Posts Tagged ‘Warren Buffett’

Buffett’s sub-prime doin’ just fine

March 1, 2009

Berkshire Hathaway bought Clayton Homes[1], America’s largest provider and financier of “manufactured homes” (aka prefabs), in 2003. Based on reams of newsprint and political waffle this is probably the worst investment in the world. Except it isn’t, of course! Warren Buffett tells us why, from Berkshire Hathaway’s 2008 annual report[2]:

Clayton’s 198,888 borrowers…have continued to pay normally throughout the housing crash, handing us no unexpected losses… Their median FICO score is 644, compared to a national median of 723, and about 35% are below 620, the segment usually designated “sub-prime.”

Yet at year end, our delinquency rate on loans we have originated was 3.6%, up only modestly from 2.9% in 2006 and 2.9% in 2004… Clayton’s foreclosures during 2008 were 3.0% of originated loans compared to 3.8% in 2006 and 5.3% in 2004.

Why are our borrowers – characteristically people with modest incomes and far-from-great credit scores – performing so well? The answer is elementary, going right back to Lending 101. Our borrowers simply looked at how full-bore mortgage payments would compare with their actual – not hoped-for – income and then decided whether they could live with that commitment. Simply put, they took out a mortgage with the intention of paying it off, whatever the course of home prices.

Just as important is what our borrowers did not do. They did not count on making their loan payments by means of refinancing. They did not sign up for “teaser” rates that upon reset were outsized relative to their income. And they did not assume that they could always sell their home at a profit if their mortgage payments became onerous. Jimmy Stewart would have loved these folks.

[1] For anyone with an interest in Buffett the purchase is a fascinating tale:
http://www.fastcompany.com/magazine/78/claytonhomes.html?page=0%2C0

[2] T’is brilliant as usual:
http://www.berkshirehathaway.com/2008ar/2008ar.pdf
Pages 10-12 for the Clayton Homes info and more mortgage insight.

We’re all doomed!

January 22, 2008

“If you expect to be a net saver during the next 5 years, should you hope for a higher or lower stock market during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”

Warren Buffett, chairman’s letter to Berkshire Hathaway shareholders, 1997.