It looks like dark clouds on the horizon for the manufactured housing market, with two well-known names cutting back or giving up on the business and another watching its asset-backed debt get downgraded.
Both IndyMac and Dynex Capital Inc. have signaled 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.
Meanwhile, 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, which primarily consist of 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 subprime mortgage industry in a less favorable light, said Pramila Gupta, a structured finance analyst with Moody's Investors Service.
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.
According to Moody's recently published report, the credit quality of the subprime home equity and manufactured housing loans of Baton-Rouge, La.-based UCFC is well below the industry average. The company, a quarterly issuer which has securitized about $5.5 billion since 1993, has remained in peril for a long time, and filed for Chapter 11 bankruptcy protection in March.
"UCFC's troubles in the subprime home equity sector are a product of its solicitation of borrowers with weak credit quality, its aggressive appraisals and its poor quality control," Gupta said.
Despite the subpar performance and additional financial troubles, investors in most of UCFC's securitized home equity deals will not suffer losses, because of the protection they receive from insurance available from either MBIA Insurance Corp. or Financial Guaranty Insurance Co.
"All investors should eventually receive full payments by the final maturity of their certificates," Gupta added.
According to the report, UCFC's performance has been worse than average for all vintages, and the unresolved problems of seriously delinquent loans and repossessed homes could lead to even poorer performance in the future.
UCFC filed to restructure under Chapter 11 in federal bankruptcy court in Wilmington, Del. The firm cited likely default on over $1.2 billion of debt, comprised of $850 million owed to approximately 23 unsecured creditors which UCFC CFO Dale Redman listed in a written statement. There was also $375 million in outstanding bonds also in doubt.
Lending Practices The Culprit
Competitors in the business sought to downplay the significance of the moves at IndyMac and Dynex, claiming both companies are in large measure victims of their operating status as real estate investment trusts, which has proved to be costly in terms of liquidity. By contrast, with UCFC they attribute its problems to very aggressive lending activities, which saddled it with lots of delinquencies.
Although agreeing that many of UCFC's problems are self-inflicted, Gupta cautions 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.
Gupta notes other manufacturers have better dealer relationships to sell repossessed units and have stepped up collection activities, giving them an edge.
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.
Officials at some of the vertically integrated manufactured housing companies added that some of the problems arise from the strong market environment that saw overall production during the 1990s increase from about 190,000 units annually to approximately 360,000 last year. - David Feldheim/AT