Reports surfaced last week that the Federal Home Loan Banks purchased the entire $46.25 million triple-A-rated A1 class of Conseco Finance 2002-2 manufactured housing paper, leading to speculation over the future investment strategies of the government-sponsored entities. With mortgage rates expected to continue declining and agencies feeling the pressure to find yield in alternative investments, sources speculated that the troubled manufactured housing sector will see increased interest from the government-sponsored entities.

While unconfirmed, buyside talk that the purchase of triple-A Conseco manufactured housing paper had some participants theorizing that this was the first step in familiarizing themselves with the collateral, prior to making a push into that sector. Mike Ciota, in the FHLBanks Office of Finance would only confirm that the bank's $200 billion-plus investment portfolio "contains several billion of manufactured housing securities, all rated triple-A, which is permitted in the charter."

In late 1999 the GSEs announced that they would increase their focus into the underserved non-prime markets - prompting critics to loudly object - but made no mention of the manufactured housing sector. The move came amid widespread profitability concerns among the member lenders, as the internet and a refi wave were combining to divert business from traditional mortgage lenders.

Neither Fannie Mae nor Freddie Mac returned calls seeking comment.

In addition to the standard conforming mortgage collateral, the agencies are permitted to purchase subprime home equity as well as manufactured housing-backed securities, as long as they are rated triple-A. Should the securities see a downgrade, an agency would have to sell its inventory.

The resulting reverse inquiry demand means that the bulk of an offering can be spoken for prior to the marketing period, which has had a tremendous impact on home equity spreads. As the home equity sector is currently roughly 70% ahead of its record 2001 pace, with approximately $60 billion sold in the first five-and-a-half months of the year according to JPMorgan, spreads are currently inside where they were last June. Most analysts point to the sector, particularly out on the curve and down in credit, as having the best relative value.

Any potential shift into manufactured housing ABS would bring considerable risk to the GSE portfolios, however, with debate currently widespread over the general health of the sector. Most analysts agree that should leading lender Conseco Finance be forced out of business, finding a servicer for the outstanding Conseco supply would be a harrowing task.

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