Berkshire Hathaway Unit in Hot Water for Unfair Lending - Analyst Blog

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The Seattle Times and The Center for Public Integrity, a nonprofit, nonpartisan investigative newsroom based in Washington, D.C. reported that Berkshire Hathaway Inc. 's BRK.B home mobile company Clayton Homes has been involved in unfair consumer lending practices.

The article in the newspaper mentioned about Calyton Homes' dealings in regressive loan terms which involved charging higher interest rates than the prevailing rate in the industry. It also threw light on the unit's undisclosed charges, exorbitant fees, and terms of transaction that would make home selling or refinancing impossible for the customers who would be left in the lurch.

Clayton Homes was bought by Berkshire Hathaway in 2003. Since then the parent company has spent billions of dollars in transforming this unit into one of the largest sellers of readymade homes. Clayton works within a network of its own companies. It has under it nearly 18 sub-units sporting different names, involved in constructing nearly half of the industry's new homes and selling them through its own retailers.

A network of Berkshire Hathaway's subsidiaries are involved in steps - right from using raw materials in manufacturing the house, financing it for sale, providing property insurance on it, and then repossessing it when borrowers fail to pay - thereby extracting profits at every stage from the customers.

Clayton recorded earnings of $558 million in 2014 compared with $416 million in 2013 and $255 million in 2012. It is now being viewed that these profits were made at the cost of Americans, who were guided into buying houses via its own lenders by promises of refinance support. The buyers would only later find surprise fees and higher-than-average interest rates charged (Clayton's interest rates on home loans averaged 6.8% higher than a typical home loan).

Warren Buffett the CEO and Chairman of Berkshire Hathaway via his mobile-home company promises to fulfill the low-income Americans' dream of owning a house. But his unit's oppressive lending practices were an antithesis to his assurance.

After Berkshire Hathaway purchased the unit in 2003, Buffett promised a new beginning for the mobile-home industry which was going through overall torpor. He also condemned the long 30-year loans on mobile homes and said, "Home purchases should involve an honest-to-God down payment of at least 10% and monthly payments that can be comfortably handled by the borrower's income." He also wrote, "Income should be carefully verified."

An investigation of more than 100 sales closed by Clayton homes revealed that most of the customers were not asked to pay any down-payment and were also unqualified (as per income) to buy a house. This implies that Buffett's unit dismissed the very standards he set.

It was also revealed that upon failure to meet the loan installments, the collection agencies would ruthlessly follow up with the borrowers and force them to make payments.

A spokesperson from Berkshire Hathaway clarified that the news was misleading.

The mobile-home buyers' concerns were known by the government but little has been done to protect their interests. This news will, however, lead to some action in favor of the customers.

Berkshire Hathaway carries a Zacks Rank #1 (Strong Buy). Some other stocks worth considering are Allied World Assurance Company Holdings, AG AWH , Cincinnati Financial Corp. CINF and First American Financial Corporation FAF . All these stocks carry the same Zacks Rank as Berkshire Hathaway.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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