stockbroker

No I understand what you're saying, and understand the arrangement between BRK and Clayton. My point is that looking at it in isolation and presenting it as evidence doesn't make sense.

Say Clayton Homes borrows from BRK at 2%. Other mobile home lenders borrow from the market as standalone companies at 3%. Assume the spread for manufactured home loans should be 5%.

Is it Clayton Homes' responsibility to price their loans at 7% (2% funding cost +5% spread) when competitors are pricing their loans at 8% (3% funding cost + 5% spread)?

I can flip this logic and suggest that you believe that BRK should effectively subsidize the price of Clayton Homes' financing. Maybe go so far to say the home should be delivered by NetJets at cost, painted with Benjamin Moore paint for free, dressers from Nebraska Furniture Mart should be thrown in complete with a free set of Fruit of the Loom undies, and then top it off with Pampered Chef cookware and a free subscription to the Buffalo News? The other customers of those companies can just pick up the tab through higher prices.

I understand that breaking the economics apart by business line is difficult. It's just a bad argument in support of your thesis that Clayton Homes is charging too much because they don't pass on a funding cost advantage (which results from the credit risk of BRK as a whole, not Clayton Homes) to their customers.

Edit: I'm not trying to be rude. I think you put together an interesting piece. I just wouldn't use the point about funding costs because it screams financial illiteracy from a corporate finance perspective.

However, Clayton’s loans are unusually costly, as Mike explained in this answer[1] , in part because Berkshire Hathaway charges Clayton up to an extra percentage point on top of BRK’s own borrowing costs -- and that’s passed directly to the consumer. So credit risk is only one element of how the rates are set.

So, you're telling me that other manufactured home lenders are paying less for their financing than Clayton?

BRK (one of the most creditworthy institutions in the world) guarantees Clayton's debt. The 1% bump probably puts it on level ground with the borrowing costs of other manufactured home lenders. Not sure why you'd expect BRK to lend to Clayton at below-market rates.

Small towns have more incentive to legalize it than other places.

"How do we get people here?"

"Why not make it legal to pay for sex with beautiful women?"

"Great idea!"

Cohorts matter. We do not know if the borrowers in the Clayton pools are of similar quality to the borrowers in the other pools.

I can show you interest rates on used car loans for Wells Fargo and Bank of America, which lend predominately to prime borrowers and earn yields in the neighborhood of 4% on average. Then I can show you car loans for Credit Acceptance, which lends ONLY to super-subprime borrowers, and their average will be somewhere around 30%. Huge difference because they lend to totally different types of borrowers.

Similarly, I could show you loan yields on normal mortgages at 30% LTV and mortgages at 100% LTV. The lower LTV loans are going to have a lower yield.

Here's the point I want to make: If 70% of your loans are priced at a 4% spread, and 30% are priced at a 10% spread, you get a 6.8% spread on average. Selection works in a way that if no one else will lend to people who should get a 10% spread, you end up with all of them. And naturally you end up with a greater proportion of higher spread mortgages bringing up your average spread.

Not a woman but I'm going to guess it's from couples ordering a bunch of tests while trying to get pregnant.