It looks like dark clouds on the horizon for the manufactured housing market, with two well-known names cutting back or giving up the business.

Both IndyMac and Dynex Capital Inc. have signalled their intentions to exit the business, either in part or in whole. Dynex has hired Lehman Brothers as an advisor for the sale of its Dynex Financial unit, the fourth largest originator and servicer of manufactured housing loans in the U.S. in 1998.

IndyMac officials said they have decided to discontinue lending programs through manufactured housing dealerships that once provided two-thirds of the company's monthly volume. It will retain its small direct lending activities, primarily refinancing and resale contracts.

This news hits the business at a bad time. Escalating problems experienced by originator United Companies Financial Corp. put the entire industry in a less favorable light, said Pramila Gupta, analyst with the structured finance group at Moody's Investors Service.

Competitors in the business sought to downplay the significance of these two moves, claiming both companies are in large measure victims of their REIT operating status, that proved to have been costly in terms of liquidity. By contrast, they attribute UCFC's problems to very aggressive lending activities, which saddled it with lots of delinquencies.

Although agreeing that many of United's problems are self-inflicted, Gupta said that the industry as a whole has benefited from the strong economic environment, and if the economy slips "this group will be the first to be hit."

For the most part, buyers of manufactured homes are the low end of the blue-collar work force and suffer the most from economic dislocations.

She said the aggressive lending practices of 1997 and 1998 will hurt the industry as the loans season, if they do not tighten up on their oversight of the loans.

Moody's has just downgraded $585 million of asset-backed securities issued by UCFC, based primarily on the weaker-than-anticipated performance of its manufactured housing loans, high level of delinquencies and repossessions and low recovery rates. Gupta notes other manufacturers have better dealer relationships to sell repossessed units and have stepped up collection activities.

However, she cited a recent scathing report of lending practices in the industry as evidence of the potential for greater pain. While she has no other issuers or issues on her watch list at present, she said the sector is always under scrutiny.

Meanwhile, officials at Lehman declined to comment on their efforts on behalf of Dynex noting they are still in the early phase of discussions. Market sources, however, said they believe there is strong interest in acquiring the portfolio. - David Feldheim

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