Manufactured Housing Still a Drag on MBS Performance

While upgrades of bonds backed by residential mortgage loans continue to outpace downgrades, some aspects of the housing-related securities market do not look so bright.

Manufactured housing bonds continue to be the weakest segment of the asset-backed securities market, according to rating agency Standard & Poor's.

In a conference call last week, S&P analysts said they see little hope for a recovery in the manufactured housing sector anytime soon. Frank Trick of S&P said that manufactured housing "was a major catalyst" for an increase in ABS downgrades during the third quarter, accounting for 160 of the 209 ABS downgrades that were initiated.

Manufactured housing has accounted for 60% of downgrade activity in the third quarter. Over the past 11 quarters, manufactured housing deals have accounted for 77% of ABS downgrades. Mark Risi of S&P said that manufactured housing has suffered as a result of a number of factors.

In 2001 and 2002, a "three-headed monster" started taking a toll on the manufactured housing business, Mr. Risi said.

Mortgage rates declined, making single-family housing more affordable than it had been. At the same time, apartment vacancies rose, making apartment rentals cheaper. Those trends increased competition for potential manufactured housing customers. At the same time, new issuers of securities backed by manufactured housing were entering the market.

"The underwriting suffered somewhat at that time," Mr. Risi said.

The result was trouble for manufactured housing securities, with issuers such as Conseco and Oakwood filing for bankruptcy protection. The manufactured housing sector continues to suffer from high delinquencies and high loss severity rates, he said.

"We have seen no indication that there is going to be a change in the performance of these transactions," Mr. Risi said. Among RMBS transactions, S&P reported 228 upgrades and 28 downgrades during the quarter. The upgrade-to-downgrade ratio was about 8-to-1. But analysts pointed out that for the first time since late last year, there were several downgrades involving prime credit quality RMBS.

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