The long-troubled loan originator Conseco Inc. is mounting a so-far successful return to the securitization markets following a dismal first quarter, but some of its proposed actions have market participants buzzing.

Lehman Brothers Inc. last week announced that it would bring a $705 million offering of manufactured housing loans to the asset-backed market, in what may be the first in several deals to liquidate some of Conseco's roughly $3.5 billion portfolio.

But questions remain about the ultimate fate of the portfolio. Lehman, which has become Conseco's financial adviser for the disposal of its Conseco Finance Corp. unit (formerly known as Green Tree Financial Corp.), has purchased only about $1.3 billion in loans, or less than half, of the existing CFC portfolio. Many market observers said that while Conseco looks to sell off the remainder in order to right its operations, it is unclear who would be willing to take on more Conseco loans.

One of the more vivid rumors to hit the Street last week was that Conseco was looking to sell more than $1 billion of its loans to government-sponsored-agency Fannie Mae. That possibility had mortgage and agency pros puzzled, as the checkered past of Conseco and Green Tree would seem to violate many quality standards that the federal agency has set up for purchasing loans for its portfolio.

Fannie Mae declined to comment for this story, saying that it never commented on specific actions taken by its portfolio managers.

But other market players were more vivid in their opinions. "Conseco breaks all the rules on Fannie Mae's guidelines," said one securitization pro. "For one, they have actively originated Section 52 high-rate loans in the past and have encouraged borrowers to take out credit life policies and fund single premium payments." Both types of loans seem to have no place on a federal agency's books, he argued.

Other rumors had GE Capital or Lehman possibly buying up the remainder of the Conseco portfolio.

The problem for an issuer taking on Conseco loans is that in order to resecuritize them in the market, there will be at least a 20 basis-point price concession needed to sell the deal to investors, traders said.

"They're going to be paying a tariff for the Conseco name," one trader said. However, he noted that the liquidity of the bonds has never entirely dried up, thus increasing the chances of a deal's success. "Within five business days of the announcement (that Conseco would post much lower first quarter earnings than expected), Conseco bonds were clearing, but only at the right price."

Lehman's anticipated strategy of offering several Conseco securitizations, rather than dumping the entire $1.3 billion into an already-battered ABS market, received praise from traders as the best move possible in current conditions.

Conseco spokesmen have said they anticipate selling the rest of the former Green Tree operation by the third quarter of this year. Erratic underwriting standards and weak earnings led to the demise of Green Tree in the last year, and have subsequently have hurt Conseco, whose bonds were downgraded last month by every major rating agency because of the controversy. - Christopher O'Leary

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