Last week both Fitch Ratings and Standard & Poor's Corp. downgraded a number of Conseco Finance home equity and manufactured housing transactions, following the default on certain unsecured debt obligations by Conseco. Fitch also cut the ratings of the previously triple-A rated senior tranches of the 1999-4 through 2001-1 M.H. transactions to double-A.
In a report, Lehman Brothers broke down the three main assumptions that Fitch made around future performance. Lehman said that Fitch ramped up loss severities to 90% from 65% over the next several years and then reduced it back down to 65%.
Delinquencies to the current pool's principal balance were increased by 20% to account for loan extensions and the 50 basis point servicing fee was moved to a senior position in the payment priority and then increased it to 100 bps over time, considered a necessity to lure any potential suitors for the portfolio, thus decreasing available excess spread.
Lehman explained that the pattern followed by Fitch is similar to the analysis made in the Aug. 19, MBS & ABS Weekly Outlook. At the time, Lehman showed that the credit enhancement relative to performance was worse on later, 1999, 2000, and 2001, vintages. In fact, the tranches Lehman singled out were the only triple-A senior bonds downgraded.
On the delinquency assumption, it is crucial to note that there is no servicer advancing in Conseco M.H. ABS. Lehman states that regardless of whether the loan is extended or delinquent the cash flow remains unchanged, "in both cases the trust receives no money from the loan that month."
The researchers noted that they had some difficulty understanding Fitch's assumption that the doubled servicing fee being moved to senior in the waterfall, as this would require 100% bondholder consent. Lehman, on the other hand, believes the servicing fee will remain at 50 basis points, because "given current valuations, subordinate bondholders may not be willing to fund this fee increase," Lehman adds.