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Salmon on Buffett

Felix Salmon’s article on Buffett talks a fair lot on how important is what Buffett DOESN’T say as much as what he does. Buffett, in his annual letter said that his stock, Clayton Homes, which makes and finances mobile homes at 9% because “very few factory-built homes qualify for agency [Fannie/Freddie] insured mortgages”; Felix thinks that’s rather rich:

Wow, sounds like a great business! Rather than see its financing profits competed away in a commoditized mortgage market, Clayton essentially has a monopoly on providing financing on its homes, and can lend out money at rates much higher than prevailing mortgage rates.

But weirdly, Buffett seems to be unhappy about this:

Berkshire can’t borrow at a rate approaching that available to government agencies. This handicap will limit sales, hurting both Clayton and a multitude of worthy families who long for a low-cost home.

Really, Warren? I’d like to see some numbers on this, because I always thought that the great thing about being Berkshire Hathaway, even without a triple-A credit rating, was that you could borrow at a rate approaching that available to government agencies. What’s the spread on Berkshire debt over agency debt? When Berkshire recently borrowed $8 billion, it paid between 2bp and 43bp over Libor on the floating-rate bonds, and between 63bp and 93bp over Treasuries on the fixed-rate bonds. In comparison, agency debt recently narrowed all the way to 66bp over Treasuries, albeit at longer maturities.

In any case, I’d say that the funding advantage that agencies have over Berkshire will be no more than about 50bp, while the financing rates that Clayton’s buyers are paying to Berkshire are, by Buffett’s estimation, about 375bp more than those offered by Frannie. And remember here that Buffett is adamant that Clayton’s buyers are good credit risks, and that “Clayton’s delinquencies and defaults remain reasonable and will not cause us significant problems”.

See, when Buffett said it, it sounded like oh God, these agencies, they won’t buy the mortgages on our mobile homes, so darn, we have to finance our customers and charge them 9%. Poor consumers could have got 5.25% but we have to lend to them at 9%. What he left unsaid was: Boss, I get money at the same rate or 50 bps above what Fannie/Freddie get, and I lend it out at 3.75% higher, and I believe my customers have low risk profiles. Feel sorry enough for me?

Clayton made about 300 million dollars on it’s financing arm. I don’t know how much it made on the actual housing sales (net of cost of construction) but I’m sure losing the 300m to the dirty rotten agencies doesn’t appeal to him as much as he hurts by their policies of not financing his customers.