Recovery rates on manufactured housing ABS bonds have seemingly reached their nadir; moreover, investors in these bonds should expect recoveries to remain at their current low levels throughout the lives of these transactions, according to analysts at Standard & Poor's.
Recovery rates on some of these transactions have been as low as 5%, said S&P Director Christopher Conroy. "This is generally a permanent impairment as [manufacturers] continue to wholesale units to get through the repossession backlog," Conroy said, speaking at a recent investor conference hosted by the rating agency at its New York headquarters.
Repossession inventory stands at 21,000 units, or 15% of manufactured housing shipments in 2003, Conroy added.
As a testament to the scope of the problems plaguing the distressed sector, a full two-thirds of downgrades in the ABS market during the past 18 months can be attributed to the manufactured housing sector. Additionally, 80% of ABS defaults over the same timeframe were on manufactured housing bonds, S&P analysts said.
Moreover, analysts expect deteriorating performance on these bonds to continue, due in large part to the aggressive origination practices adopted in the mid- to late 1990s to build volume in a competitive landscape. During that period, many lenders failed to verify information received from dealers and brokers, while simultaneously lengthening loan terms up to 30 years. Analysts noted that loans underwritten by lenders who refrained from such behavior and stuck to the traditional 15-to 20-year products - specifically Vanderbilt Mortgage - dramatically outperformed those written by lenders that caved to competitive pressures.
Issuance is expected to be slow in the foreseeable future, Conroy said, with few new entrants in the market. Interest on the new-issue side is focused mostly on repackaging, he said.
While much of the news for investors in the sector was disheartening - particularly for those holding 1997 through 2002 vintages - some positive developments are emerging from the wreckage. Berkshire Hathaway's acquisitions of Vanderbilt and Oakwood Homes will unleash new capital, and can be viewed as a sign of confidence in the sector, Conroy said. GMAC-RFC and US Bank both have started up manufactured housing lending divisions, which may also infuse the market with some new blood.
Furthermore, lenders appear to have learned a lesson after suffering through an unprecedented number of repossessions. Underwriters are paying more attention to the appraisals they receive from brokers and dealers, and have made changes to their own internal scorecards as well, analysts said.
The consequences of lax underwriting standards have also led to a standardization of industry practices. The Manufactured Housing Institute has launched a best-practices task force as well as a voluntary certification program.
Meanwhile, installation inspections have become more thorough as manufacturers look to cut shoddy workmanship, and park property managers are taking a more active stance. Joint efforts between manufacturers and parks to find new tenants for vacant units, as opposed to having them repossessed and removed from the premises, have become more formal, analysts said.
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