Berkshire Hathaway 2003 Annual Meeting Audience Question # 34

Clayton Homes had “much sounder policies” than other manufactured housing company

Warren Buffett:

The second. Manufactured housing. You know, it is… I mean practically everybody in manufactured housing is losing money now, and Clayton is making money.

They’ve had much sounder policies, in terms of how they’ve operated over the years.

One of the things they do… most of their houses are sold through their own retail units. They have about, I think, 297 or so retail outlets of their own. And those managers are on a 50/50 profit split, basically, as I remember it, with Clayton. And they’re responsible for all of the paper they generate.

So, unlike what was going on a few years ago in manufactured housing, where a manufacturer would sell a house, maybe a floor plan, to a dealer. And then that dealer could borrow, maybe… if I he got some kind of a purchaser on the note, maybe 125 or 130 percent of invoice price, if he could just create a warm body out there someplace that would give him some apparent down payment. That situation was just built for disaster.

But at Clayton, the profit or loss off that person who buys the product goes till the obligation is fully paid for.

So if a dealer takes inadequate down payments or sells to people he shouldn’t be selling to, it’s going to be his problem, and he’s going to get the repo back. He’s going to have to sell it himself. He’s going to get the loss on the paper charged to him. And that produces an entirely different kind of behavior at the retail level than occurred with many of the other manufactured housing manufacturers.

But it’s not an easy business. It’s… Clayton does it the right way. And in fact, if you read Jim Clayton’s book, he will… he tells in there about the time he bought his first home in Indiana. And he tells about a little of the funny business that went in, in terms of how the manufacturer behaved.

And he described some of the systems that people use to gain the financing. And those activities are coming home to roost in a huge way for both the manufactured housing companies and for the people that finance the retail paper.

Clayton did it right, basically, and they’ll continue to do it right. Even so, there is such a stain over the whole manufactured housing industry, in terms of financing, that even… Clayton is the only one that has… is able to securitize.

And, as I said earlier, they cannot securitize to the extent… without us… they wouldn’t be able to securitize to the extent that they could have a year ago.

It’s an industry in big trouble. I think we’ll do fine in it, because I think we’re in with a class player. I think they’ve got these systems in place that have the right incentives, which you need all the way through the system. And I think Berkshire will make them even stronger, because we will not securitize. We’ll keep it for the portfolio.

The gains on securitization… the point you made is essentially correct, that some of the… when you see a company with lots of gains on securitization, you ought to get a little suspicious. I don’t want to get into more detail than that because it’s an accounting question.

Charlie?

Charlie Munger:

I’ve got nothing to add to that, either.

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