In 1987, taking vertical integration to the ultimate level, Clayton opened its first manufactured-home community, in Texas, and soon added sites in Michigan, Missouri, North Carolina, and Tennessee. In every year from 1989 through 1992, Forbes named Clayton Homes one of the best small companies in America. It boasted ten manufacturing plants, 125 company-owned dealerships, and 325 independent dealerships operating in half the states.
Prosperity continued through the 1990s as the company grew in all ways, adding manufacturing plants and dealerships and increasing sales and financing revenue. In 1996, Clayton achieved its sixteenth consecutive year of record earnings. Revenues passed the $1 billion mark the following year. Growth was supplemented by acquiring existing mobile home communities in new territories. By 1998, Clayton owned seventy communities that were home to 18,900 families.
In 1999, when Forbes named Clayton one of America’s top 400 large companies, Jim Clayton passed the CEO reins to his son, Kevin. The next year, as the economy sagged, the manufactured housing industry went into a tailspin, which worsened as the decade progressed. While competitors downsized aggressively and closed plants extensively, Clayton was able to minimize its need for both. Thanks to the successful vertical integration of the business that generated multiple revenue streams, the company even managed to maintain profitability throughout the decade.6
The company is always scrupulous in dealing with home buyers and the financiers who invest in the pools of mortgages it underwrites. Jim Clayton criticized unsavory peer practices that made it too easy for customers to borrow, such as manipulating the terms of down payments or allowances, contrasting the culture at Clayton Homes:
At Clayton Homes, we can’t ever compromise our credibility by participating in such schemes. Unethical behavior is not and will not be tolerated. We now sell over a billion dollars of mortgages every year, and investors who buy those mortgages never meet the customers, or see the collateral. The trust and faith enjoyed by our company from so many shareholders, investors and suppliers, and our 8,000 team members is so very important. We must always take our credibility and integrity seriously.7
The opportunity to acquire Clayton came to Berkshire’s attention fortuitously in 2003.8 Albert L. Auxier, who taught finance at the University of Tennessee, made an annual trip to Omaha with his students to meet Buffett—one of several dozen student groups Buffett hosts annually. Auxier’s students always brought a present, which, in 2003, was Jim Clayton’s new autobiography, First a Dream. Buffett knew of the man and the company. Berkshire had made disappointing investments in the bonds of Oakwood Homes, a competitor whose questionable consumer lending practices were uncovered only after it went bankrupt.
Berkshire offered to buy Clayton Homes in April 2003 for a price 7 percent above its average market price over previous months. Many institutional shareholders of Clayton objected. Some challenged the deal in court,9 whereas another, Cerberus Capital Management, told Clayton management it wanted the chance to make a competing bid. The result was a six-month delay in getting the Clayton shareholder vote, which finally approved the Berkshire deal. That same year, seizing an opportunistic expansion, Clayton acquired many of Oakwood’s assets out of bankruptcy.
In the early 2000s, promoters of manufactured homes spurred business by siphoning funds to buyers who should not have purchased homes with loans lenders should not have made. What distinguished Clayton Homes was that its financing division, unlike that of competitors, did not engage in predatory lending or exploit its customers’ naivety. Jim Clayton attributed the difference to his company’s maintenance of a “sacred wall” between sales and credit that competitors failed to maintain.10
The industry’s problems crystallized during the 2008 financial crisis, and Clayton took advantage of them. Before 2008, it grew its own business by applying prudent lending criteria that resulted in a well-performing portfolio of loans. After 2008, it prospered while its chief rivals, such as Champion, faltered. Clayton and its customers compared actual mortgage payments with actual income, and loans were made only when the relation proved affordable. Competitors, on the other hand, assessed long-term affordability using teaser rates that applied in early years but increased later.
Amid the crisis, Clayton was an exception: no purchaser of the loans it originated or had repackaged for sale ever lost a dime of principal or interest.11 The results were astounding for the industry—as well as for Clayton and Berkshire. In 1999, the three largest manufacturers were Champion, Fleetwood, and Oakwood, which together commanded nearly half the output. Clayton was fourth. By 2009, the top three had all disintegrated, and Clayton Homes, which had acquired much of Fleetwood and Oakwood as well as several other rivals, was number one.12 Those who invested in pools of manufactured housing mortgages lost large sums of money. Clayton Homes, an industry leader, shows that integrity is not only a moral virtue but a business value.