Combine a depreciating asset with credit that’s easy, plentiful and unimpeded by pesky verification checks, and the result is a bubble that inevitably bursts. That pretty much sums up the manufactured housing industry, which over the past six years has seen shipments sink by nearly two-thirds.

Since 2002, leading lenders GreenPoint Credit and JPMorgan Chase exited the sector, Oakwood Homes and Conseco, which serviced the largest pool of manufactured housing mortgages, sank into Chapter 11, and repossessed homes piled up like Internet executives after the dot-com bust.

Into this seeming morass stride the mortgage units of Clayton Homes—Vanderbilt Mortgage & Finance and 21st Mortgage Corp. The Knoxville- based company paid $4 billion in December for a portfolio of manufactured housing loans from Chase. With the deal, Clayton has nearly tripled the size of its mortgage portfolio to $15.7 billion since the company’s July 2003 acquisition by Warren Buffett’s Berkshire Hathaway, according to BB&T Capital Markets estimates. The recent transaction signals just how well positioned Clayton is to boldly and profitably consolidate that niche of the mortgage market.<

"It’s not just their access to capital,” Standard and Poor’s credit analyst Elizabeth Fitzpatrick says of the deep pockets of AAA-rated parent Berkshire Hathaway. Most critically, “Clayton has always been opportunistic and thrifty.”

Hailed in the industry as the “Clayton model,” the company’s successful vertical integration of sales and manufacturing with financing was achieved by linking retailers’ compensation to loan performance. As a result, Clayton is eager to build market share while others retreat, as was the case with the Chase deal. “It would take us three years to originate this size portfolio,” Paul Nichols, president of Vanderbilt Mortgage & Finance, says of the Chase assets. And they should fit nicely with Clayton’s existing portfolio. By the reckoning of most industry observers, the quality of the acquired pool of mortgages was nearly as high as that of the conservatively issued mortgages Clayton originated itself. While acknowledging that the size of the Chase transaction was atypical, Nichols says the company “would not shy away from similar transactions” and is examining dozens of opportunities each year.

Nichols’ aggressiveness is well-timed, notes Bill Gibson, an analyst with San Francisco investment advisor Nollenberger Capital. He says US Bancorp and GMAC have announced plans to enter the manufactured housing lending market, while Green Tree (the former Conseco) plans to renew lending under new owners.

Even so, Vanderbilt and 21st retain a potential advantage over competitors. It’s just about the only lender with access to the asset-backed market, which allows it to maximize its available capital and tap relatively low-cost additional funds by securitizing pools of mortgages. Most other lenders cannot securitize either profitably or at all, says Michael Binz, a director in Standard and Poor’s structured finance ratings group. Vanderbilt has not securitized since early 2003 but could do so if the asset-backed market were to offer more attractive interest rates.

These many advantages loom large for Clayton. But it must remain mindful of the risks in lending to the manufactured housing sector. Owners who don’t also own the land tend to abandon their manufactured homes when in financial distress. And while not exactly as mobile as implied by the earlier tag “mobile home,” manufactured houses can be moved—creating the prospect feared by all lenders of disappearing collateral. According to Consumers Union, manufactured home mortgages default four times as frequently as mortgages secured by homes built on-site.

So yes, mortgage valuations are attractive, but there’s still a lot of risk out there. As S&P's Fitzparick says, "There are some opportunities for smart players with capital, like Clayton."