MH Recovery Uncertain

Analysts at Fitch Ratings say that while they are seeing some positive signs, investors are still uncertain about whether or not the manufactured housing market has hit bottom.

"Fitch Ratings believes that the industry may be past its worst period, but it will take time for the market to fully recover, causing MH ABS to continue to perform poorly in 2004," analysts Jenine Fitter and Kathleen Tillwitz said in a recent report.

Among the positive developments noted by Fitch:

* Berkshire Hathaway's purchase of Clayton Homes, as well as its pending purchase of Oakwood Homes from bankruptcy.

* Fortress Investment Group, Cerberus Capital Management and JC Flowers also purchased Conseco Finance Corp. out of bankruptcy last June.

* Fannie Mae's recent announcement about a new manufactured housing loan program.

But the news is not all rosy, according to Fitch.

For instance, despite Fannie Mae's recent commitment to finance more manufactured housing loans with as little as 5% down, federal regulators last week said that Fannie Mae may have to restate prior years earnings because it failed to apply the property accounting for impairment charges against its manufactured housing loan portfolio. (see related story below)

"Despite a notable reduction in repossession inventory throughout the industry, inventory levels remain relatively high by historical standards. Homes continue to be liquidated through wholesale channels, causing recoveries to be extremely low," the Fitch report said.

But the industry remains fraught with "headline risk," Fitch noted. Recently, Radian Asset Insurance announced a $96 million writedown related to insured manufactured housing bonds.

Other examples include the Federal Home Loan Bank of New York's $183 million loss in September of last year due to investments in manufactured housing ABS and Fannie Mae's highly publicized $9 billion exposure to MH securities, Fitch Ratings said. Fitch noted that it has continued to take negative rating actions on MH bonds.

"For many issuers, the losses have far exceeded the level originally expected," Fitch said.

Fitch expects lifetime losses for MH bonds in the 20% to 30% range, depending on the issuer. For some issuers, however, losses are now expected to reach 35% to 40%.

When these bonds were initially rated, the base case loss expectations ranged from 8% to 12%. Loss severity in the case of default also has been higher than expected.

In addition, changes in loan servicing have resulted in continuing changes in servicing practices and, as a result, volatility in delinquency and default rates. Changes have affected loan servicing extension and loan assumption policies as well as liquidation strategies.

Fitch said that MH loan servicers have been hamstrung by "aggressive underwriting during a period of heavy competition and overbuilding."

New lenders that entered the business during the 1990s gradually discovered that manufactured housing is a unique asset class that requires specialized loan servicing.

For instance, relationships with manufactured home dealers are critical for liquidating real estate-owned, Fitch said.

The list of companies that have exited the manufactured housing loan business is a long one, starting with the prominent bankruptcy of Conseco Finance Corp.

Other companies that have closed down their manufactured housing loan origination operations include IndyMac, GreenPoint Credit, Bombardier Capital Mortgage, United Companies Financial and Access Financial.

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