The Conseco Finance servicing fee restructuring delivered its first visible blow to the industry last week. Double-A rated guarantor Radian Asset Assurance, acting as reinsurer in a deal wrapped by Radian Insurance, announced it would likely pay claims amounting to $111 million tied to a privately placed 2000 vintage Conseco manufactured housing deal.

During an investor conference call last week, Radian Group's CEO Frank Filipps said that the servicing fee change "has cost the waterfall about $44 million to date. That $44 million could have been in front of our loss, in a situation that did not result in a shift in subordination."

Meanwhile, all three rating agencies have taken action on the outstanding Conseco/Green Tree manufactured housing bonds over the past few weeks. Fitch Ratings, which downgraded roughly $10 billion worth of bonds on Thursday, stated in a release, "excess spread has been reduced since the bankruptcy primarily due to the increase in the amount and priority of the servicing fee."

Early last year, at the adamant protest of bondholders in Conseco/Green Tree manufactured housing ABS, the bankruptcy court allowed the fee restructuring as part of CFN Investment Holdings' purchase of Conseco's MH business and servicing platform. In March, CFN succeeded in moving the servicing fees from the bottom to the top of the waterfall, and increasing the fee from 50 basis points to 150 basis points, with a scheduled 12-month step-down to 115 basis points.

Servicing fees are generally subordinated in the securitization waterfall, aligning the servicer's interests with the performance of the assets in the deal, an integral strength to the ABS structure. The problem with Conseco, however, was that, as it approached bankruptcy, its manufactured housing servicing platform had no prospects at profitability, making it a difficult asset to sell to a third party.

CFN Investment, which is now called Green Tree Investment Holdings, was a purchasing group led by Fortress Investment Group, Cerberus Capital Management and J.C. Flowers & Co.

Radian's woes

At the first sign of significant deterioration, Radian had considered enforcing a servicing transfer, but thought a transfer might have disrupted the transaction further, rather than leaving it with the existing platform. This was before it became apparent that the fee structure would be amended.

While Standard & Poor's placed Radian Asset's insurance rating on review, the parent company has already infused RAA with an additional $65 million, and reaffirmed its commitment to the financial guaranty business, though it has strategically decided to withdraw from writing new business in the MH sector.

Radian added $96 million in loan loss reserves to cover the claims it anticipates in the Conseco manufactured housing transaction. Radian Insurance wrapped three tranches at varying credit levels (triple-B to double-A), then reinsured by Radian Asset Assurance in 2001. The company expects to pay out the entire $111 million in exposure to the transaction. The $96 million increase will result in an after-tax charge of $62 million to Radian Guaranty's earnings. Radian had already had it loss reserves at $15 million against this deal.

Through Radian Insurance and RAA, the firm has exposure to $140 million in additional MH. Radian Re, another reinsurance arm, has $255 million in MH exposure, though there is no expectation of further losses.

The bulk of the additional MH exposure is through two large deals, as well as a handful of smaller transactions. The two large deals could suffer $81 million and $97 million in deterioration, respectively, before Radian were to take a loss. This would translate to loss rates of nearly 50% each of these transactions. Greenpoint Mortgage is apparently servicing these deals.

By contrast, the CFN-serviced deal, for which RAA is taking a hit, has a cumulative loss rate of just 9.7% and a monthly default rate of 1%.

Separately, last week Moody's Investors Service placed two transactions on watch for potential downgrade for their association to Radian Re, which provided reinsurance on the deals. Moody's placed Radian Re on watch for possible downgrade on Dec. 22. Interestingly, capital levels are not as much of a factor as competitive concerns from newcomers, realignment of relationships and general changes in the reinsurance market, which are exacerbated because there are so few players, a Moody's analyst said.

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