In the wake of the Moody's Investors Service announcement that it would increase overcollateralization levels for subordinated home equity and subprime MBS transactions containing a certain percentage of manufactured housing loans, Lehman Brothers researchers quantified that risk last week. Concentrations of such exposure in recent home equity deals, however, are trending downward, Lehman analysts report.
More recent, 2004 vintages have faired better with liquidation rates 2%-to-3% lower than previous vintages. Newly issued transactions rated by Moody's would see boosted overcollateralization requirements, based on the percentage of MH loans in deals. The rating agency change will likely have a significant effect on the new-issue home-equity ABS market, but seasoned sectors may be more susceptible to scrutiny and downgrades. "Seasoned subordinates should begin to tier, based in part, on their exposure to MH loans," according to the report.
While the MH sector itself has seen a marked decline in issuance since 2000, as the high-volume lenders exited the business or chose to fund loans on balance sheet, certain home equity lenders have continued financing land-home loans - loans backed by both the pre-fabricated home unit and the land on which it sits - and include them in home equity loan pools.
According to Lehman's statistics, up to 83% of 2001 vintage home-equity deals had land-home MH exposure, and 11% of that amount had more than a 4% concentration at origination. Those numbers have receded somewhat, as 66% of 2004 vintage home equity ABS had land-home MH exposure at origination, and 89% of those transactions had less than 2% exposure.
Due to the fact that MH repays slower than subprime mortgage collateral, the percentage of MH in home-equity ABS tends to increase with seasoning. For example, while greater than 30% of 2001 vintage home-equity ABS have more than 4% MH concentration - versus 11% at origination - roughly one in seven of those deals now has MH exposure topping 8%. Lehman researchers report that while these trends alone would not be of concern to investors, except for the fact that MH collateral performance trends have been "less than stellar" in recent years.
Using the 2001 vintage as an example, MH liquidation rates reached as high as 20% after three years, compared to 16% for home equity and 7% for Green Tree MH land-home loans. Loss severities between the two types of loans differ quite sharply, with manufactured-housing loans included in home equity ABS exhibiting average severities in the 50%-to-60% range, while the standard home equity loans are experiencing severities in the 25%-to-30% range.
Lehman analysts theorize that transactions with 4% or more manufactured housing concentration at origination could experience future downgrades at the Baa1', Baa2' and Baa3' levels. "Therefore, certain transactions with a high percentage of MH at origination could be exposed to rating actions down the road. We believe the risk of this downgrade should begin to factor into spread levels for high MH concentration subordinate securities. The risk of a downgrade above the triple-B level is lower, but will vary by deal," concludes Lehman.
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