by Calculated Risk on 2/26/2011 12:24:00 PM

A few excerpts from Warren Buffett's annual letter to shareholders.

On Housing:

A housing recovery will probably begin within a year or so. In any event, it is certain to occur at some point.

He wrote the same thing last year:

[W]ithin a year or so residential housing problems should largely be behind us, the exceptions being only high-value houses and those in certain localities where overbuilding was particularly egregious.

Last year I disagreed, but now I think a recovery will probably "begin" within "a year or so".

On Clayton (manufactured homes):

At Clayton, we produced 23,343 homes, 47% of the industry’s total of 50,046. Contrast this to the peak year of 1998, when 372,843 homes were manufactured. (We then had an industry share of 8%.)

CR Note: This is close to the record low for manufacturing homes set in 2009 of 49.8 thousand units.

Clayton owns 200,804 mortgages that it originated. (It also has some mortgage portfolios that it purchased.) At the origination of these contracts, the average FICO score of our borrowers was 648, and 47% were 640 or below. Your banker will tell you that people with such scores are generally regarded as questionable credits.

Nevertheless, our portfolio has performed well during conditions of stress. ...

Our borrowers get in trouble when they lose their jobs, have health problems, get divorced, etc. The recession has hit them hard. But they want to stay in their homes, and generally they borrowed sensible amounts in relation to their income. In addition, we were keeping the originated mortgages for our own account, which means we were not securitizing or otherwise reselling them. If we were stupid in our lending, we were going to pay the price. That concentrates the mind.

If home buyers throughout the country had behaved like our buyers, America would not have had the crisis that it did. Our approach was simply to get a meaningful down-payment and gear fixed monthly payments to a sensible percentage of income. This policy kept Clayton solvent and also kept buyers in their homes.

... a house can be a nightmare if the buyer’s eyes are bigger than his wallet and if a lender – often protected by a government guarantee – facilitates his fantasy. Our country’s social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford.

Note: The worst performing mortgages originated during the housing bubble were NOT protected by a government guarantee, instead they were the product of the Wall Street driven originate-to-distribute model. But I agree with Buffett's comments on how prudent lending "concentrates the mind", and about putting people into homes they can afford.