Battered Green Tree Relies on Niche Dominance

Green Tree Financial Corp. has taken plenty of lumps in recent months, but a look back at its 20-plus years reveals that it has bounced back before.

The manufactured-housing loan market that Green Tree caters to has carried it through hard times, and it isn't likely to disappear, observers said. Manufactured homes now account for one of every three homes built. The market is even luring banks in: After its merger with Barnett, NationsBank is creating a massive manufactured-housing unit.

But the St. Paul lender's travails lately have been garnering much more attention than the attractions of its niche, and these woes may help explain why banks have not leaped into the market by purchasing specialists.

Most recently, Green Tree took a series of writedowns for accounting changes, decimating its stock price and shattering the confidence of loyal investors and analysts.

"The first time they announced this, it was bad," said one investor, leaving a January briefing Green Tree held to explain why it would have to restate its 1996 earnings. "The second time, it's even worse. This is pretty grim."

"They have no idea," said an investor, shaking his head. The company attributed much of the discrepancy to a computer glitch that did not accurately record partial prepayments, he noted. "Unbelievable."

Green Tree is the subject of takeover rumors. Its stock has fallen from an October high of $49.81 a share, to a low of $19 on Jan. 28, stirring talk that it could be bought at a bargain price.

Early last week, Merrill Lynch & Co., Green Tree's longtime investment banker, quietly stopped making a market in its bonds, which is often taken as a sign that a company is seeking merger advice. Last Wednesday, Merrill resumed its market activity, putting a lid on much of the merger talk.

Such speculation would have been unthinkable two years ago. Green Tree was then revered by analysts and investors for its phenomenal earnings and No. 1 market share in a fast-growing sector.

Now observers keep drawing parallels between Green Tree and Mercury Finance Corp., the subprime auto lender that imploded in January 1997 after massive accounting irregularities came to light. On Friday, Mercury announced that its longtime CEO, John Brincat, was resigning and returning part of his bonus, echoing a recent action at Green Tree.

"Green Tree was the grandfather of the industry, much like Mercury was," said a hedge fund investor. "You could make the case that all (subprime finance) companies are going there."

Despite numerous shareholder lawsuits and the embarrassment that chief executive officer Lawrence Coss-the highest-paid executive in the nation in 1996-has to return some of his performance bonus, Green Tree's survival may not be at issue.

After all, Green Tree - and Mr. Coss - have survived worse.

The manufactured-housing giant was founded in 1975 with capital from Midwest Federal Savings and Loan and run by Mr. Coss.

Midwest Federal, a Minneapolis thrift with Harold M. Greenwood Jr. as chairman, took Green Tree public in 1983, offering 1.2 million shares.

By 1986, Green Tree was the leading financer of new manufactured homes, with nearly $1 billion of financings that year. In 1987 it bought out its parent company. That's when Green Tree's development hit its first big bump. It found itself embroiled in litigation against Midwest over a loan purchase contract.

Midwest alleged that the contracts contained misleading arrangements, that Mr. Coss was "grossly overpaid," and that auditor Touche, Ross & Co., under managing partner Robert D. Potts, was conspiring with Green Tree to defraud the thrift.

In January 1989, Midwest's new auditors told the then-failing thrift that it should write off $200 million of servicing for manufactured-home loans originated by Green Tree-a move that would make the thrift insolvent.

Midwest was taken over by the Federal Savings and Loan Insurance Corp. in 1989, and in 1992 Green Tree was forced to repurchase loans it had sold to the thrift. Mr. Greenwood and other Midwest executives were sentenced to prison and ordered to pay multimillion-dollar fines for conspiring to hide losses.

It was then that Green Tree management orchestrated a colossal turnaround. For the succeeding five years, Green Tree's stock ranked among the top performers in the nation. In 1992 its public debt was upgraded to investment grade, and by 1993 finance volume had doubled, to $2.7 billion.

In 1994, it hired Touche's Mr. Potts as executive vice president of administration.

The company did so well, in fact, that Mr. Coss was granted the plum contract that garnered so much ill will from investors during the recent debacle.

"It certainly is disappointing," Mr. Coss said in a prepared statement about the company's 1996 and 1997 earnings adjustments. "However, these adjustments should be viewed in the context of the extremely detailed and thorough review that has been completed. Green Tree and its shareholders can now proceed with higher confidence."

Mr. Coss said he expects the company's managed receivables will surpass $32 billion in 1998. Green Tree has hired an outside consultant to help it find credible, experienced members for its board of directors, he said, and is moving on. "We remain sharply focused on continuing our history of success in building a unique franchise position in the finance industry."

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