in many areas of the country these communities have long faced considerable economic and regulatory impediments that can make expanding the supply of affordable housing more difficult for manufactured homes than for other types of housing. Resident-ownership of manufactured housing communities, or cooperatives (“Co-Ops”), are being promoted across the nation as a strategy for increasing affordable housing and as a way to increase the economic benefits of owning homes in manufactured housing communities.

Advocates of Co-Ops argue that resident-owned cooperative communities are an effective strategy for “preserving and improving affordable housing communities,” “building individual assets,” and “fostering, healthy, supportive communities,”1 but there is little evidence to date that suggests there are definitive benefits for the supply of affordable housing or the economic and financial well-being of cooperative owners beyond those that result from traditional, privately-owned communities. PolEcon completed and extensive research project on the impacts of Co-Ops in New Hampshire.2 Our 2008 research on the cooperative movement in NH used standard tools and methods of economic and housing market analysis and raised serious doubts about the claims of benefits made by advocates. Our report correctly pointed to the possible impacts that cooperatives would have on the supply of manufactured housing and raised concerns about the financial viability of highly leveraged cooperatives. We believe those concerns have been validated in the interim. In contrast, as the cooperative movement has been more broadly advocated across the nation, Co-Op advocates have yet to produce serious empirical research (that can be validated and replicated), that documents the impacts of Co-Ops on the supply of affordable, manufactured housing or the purported claims of economic and financial benefits that accrue to them.

Resident ownership of manufactured housing communities is an appealing story with appeal to many policymakers with real concerns about homeownership and the supply of affordable housing. Cooperatives have especially appeal to populists and believers in the greed and insensitivity of investors, owners, and landlords. Accurate or not, little of that would matter if cooperatives provided the affordable housing, economic, financial, and psychological benefits claimed by advocates. A proliferation of cooperatives is not an indication that they provide real economic, financial and housing benefits, however. Rather, it is an indication that advocates of cooperatives have assembled a combination of favorable financing, government subsidies, and supportive regulations that facilitate their growth. There are at lest four issues that should be considered by policymakers in considering the efficacy and desirability of proposals that facilitate or provide incentives for conversion of manufactured housing communities to resident- owned cooperatives:
1 ROC USA PowerPoint presentation “Resident Owned Communities: Ownership, Opportunities, Fairness”
2 “The Real Economic Impacts of Cooperative Ownership of Manufactured Housing Communities...”, PolEcon Research, November, 2008.
3 The NH Community Loan Fund contracted with sociologists at the University of NH to produce a research report used in advocating cooperatives. Despite repeated attempts to obtain the data used in that analysis to verify findings PolEcon was unable to obtain the data or detailed methodologies to analyze it. This is highly unusual for university- affiliated research. A complete critique of that report and shortcomings of it limited economic analysis is included in PolEcon’s report “The Real Economic Impacts of Manufactured Housing Cooperatives” available on request.

• What will be the potential long-run impact on the supply of manufactured and affordable housing?
• Will government and taxpayer subsidies be required to promote the cooperative model?
• What are the financial implications, on both cooperatives and home purchasers within them, of lending practices and underwriting standards that have been vilified as contributing to the recent housing crisis?
• Are there economic or financial gains for cooperatives and their homeowners above those realized in traditional, privately owned communities that would strongly warrant public subsidies? 
Each of these issues is briefly discussed in this report. Psychological benefits to homeowners in cooperative also appear to be a primary benefit cited by advocates of cooperatives but they are less amenable to empirical investigation and outside of the expertise of PolEcon to evaluate. 


The Impact of Cooperatives on the Supply of Manufactured Housing 


Research on the supply of housing and its costs provides convincing evidence of how efforts to provide benefits to one group of citizens can have unintended and negative consequences for other citizens. The clearest and best example is rent control which is designed to make housing more affordable for some residents. Rent controls make rents more affordable for those residents in controlled units but evidence but an unintended consequence is that rents rise more rapidly in uncontrolled units and a reduction in overall housing investment (in part in response that new units may also someday become rent-controlled) also occurs. 
There are several ways in which an increasing number of conversions to cooperatives could affect the supply of manufactured housing and ultimately impact the availability of affordable housing.

♦ €The primary sources of increased supply, developers and investors, may view the increase in Co-Ops as a sign of declining investment opportunities, a more hostile regulatory environment that minimizes returns on investment, or some other signal of a less favorable environment for expansion of manufactured housing and housing communities. The result would likely be a reduction in investments in manufactured housing, thus limiting a valuable source of affordable housing.
♦ €Similarly, owners and investors in manufactured housing communities may see a trend toward increased regulations and restrictions on their properties that reduce their economic value.

In such a circumstance it is possible that more owners would look to convert their properties to alternate uses or hasten their conversions. In this case, the net number of new manufacture housing community units (the number of new units minus the number withdrawn) could decline or stagnate even as some new units or communities are being added. 
Our 2008 research on housing trends in New Hampshire shows that the rapid rise in cooperative-ownership coincides with a decline in overall growth in manufactured housing units in pshire. As the number of housing units in communities increased dramatically this decade, the net increase in manufactured housing units fell dramatically.
The decline in net new manufactured housing units is not simply a function of a more general decline in new housing units in New Hampshire. The chart shows that in addition to the absolute declining trend in net new manufactured housing units, the percentage of new housing units in New Hampshire represented by manufactured housing also declined during the period of rapid increase in Co-Ops, falling from a high of about 12 percent in 1995 and 1996, to a low of under 3 percent by 2009.

Growth in Manufactured Housing is negatively related to the Presence of Co-Ops in a Town
Using more sophisticated, multivariate and econometric techniques, our 2009 research found that the presence of cooperatives in individual towns in New Hampshire was clearly related to slower growth in manufactured housing units compared to towns that had manufactured housing communities but no cooperatives. There are many more factors that influence the supply of manufactured housing but our results show a clear relationship between the presence of cooperatives in a community and slower growth in manufactured housing. These results were the first sophisticated attempt to empirically assess the impacts of Co-Ops on the supply of manufactured housing units. The results support some basic economic principles that suggest increasing barriers (or removing incentives) for private investment in an industry reduces the production or output in an industry.

Liberal Financing and Terms Produce Highly Leveraged Cooperatives and Homeowners

Establishing a cooperative requires both financial expertise and access to capital, two elements not typically available to residents of manufactured housing communities. Advocates of the cooperative movement promote cooperative ownership by supplying financial and management expertise and ready access to capital on extremely favorable terms that are not made available to investor-owned communities or to owners of manufactured homes in communities that do not have cooperative ownership. As advertised by ROC USA, these terms include financing 100% of the appraised value of communities.4 The NH Community Loan Fund has advertised mortgage financing for homes in co-ops up to 115% of appraised value in the past, although it is unclear if those terms are still available today. These types of “zero down payment,” low, or no equity, highly leveraged loans are widely thought to be a primary cause of the recent housing bubble and subsequent housing market crash and financial crisis in this country. Banks and mortgage companies were roundly criticized and subsequently subject to greater regulatory control as a result of making highly leveraged or zero down-payment loans.

The financial subsidies provided to Co-Op communities and homeowners should be assessed within the context of our understanding of the potential risks posed by highly leveraged real estate transactions. Our research in NH examined over 4,000 transactions in manufactured home communities in NH between 1999 and 2007. We found similar rates of foreclosure among homes in co-ops and investor-owned communities but that analysis was completed before the full impacts of the housing crisis occurred when the problems inherent in highly leveraged and zero equity mortgage loans were more likely to result in foreclosure than were less leveraged loans. Advocates Co-Ops, and of the liberal financing that allows residents to establish them, dismiss such concerns but to date but have not provided empirical data on the performance of the loans. Unlike financial institutions, the specialized organizations that arrange financing for cooperative conversions do not face the same reporting and regulatory requirements regulatory requirements as do most lenders. In essence, the performance of these loans is what cooperative advocates and their support organizations say they are. If they choose not to report a loan that is 90 days past due as in arrears, there is no publicly available mechanism (as there is with FDIC

4 See ROC USA http://www.rocusa.org/for-homeowners/financing.aspx .

quarterly bank “call reports” or credit union 5300 quarterly reports) to verify the performance and condition of their loans.
The number of emergency grants awarded to cooperatives previously documented in this report provides some indication of the financial position of many cooperatives and there have been several instances where board members of cooperatives have publicly stated their struggles to meet financial obligations.5
Although our research was conducted in 2008, during the beginning stages of the housing market crash and subsequent financial crisis, there was some evidence that greater forebearance was granted to delinquent mortgages in co-ops compared to mortgages in investor- owned properties. This likely occurred because the sources of financing (the NHCLF, ROC USA) and its partners and funders - foundations, tax credits, as well as banks as part of their Community Reinvestment Act (CRA) requirements were less compelled and under less scrutiny to enforce the provisions of these loans. In this circumstance, loans that traditionally perform more poorly (highly leveraged loans) in terms of default rates were more likely to be granted forbearance for delinquencies.

Promoting affordable housing and providing assistance to individuals in obtaining mortgages and purchasing homes are important and worthy public policy goals. However, the recent housing market crash and resulting financial crisis challenges the belief that public policies and public entities (think Freddie Mac and Fannie Mae) or funds promoting that goal always have beneficial impacts. A clearer understanding of how cooperatives, homeowners in them fared during the recent housing crash should be required before public policies or funds are made widely available in promoting cooperatives. As we note in this report, over a period of just a few years, even a brief review of publicly funded housing grants revealed that 25% of cooperative in NH required some for of public subsidy for capital improvements.

The inherent subsidies given to Co-Ops (via favorable financing and direct grants for infrastructure investment from governmental, not-for-profit, and some private financial institutions, as well as greater forbearance in enforcing lending terms) can mask the financial difficulties encountered in the purchases of Co-Op communities or homes in a way that traditional communities cannot mask. It is relatively easy to increase the viability of cooperatives as long as financial institutions, and government and other grants are providing subsidies. Policymakers may, in fact, decide that such subsidies are desirable, and that promoting incentives for resident ownership are warranted but given the relatively high level of public subsidy they receive, it is may be more appropriate to call the resident and publicly-owned manufacturing housing communities rather than “resident-owned” communities.

As an example the Medvil cooperative testified before a NH House committee looking at the issue of abandoned homes. Medvil board members indicated that they needed to be able to dispose of abandoned homes in their cooperative and rent those lots because their debt service was at 75% of revenues.
Resident-Owned Co-Ops Often Require Government Subsidies

Well-intentioned policies to support cooperatives often result in highly leveraged cooperative communities that may not be economically viable without substantial subsidies. Manufactured housing communities need periodic infrastructure improvements and investments. Lot rental fees in investor-owned communities must be high enough to build reserves or otherwise cover capital improvements in their communities. Community residents in investor owned parks can recognize the need for improvements but owners of communities are often criticized when lot fees are adjusted to cover these costs. Advocates of cooperatives often criticize owners of manufactured home communities for not making capital improvements and criticizing them for increasing rental fees when they do

Advocates of cooperatives downplay the financial difficulties that confront cooperatives at the same time making it clear to potential cooperative owners that assistance in obtaining grant funding and subsidies will be made available. Cooperative owners face the same need to fund capital improvements (as well as other financial needs) as other communities. In NH, these needs have largely been met by obtaining public subsides in the form of government grants to fund inevitable capital improvements. Advocates thus argue for the benefits that “independence” that resident ownership and control may offer at the same time cooperative appear to increasingly rely on public subsidies for financial viability. The Community Development Block Grant (CDBG) program in each state funded by the U.S. Housing and Urban Development agency and is one of the primary subsidies increasingly used by cooperatives in NH. Even an incomplete review of CDBG grant awards from the past 6 years6 shows that fully 25% of cooperatives in NH have obtained CDBG funding totaling more than $7 million.

The Economic Benefits of Cooperatives Have Not Been Empirically Demonstrated

There may be many reasons for promoting cooperatives, but results from our 2008 study, which used examined recorded deeds in over 4,000 manufactured homes sales in NH and which used an appropriate measures of economic gain (home price appreciation using a repeat-sales measure), showed that homes in Co-Ops do not offer the economic advantages over homes in traditional, privately-owned communities that are often cited by Co-Op advocates.

There is a vast literature in housing research that is applicable to Co-Ops. The various restrictions, etc. associated with Co-Ops function similar to more general land use and housing regulations. Regulations designed to benefit one group or homeowners or renters (in this case Co-Op homeowners) generally raise prices in the less regulated segment of the housing market. This has been near universally demonstrated with rent controls (a 1999 Fannie Mae study7 provides a solid review of the studies and evidence), but more generally research shows that housing restrictions and regulations of many types tend to increase prices in the “unrestricted” or “unregulated” segment of the market. Thus the proliferation of Co-Ops may be buoying appreciation of homes in traditional privately owned manufactured home communities in the same and neighboring towns.

♦ €Our research indicates that the appreciation of homes in traditional privately owned communities exceeds that of homes in Co-Ops. o empirically valid measure has shown that homes in Co-Ops appreciate at a higher rate than do homes in traditional privately owned communities. A frequently cited (by Co-Op advocates) Consumer Union study measured appreciation using homeowner estimate of appreciation not actual market transactions and the NH Community Loan Fund study had no estimate of price appreciation but implied greater appreciation simply on the basis of initial sales price.
♦ €Both higher appreciation and higher volume of sales suggest that homes in traditional privately owned communities are in greater demand compared to homes in Co-Ops and are likely a more liquid asset than homes in Co-Ops (but neither should be considered a liquid asset). 
6 Management of NH’s CDBG program has changed agencies (from NH Office of Energy and Planning to the Community Development Finance Agency) and previously available documents are not currently available on the Internet.
7 Early, D. W. and Phelps, J.T., “Rent Regulations’ Pricing Effect in the Uncontrolled Sector: An Empirical Investigation”, Journal of Housing Research, Vol 10, No. 2, 1999.

Conclusions

Cooperative ownership of manufactured housing communities can provide benefits to residents, but it is important that these benefits not be promoted or subsidized in a manner that comes at the expense of the larger goal of increasing the supply of affordable housing options, or which increases the need for public subsidies and direct expenditures to accomplish these goals. To avoid potential unintended consequences, higher-quality research (than has been introduced thus far by advocates) on the impacts and implications of cooperative ownership of cooperatives is needed before policymakers embrace policies designed to facilitate them. The financial subsidies provided Co-Op communities and homeowners should be assessed within the context of our understanding of the potential dangers of high leverage learned from the recent housing and financial current crises. The inherent subsidies given to Co-Ops (via favorable financing and direct grants for infrastructure investment from governmental, not-for-profit, and some private financial institutions) can mask the financial difficulties encountered in the purchases of Co-Op communities or homes in a way that traditional communities cannot mask. Ultimately such risks may be warranted, but only if the benefits of cooperatives can be shown to clearly outweigh their risks of policies that promote them.