real-estate ABS; wary of MH collateral

PARADISE ISLAND, Bahamas - Analysts and researchers at the real-estate ABS researchers' roundtable held at ABS East 2002 were generally positive on the sector, noting improved credit fundamentals and discounting the existence of a nationwide housing bubble.

Karen Weaver, managing director at Deutsche Bank Securities, said that there may be some housing bubbles in certain regions, but if home prices were to drop steeply in these areas, there is sufficient regional diversity in home-equity pools to offset the decline.

Weaver noted that home prices are driven by demographics, homeowners' income and interest rates, adding that some regions are doing better than people seem to think. In San Francisco, for instance, though home prices have skyrocketed, income affordability has remained constant.

She said that even if interest rates were to rise, it would have only a slightly negative impact on the sector. A sizable jump in interest rates and no corresponding rise in income, however, would present a more difficult scenario, although income affordability has remained more or less consistent in general.

Lehman Brothers Senior Vice President Arthur Chu identified certain factors benefiting the real-estate sector, including an improvement in fundamental business models and increased proficiency among Lenders in accessing the whole loan and NIM markets. Another factor, according to Samir Bhatt, vice president at Credit Suisse First Boston, is credit migration, which has not only served to increased volume but has improved credit quality.

Echoing the theme of continually improving real-estate fundamentals, Ivan Gjaja, a director at Salomon Smith Barney, said that collateral has improved across the board, with FICO scores up and LTVs down. He explained that robust volume has allowed originators to be selective.

JPMorgan Securities Managing Director Christopher Flannigan said that he considers serial refinancings to be a benign phenomenon, pointing to predatory lending laws as the issue to monitor.

Manufactured housing

A big topic in most of the real-estate-related panels was manufactured housing and the sector's child gone-awry, Conseco Finance (see story p. 8). Analysts see more downgrades are on the horizon for Conseco manufactured housing deals. Salomon's Gjaja cited the very high level of repos in Conseco's portfolio, comparing the company to Greenpoint Mortgage and Bombardier. When Greenpoint exited the sector, he said, there was a sharp drop in repo inventory. Bombardier's repo inventory also came down. Other analysts on the panel said that Conseco's failure will seriously impact recoveries on a widespread basis - a high-risk situation that would take some time to resolve.

The outlook for the manufactured housing sector, in general, is rather dim. According to Deutsche's Weaver, as people continue to underwrite and add repossessed manufactured housing units (typically associated with lower quality borrowers), history may repeat itself in a Conseco-like situation a year or two down the line. A better business model would be to finance new MH units.

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