Manufactured Housing Still Causes Distress

The credit performance of U.S. structured finance securities in asset-backed, commercial mortgage and residential mortgage classes improved, but only slightly, in the first half of last year.

And manufactured housing continued to be a big drag on the performance of asset-backed securities, according to Moody's Investors Service.

The aggregate, one-year impairment rate for structured finance securities was 1.5%, slightly slower than the 1.6% impairment rate reported in December of 2003, according to a Moody's first-half 2004 update. But the impairment rate remained above the historical averages, the rating agency noted.

While manufactured housing was a driver in new ABS impairment, the home-equity sector appears more stable, according to Moody's. And residential MBS continue to fare extraordinarily well.

Securities backed by manufactured housing loans, equipment leases or aircraft leases made up more than 80% of all ABS impairments in the first half of 2004.

Moody's projects that the RMBS and HEL securities that became newly impaired in the first half of 2004 will ultimately lose a median of 16.5% of their original balances if they carried an investment-grade rating at origination, and 54.8% if they were rated speculative-grade at origination. Those expected loss rates are slightly higher than the historical averages, Moody's said.

Jian Hu, director of structured finance default research at Moody's, said the disparity between expected loss rates on investment-grade (Baa3 or higher) securities and speculative-grade securities is not surprising.

He said investment-grade securities include many AAA and AA rated securities, so the investment-grade spectrum is skewed toward deals with significant credit production.

For the structured-finance universe as a whole, roughly $2.6 billion in securities were impaired in the first half of this year, representing 0.2% of the total $1.2 trillion in outstanding securities.

The ABS sector, weighed down by manufactured housing loans and by equipment and aircraft leases, had the largest number of impaired securities, with a total of 90 in the first half of 2004. That pushed the ABS impairment rate to a record high of 1.25% in the first half of 2004, up from 1.21% at the end of 2003.

Moody's is assembling data to help predict how much damage is likely to occur when securities backed by manufactured housing loans go sour.

"It has been a problem for awhile, and we have not reported any loss-given default rate for that asset class. We plan to do so this year as soon as more data comes in," Mr. Hu said of the manufactured housing sector.

Marjan Riggi, a vice president and senior credit officer at Moody's, said there is little sign of improvement in the manufactured housing sector.

But she's more optimistic about the home-equity loan category, where ABS performance has been aided by high prepayment rates and rising home values.

"The loss rates have actually improved over the last three years," she said.

She said Moody's is concerned about some new subprime loan products that have been coming on the market, especially in high-cost areas. Some of those products may leave homeowners "a little stretched" in terms of their ability to make payments.

But for the first half of last year, home-equity performance remained strong. The HEL category within ABS posted 10 additional impairments in the first half of 2004, representing about 0.26% of all outstanding HEL securities. The HEL sector's one-year impairment rate for investment-grade securities, at 0.32%, was virtually unchanged from the end of 2003.

The CMBS sector recorded 22 impaired securities in the first half of the year, representing 0.75% of all outstanding CMBS securities, or 0.13% as a share of their original balances. Moody's noted an improvement in the CMBS sector's investment-grade impairment rate, which fell to zero from 0.23% at the beginning of 2004.

The RMBS sector added just three impaired securities in the first half of 2004, representing less than 0.1% of all outstanding RMBS securities. That equals an investment grade, one-year impairment rate of zero, where it has stood for 17 consecutive months.

Mr. Hu said the trend is likely to remain positive in the residential mortgage and home-equity sectors.

"So far, we haven't seen any investment-grade impairment in the recent vintages in RMBS or HEL. For RMBS, the last vintage that had investment-grade impairment was 1997," he said.

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