Earlier this year, Origen Financial met the rating agencies' tough new stance on credit enhancement in the manufactured housing sector with a fresh infusion of equity capital. Since February, the lender has been in the market twice, and plans to maintain that pace going forward.
Prior to the $200 million 2004-A offering completed in February, Origen had been absent from the term ABS arena for two years.
"The rating agencies had moved so far away from previous securitizations in terms of subordination levels," said Mark Landschulz, executive vice president of portfolio management at Origen. "We were not prepared to retain so much of our own equity in a transaction."
In 2002, enhancement levels were set at 4% of overcollateralization initially, growing to 7%. For the 2004 transactions, that figure had been reset to 16%, a gross misinterpretation of risk, in Landschulz' estimation. While in hindsight, four percent was probably too low, improved collateral performance and better underwriting standards should help offset the uninspiring historical performance in the sector, he said.
In order to contend with escalating overcollateralization levels, Origen spent the past two years raising cash via two private equity offerings and an initial public offering in May.
"We raised almost $230 million in equity and converted to a REIT. We are now positioned as a corporate entity to retain substantial pieces of equity in our bond securitizations," Landschulz said.
Beginning in mid-2001, Origen began a series of enhancements to its underwriting standards. One of the hallmarks of the revamped program is the verification of down payment information by insisting on proof that the payment has, in fact, been made. "This is something that was never done in the manufactured housing industry," Landschulz said.
The lackadaisical approach to down payments in the past had allowed dealers to manufacture down payments by raising the sales price as shown to lenders while charging the customer significantly less.
Additionally, Origen is taking a more exacting approach to verifying underwriting conditions, such as over-time income. "We have effectively stopped waiving any underwriting conditions, which used to be typical in the manufactured housing marketplace, particularly when competition was fierce."
It would appear that the more stringent underwriting standards are paying off, with 2002 vintage loans performing substantially better those written during the preceding two years. To date, 3.35% of 2002 loans have defaulted through 10 quarters, compared with 10.35% and 11.07% for the 2001 and 2000 vintages, respectively, Landschulz said.
There has also been a shift in the geographic distribution of the collateral backing Origen's most recent ABS offerings. "We are concentrating our lending more in California and the West and Upper Midwest," Landschulz said. "We are doing less business in Texas and the Southeast."
Landschulz anticipates coming to market on a twice-yearly basis for the foreseeable future, depending upon origination volume. While he did not offer specific numbers, he did say that origination was up 40% year over year.
"Our primary access to capital will be through the securitization market. It is important to build a long-term program and have a solid stable of investors," Landschulz said.
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