If any multi-billionaire can be said to be respected by progressives, it would probably be Warren Buffett. Which is why a recent exposé published by the Seattle Times and the Center For Public Integrity (diary here) was so jarring, documenting as it did alleged predatory lending practices by Berkshire Hathaway's (i.e., Buffett's) Clayton Homes division, the nation's largest mobile home manufacturer and retailer and an interlocking network of lenders also owned by Berkshire Hathway - practices which the ST/CPI report argues have the effect of loading low-income, poor-credit mobile home purchasers with obviously unaffordable high-interest loans that are all but guaranteed to go underwater and/or to quickly lead to default and repossession by Buffett's firm.
Equally jarring is Buffett's response to these charges, delivered both via a Berkshire Hathaway statement and from the Oracle of Omaha's own lips at the just-concluded annual Berkshire Hathway sharholders' love-in.
Following publication of the ST/CPI report on April 3rd, Buffett's Berkshire Hathaway reportedly stonewalled requests for comment from news organizations such as Marketwatch, choosing instead to publish a statement in the Omaha World-Herald (a Berkshire Hathaway-owned newspaper). Three days later, the Center for Public Integrity published a point-by-point refutation of that article's major claims, including:
CLAIM: Loans over the past year had an “average total down payment of just under 19 percent.”
FACTS: Clayton is not referring to down payments in the traditional sense. The company promotes “$0 CASH DOWN” loans and allows customers to put up land that they own instead. Land collateral is fundamentally different from a cash down payment, mainly because it does not reduce the balance of the loan or increase the borrower's equity in the purchased asset [....] The Times and CPI reviewed more than 20 loans originated since the Berkshire merger that included no cash down payment, and one from 2010 that included a $1 down payment.
CLAIM: “Interest rates on manufactured homes can be higher than loans for site-built homes.”
FACTS: Clayton’s loans are particularly expensive, even among its peers. Among new loans considered “higher-priced” by the federal government in 2013, Clayton's averaged 7 percent above prime, compared with an average of 3.8 percent above prime for all other mobile-home lenders.
CLAIM: “The retailer selling the home receives no financial incentives from the lender the customer chooses.”
FACTS: Two former dealers interviewed for this story said they received financial incentives, which they called “kickbacks,” to finance buyers through Clayton lenders or sell Clayton insurance products in the years after the Berkshire Hathaway merger. A third former manager, who worked for the company until 2013, described ongoing pressure from his supervisor to put at least 80 percent of borrowers in Clayton financing.
Buffett himself has remained mum for the past month regarding the ST/CPI allegations, but finally took advantage of the friendly environs of Berkshire's annual shareholders' meeting to
nocomment:
“Clayton follows a pattern that is exemplary and rather extraordinary,” he said [....] “I make no apologies whatsoever for Clayton’s lending terms”
And, more tellingly, according to
a CPI analysis of Buffett's comments:
Buffett said the company has a default rate of just 3 percent “in a year” [....] But that method doesn’t reflect the total default rate that occurs in loan pools over the course of time — a cumulative number that would better show the likelihood of a new borrower getting a loan that will fail [....] Kenneth Rishel, an industry consultant for 40 years, has said the industrywide failure rate on nonmortgage mobile-home loans is 28 percent. Citing his own research and conversations with Clayton executives, he said Clayton’s two lenders have failure rates of 33 percent and 26 percent.
The latter point - financially sophisticated Buffett's disingenuous citation of a low single-digit 'per year' default rate which much less-sophisticated readers would mostly fail to realize represents a whopping large percentage of defaults over the life of these loans - is the best indication we have yet of Buffett's apparent guilty knowledge in the Clayton Affair.
But wait - why on earth would a retailer/lender cartel want to sell and finance products the buyers will likely default on? Perhaps because mobile homes are uniquely easy to foreclose on: not only can the repo man just hitch up a tow truck and haul 'em away, but also most of these loans aren't mortgages at all, but rather consumer loans (and thus not subject to the legal protections many states impose on home foreclosures).
And finally, there's another point to consider when trying to understand Buffett's and Berkshire's possible motivations (and it's a point I haven't yet seen mentioned in any other discussion).
Berkshire Hathaway is widely celebrated, among investors and analysts, for the tight vertical integration of its many companies, as exemplified by Clayton Homes, whose manufacturing operation buys materials from other Berkshire companies (such as Johns Manville) and finances the sale of its finished products through Berkshire-owned lenders, who in turn insure those loans through Berkshire-owned insurance companies. But wait...there's more. Have you noticed the ever-increasing bumper crop of 'home for sale' signs springing up around your neighborhood bearing the "Berkshire Hathaway HomeServices" name? That endeavor is the fruit of Berkshire's (i.e., Buffett's) 2000 acquisition of HomeServices of America. So now, with a vast nationwide realty company under its belt, Berkshire Hathaway can profit from mobile home defaults not merely by pocketing the down payment and interest paid and reselling the used home, but also - in those many cases where the loan was secured by the buyer's deed to his land - by taking title to and reselling the land on which the mobile home sat.
'Rent-To-Own' furniture and appliance stores that prey on financially unsophisticated poor communities are widely, and justly, reviled. But now it seems that Buffett's Berkshire Hathaway has innovated a new and even richer scheme: 'Buy-To-Lose-Everything.'
Sweet.