According to a report recently published by Moody's Investors Service, issuance for the first quarter in the manufactured housing sector has fallen 37% in comparison to what was seen in the first quarter of 1999. With big name players such as Conseco Inc. looking to sell its subsidiary business Conseco Finance, (formerly Green Tree Tree Financial Corp.) and Associates First Capital exiting the sector, the question on the minds of many market participants is what we will be seeing in MH going forward.
However, a spokesman for Standard & Poor's denounced Moody's findings.
"From the regular core issuers, it seems like we've seen approximately the same number of deals as we did this time last year," the spokesman said.
According to a source in banking, the troubles in the manufactured housing sector have been a long time coming.
"Unlike some other areas of ABS, there is a really close link between the manufacturing and selling process of manufactured housing and the financing of it," said an industry source familiar with the situation. "What happened ...was the shipments and sales of MH was really, really high for a couple of years."
In turn, many MH units were piling up but not actually being sold. There were a glut of units sitting out there on the lots, said the source.
Things also started going haywire on the financing side ; many began to use aggressive sales and financing techniques to help push sales.
"They sort of did some silly things," said the source. "It wasn't just one; many of these companies got involved back in 1998-99. The consequences were that losses, defaults and delinquencies have all sort of increased for these guys right across the board. Whether its Oakwood Homes Corp. or Green Tree. Some of the people thought that it was so bad that they just got out of the business."
It All Boils Down to Conseco
"The wild card really is if Conseco Finance finds a buyer and it all goes well, it's going to be positive for the whole sector," said Pramila Gupta, a senior vice president at Moody's. "If it doesn't go well, it's going to have a very negative impact because they have 38% of the market."
As far as MH securitization volume goes, it is going to be affected by what happens to Conseco as well - touching on both the lending and manufacturing industry, Gupta said.
The sector is also dealing with issues that plagued it in the past, mainly problems that occurred due to poor underwriting standards.
"Recovery rates are lower than they have been historically because there is a lot of repossessing of materials and the prices of new units are depressed," Gupta said. "Because of the aggressive underwriting there are more defaults today than we have seen in the past. Those problems have to get weeded out but we do see an effort by the major lenders to price more appropriately for risks and approve their underwriting standards."
The new underwriting standards will only affect the bonds that are newly securitized. Bonds that were performing poorly prior to the tightening of underwriting will continue to perform poorly.
Shipments in the MH sector are also lower this year compared to last year, which has presented another problem: the manufacturer makes a profit when the dealer sells the unit and it goes into the retail sector. The dealer makes a profit when it's able to unload the unit to the ultimate buyer: the retailer.
"If Conseco Finance doesn't get sold and there are growth constraints put on them, then the sale of all manufactured housing units will dramatically drop," Gupta said. "That in turn will affect manufacturers and dealers if the sale doesn't happen. The effective sell of Conseco Finance is very key to what will happen in the sector in the year 2000."
For example, if a highly rated entity purchases Conseco and decides that with all of the problems that Conseco has had with its earnings, it no longer needs to securitize to raise cheap capital, that could have a negative effect on the volume of securitizations the companies does, Gupta said. If it decides to keep the funding strategy that it has always used in the past it's really not going to have a major impact.
One industry source speculates that Conseco will remain in the business because it is such a big franchise, but possibly will downsize or restructure.
But with Conseco's future looking so hazy and Associates out of the picture, the question floating around the market is the likelihood of other industry players jumping ship.
"Given the number of people that play in the market, we already have seen a sizeable exit from the business," said one source. "I think the remaining people will stay but it will be dicey' and people will be concerned about this product for a while. I think it will be a shaky sector for the rest of this year. Everyone is really waiting to see what happens with Conseco."
Gupta feels that "if things get really bad, we could see some other lenders fold-up."