By Jonathan Stempel
(Reuters) - Warren Buffett on Saturday used part of his annual letter to Berkshire Hathaway Inc (BRKa.N) shareholders to defend the businesses practices of one of his conglomerate's lesser-known but more controversial operating units: Clayton Homes.
The mobile home unit, which Berkshire bought for $1.7 billion in 2003, came under fire in reports two years ago in the Seattle Times accusing Clayton of driving black, Latino and Native American borrowers into unaffordable subprime loans, and promoting a racist corporate culture.
Clayton has forcefully denied such allegations, and Buffett's annual letter came to its defence for the second straight year.
"Clayton and Berkshire have been a wonderful partnership," Buffett wrote. "Kevin Clayton came to us with a best-in-class management group and culture. Berkshire, in turn, provided unmatched staying power when the manufactured home industry fell apart during the Great Recession."
Manufactured homes are often bought by people with low credit scores and incomes, with financial profiles that Buffett said can be easily damaged by divorce or death.
He called such demographics a factor in Clayton's decision to foreclose on 8,304 manufactured housing mortgages last year, or 2.5 percent of its portfolio, at a cost of $150 million, compared with 8,444 foreclosures costing $157 million in 2015.
But he said the Maryville, Tennessee-based unit also gave loan extensions last year to 11,000 borrowers, and cancelled $3.4 million of payments from 3,800 borrowers.
About 94 percent of loan balances were current on payments, down from 95 percent a year earlier, Berkshire said.
For all of 2016, Clayton's pretax profit rose 5 percent to $744 million, mainly from its $13.3 billion mortgage portfolio.
Revenue rose 18 percent to $4.23 billion, mainly from the sale of 42,075 homes, equal to 5 percent of all new American homes, Buffett said.
Clayton accounts for about 2 percent of Berkshire's overall profit. The Omaha, Nebraska-based parent has more than 90 operating units including insurers, energy providers, food and apparel producers, furniture and jewellery makers, and a railroad.
(Reporting by Jonathan Stempel in New York)