Cleveland Real Estate News

There is a reason Warren Buffet and Berkshire Hathaway (BH) have had so much success over the years. He seems to buy shares in companies that use the same common sense approach to business he does. He’s so successful now, that we all treat Buffet like the guy in the old EF Hutton commercial: when Warren Buffet speaks, we listen.

This article from CNN Money features Clayton Homes/Mortgages out of Tennessee. The business was bought by BH a few years ago because they liked the way they did business. Yes they are a home builder (mobile and prefab) but that is not why it got my attention.  Their banking arm or lending arm utilizes practices that make so much sense, they have not seen the same instability as so many other lenders/bankers around the Country.

This is not about thinking outside the box but using common sense lending practices. Most of their buyers are not speculators; they do not offer initial low prices to corral people into their loans.  They hold their own mortgages instead of selling them off.

Quotes from the article:

What’s behind the portfolio’s strength? Clayton is more careful about lending because it keeps all loans on its own books rather than offloading them to others by means of securitization.

As Buffett wrote, “When we make a mistake in making or buying a loan, it costs us money, not some buyer thousands of miles away who ends up with an RMBS, CDO, or (horror of horrors) a CDO squared.”

Another important fact is that Clayton has banked on homebuyers who can afford their monthly payments and who purchased their houses for shelter, not for speculation. Clayton also avoided the mortgage industry practice of enticing buyers with low initial payments, followed by much higher payments a few years down the road. Most notably, Clayton’s customers aren’t likely to walk away from a house simply because it has lost value.

We know, at Howard Hanna, that our mortgage arm is strong.  We have our own reserve funds (I think 125 million dollars). Back in the heady days of 2004 and 2005, some of my potential clients would get irritated that they couldn’t qualify for a loan with Howard Hanna Mortgage Services. But the truth is, this (by today’s standards) conservative approach to lending has helped HHMS stay solid and sound, much in the same way as the Clayton example here. I bet some of the people who harrumphed at HHMS (and subsequently me) during those years wound up with high interest loans they had trouble paying. Just like so many others around the US.

After all the scary instability banks and mortgage lenders are facing these days, I have a feeling more of them will be trying to follow the Clayton business model. Clayton, btw, has about 45% of it’s portfolio in sub prime loans. But as the quotes above show, they hold the loans and they loan mostly to owner occupants not speculators. Their success rate can be measured this way:

 ”….The company’s loan delinquency rates have been stable: On June 30, 2004, the rate was 3.26%; last year it was at 3.5%; and now it’s 3.82%. (In comparison, the delinquency rate in the traditional housing market is around 6.4%.) Annual credit losses are running steady at a reasonable 1.5% of the loan portfolio. And Clayton’s foreclosures have actually dropped from two years ago, from 5,823 to 4,588….”

A good model indeed.  Peace Out – 3C