Consulting Corner

Keen Eye for Manufactured Housing
By Mickey Storms

Though the loss rates exhibited by manufactured housing (MH) loans may have peaked during 2003, the fallout continues to generate unpleasant surprises. Radian Insurance Inc. recently announced it was taking a $96 million dollar charge to increase loss reserves on a Conseco MH MBS transaction that the company insured to $111 million. The deal is believed to be Conseco 2000-3.

At inception, Radian's loss position was senior to an estimated first loss position of $145.0 million, or 14.7% of $980 million dollar original balance. Recent loss rates for the Conseco 2000-3 on an annualized basis have ranged from a high near 14% to a low near 9%. Cumulative losses are approximately 9.5%. Analyst estimates for total lifetime losses for 2000 vintage deals such as the Conseco 2000-3 range from mid 20% to 35%. The credit performance of AAA MH MBS from 2000 vintage deals remains in the spotlight as a result.

MH performance highlights the importance of using analytical methods that fully value credit options for products in which financial credit performance is uncertain and/or highly leveraged.

At AD&Co. we rely on two techniques for this purpose, (1) Default Adjusted Spread (DAS) and (2) Expected Value (EV). Both methods estimate the mean and dispersion of loss rates, calculate scenario prices and produce a probability weighted, expected value or price for the MBS that is fully default adjusted. These methods consider the full cost of default options and the true price volatility of credit sensitive ABS/ MBS. The graph above shows an example of the EV results for a 2000 Vintage MH MBS previously rated AAA. The expected price calculated is 92-16/32 at a spread of Treasury +300 basis points.

The Radian experience highlights the importance of effective investment guidelines. Radian's news release stated that "Radian prides itself on its disciplined and prudent approach to risk management," and that "we have learned a difficult lesson on limiting our single market exposure and will apply this lesson going forward." Investors would be well advised to consider this comment and periodically review investment guidelines to ensure that only a small percentage of assets can be concentrated assets such as MH MBS, even at the AAA level. Concentrations based on ratings for asset types such as MH and sub-prime mortgages backed by loans from new, competitive, high growth businesses with high inherent credit leverage (LTV) and limited underwriting and performance history are problematic.

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