By Anupreeta Das
Warren Buffett kicked off the question-and-answer session at the
Berkshire Hathaway Inc. annual meeting Saturday by defending the
practices of Clayton Homes Inc., a subsidiary and the country's
largest manufactured housing company.
Clayton Homes, which builds, sells, finances, leases and
insurers its manufactured houses, has come under shareholder
scrutiny after an April article by the Center for Public Integrity
and The Seattle Times newspaper alleged predatory collection and
lending practices, high fees and other problems at the company. The
article said these practices led to unsuspecting borrowers getting
trapped in loans they couldn't afford.
Clayton Homes has said the story was "misleading."
"I make no apologies whatsoever for Clayton's lending
practices," Mr. Buffett said in response to a question from a
Berkshire shareholder who said he was "disgusted" that Berkshire
would support unethical practices. "Clayton has behaved very
well."
Only about 3% of Clayton's $12 billion of mortgages on 300,000
homes go sour, Mr. Buffett said. The rest of the borrowers are able
to pay off their loans within a 20-year time frame on average.
"When a mortgage goes bad, two people lose, both the person who
owns the house and the person who owns the mortgage," he said.
Clayton doesn't "securitize" its mortgages--slice and dice its
portfolio and sell the pieces to investors--but instead holds them
on its books, adding to the company's financial risk when customers
default.
Clayton Homes sold 45% of all manufactured homes purchased in
the U.S. last year, according to the company. Unlike traditional
houses, which are built on site, manufactured homes are built in
factories and then transported to be installed on location. These
homes usually are priced far lower than site-built homes and
targeted to low-income people who don't qualify for
government-insured mortgages.
"It's true that manufactured housing hits the lower end of the
market...the question is, can you lend intelligently to people [so
that they can continue] making those payments and keeping their
house?" Mr. Buffett said. In that regard, he said, Clayton has been
"exemplary."
The U.S. House of Representatives recently voted to reduce
safeguards for people who have loans with steep interest rates,
scaling back financial-protection rules put in place as part of the
2010 Dodd-Frank Act.
Berkshire bought Clayton in 2003 for $1.7 billion in cash. The
company did better than many of its housing-industry peers during
the financial crisis because it had more stringent lending
standards, Berkshire has said.
Mr. Buffett said that the company, founded in 1956, tries to get
potential customers Federal Housing Administration loans when
possible. But most of Clayton's borrowers don't meet the FICO
credit score threshold of 620, which frequently means they get
tacked with a high-interest-rate loan.
He refuted the article's allegation that Clayton offers 30-year
mortgages, saying that only FHA loans extend that long. He said the
average monthly interest payment for borrowers who didn't default
came to about $600.
The article also said that because Clayton owns lending
companies and operates under multiple names, it has misled buyers
into thinking they were getting more of a choice than they really
were.
Mr. Buffett, who said earlier that he had prepared a rebuttal to
the story that he would share at the meeting, said that each of
Clayton's more than 1,000 retailers clearly mention a variety of
lending options including local banks and credit unions, and that
the terms are listed succinctly.
Mr. Buffett also said the story confused gross profit and profit
margin, and therefore erred in its conclusion about how profitable
Clayton Homes is.
He acknowledged that people get upset when they lose their homes
due to a default, but said that "in the past three years, I have
received not one call from any party in connection with a Clayton
Home."
Write to Anupreeta Das at anupreeta.das@wsj.com
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