Financing Manufactured Homes in America Today and in the Future. Floor Plan Lending

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Gillian McCormick
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1 Financing Manufactured Homes in America Today and in the Future Floor Plan Lending Gail Cardwell Manufactured Housing Institute Louisville Show: January 12, 2009

2 What is Floor Plan Lending? Floor plan, or wholesale, lending is a form of retail goods inventory financing in which each loan advance is made against a specific piece of collateral. As each piece of collateral is sold by the dealer, the loan advance against that piece of collateral is repaid.

3 Floor Plan Lending Challenges High touch servicing required Track inventory/sales ratios Regularly inspect collateral Monitor retailer s capital position Consideration of market conditions Payoffs Ensure that debt reduction happens quickly after a sale

4 Options for Manufactured Home Floor Plan Lending 21 st Mortgage Textron Financial GE Capital Local Banks

5 Effects of the Credit Crunch on Floor Flan Lending The credit crunch has reduced the quantity of capital available for all types of financing including floor plan finance The floor plan lending crisis is not limited to the MH sector (e.g., autos, RVs, PWCs) Each of the Big 3 MH Floor Plan Lenders have announced plans to reduce their exposure to MH Floor Plan debt

6 Summary of Announcements from National MH Floor Plan Lenders

7 GE Capital Effective December 6, 2008, Commercial Distribution Finance Corporation (CDF) placed retailer s credit facility on approval hold.

8 21 st Mortgage Effective December 15, 2008, 21 st Mortgage will only issue floor plan approvals for manufacturers who commit to 1 of 2 alternative programs: 1. Manufacturer Participation Program, or 2. Retail Sold Program. MPP requires manufacturers to lend an amount equal to 2/3 of the funds required to floor plan a home to 21 st Mortgage RSP: 21 st to continue to finance retail sold units for existing retailers with an outstanding balance with 21 st subject to paying a 1% discount on each invoice.

9 Textron On December 22, Textron, Inc. announced its exit of all Textron Financial Corporation s (TFC s) commercial finance business through a combination of orderly liquidation and selected sales, other than the portion of the business supporting the financing of customer purchases of Textronmanufactured products

10 Federal Efforts to Free Up Credit Many federal efforts to free up capital Two primary vehicles that affect Floor Plan Lending: Commercial Paper Funding Facility (CPFF) Troubled Asset Relief Program (TARP)

Commercial Paper Funding Facility (CPFF) Began operating in October 2008; will cease purchasing on April 30, 2009, but the Federal Reserve Board (FRB )may extend that date The FRB, through a special

11 Commercial Paper Funding Facility (CPFF) Began operating in October 2008; will cease purchasing on April 30, 2009, but the Federal Reserve Board (FRB )may extend that date The FRB, through a special purpose vehicle (SPV) purchases commercial paper. Treasury will make a special deposit at the FRB of NY to support this facility. The SPV will purchase US-dollar denominated, 3-month, commercial paper directly from eligible issuers. Issuers must be US issuers (but could have a foreign parent); Spread is 300 bps annually for asset-backed commercial paper (over the overnight index swap rate). Rates announced daily Commercial paper the SPV purchases must be rated at least A1/P1/F1 by at least 2 rating agencies. Issuers sales are limited to the greatest amount of commercial paper the issuer had outstanding any day during the 1 st 8 months of If not asset-backed, the issuer must provide collateral satisfactory to the FRB and an unspecified fee upfront

Troubled Asset Relief Program (TARP) Created by the Emergency Economic Stabilization Act (EESA). The law provides $700 billion to stabilize financial and housing markets.

12 Troubled Asset Relief Program (TARP) Created by the Emergency Economic Stabilization Act (EESA). The law provides $700 billion to stabilize financial and housing markets. The Treasury Secretary has a number of powers in administering the program, in consultation with federal banking regulators, HUD and the NCUA. Authority terminates on 12/31/09, with Treasury extension to 10/3/2010. Treasury can purchase troubled assets from any financial institution, including central banks of, or institutions, owned by, foreign governments. Troubled assets that TARP may purchase include: Residential or commercial mortgages originated on or before March 14, 2008, or instruments based on such mortgages Other financial instruments that the Treasury Secretary and FRB Chairman with notice to Congress deem necessary Treasury can t purchase troubled assets unless it receives: 1. a warrant for nonvoting common or preferred stock, or voting stock that Treasury agrees not to vote (if publicly traded selling institution); or 2. a warrant for common or preferred stock, or for senior debt, with protections to ensure Treasury is appropriately compensated. Treasury must consider taxpayer protection Requirements: executive compensation limits, disclosures about assets purchased, etc.

TARP TARP has been used to purchase illiquid assets from banks and other institutions Checks sent to 116 banks totaling $168 billion Committed another $82 billion to capitalize more banks Bought $40

13 TARP TARP has been used to purchase illiquid assets from banks and other institutions Checks sent to 116 banks totaling $168 billion Committed another $82 billion to capitalize more banks Bought $40 billion in preferred shares of AIG Committed $20 billion to back any losses that the NYFRB might incur under Term Asset-backed securities loan facility Committed to invest $20 billion in Citigroup on top of $25 billion bank had already received Committed $5 billion as a loan loss backstop to Citigroup Agreed to loan $13.4 billion to GM and Chrysler for 5 months.

14 MHI Response to Floor Plan Crisis Outlined immediate course of action on Officers call on Nov. 14 Contacted Independent Community Bankers Association (ICBA) and SBA to explore inventory lending programs Distributed a Housing Alert to all MHI members on Nov. 17 that: 1. provided a list of community bank lenders; 2. furnished information on SBA s 7(A) inventory loan guaranty program Conducted conference call with state execs to outline course of action and provide link to state-based community bank associations Petitioned US Treasury Secretary Paulson in a formal letter sent on Nov. 21, calling on him to require non-bank lending institutions offering MH inventory financing who receive TARP funds to dedicate a portion of those funds to maintain this financing

15 MHI Response to Floor Plan Crisis Sent a letter to Federal Reserve Chairman Bernanke emphasizing that their Commercial Paper Funding Facility (CPFF) restricted to the highest rated issuers should go beyond the top-rated issuers, as lower-rated issuers have suspended inventory lending to retailers Participating in a coalition with large, 2 nd tier issuers on CPFF, e.g. Nissan, Textron, to coordinate strategy with FRB Ongoing conversations with Federal Reserve staff who are evaluating extending the CPFF to lower-rated issuers Met with the Equipment Leasing & Finance Association whose members have business lines that include inventory financing Distributed survey to manufacturers to assess impact of national floor plan lending on the industry s structure and production Conducting webinar on January 21 with community bank lenders to brief MHI-member retailers & members on lending criteria and inventory lending programs Drafted prototype presentation for retailers to use when approaching their local banks for inventory financing Working with media to get the story out

16 Options Specialty Finance Companies Local Banks Marketing plan for sales growth Average amount of Home Invoice Operating expense to income ratio (5-year history) Copy of recourse agreement with manufacturers Value of any real estate or other assets owned Monthly inventory turnover Inventory to Sales Ratio

Term Asset-Backed Securities Loan Facility (TALF) Terms and Conditions 1

Term Asset-Backed Securities Loan Facility (TALF) Terms and Conditions 1 Facility The TALF will be a Federal Reserve credit facility authorized under section 13(3) of the Federal Reserve Act. The TALF