On the brink of bankruptcy, Conseco Inc. is jangling the nerves of its creditors as well as its competitors, particularly those in the manufactured-housing market.
Because it is one of the largest originators and servicers of these loans, Conseco Finance plays a big role in everything from pricing to how repossessed homes are sold.
As the market reacts to Conseco's problems, companies that rely on asset-backed securities to finance their manufactured-housing loan fundings face higher costs.
"In the last several weeks spreads have widened in anticipation of bad news," Ronald A. Klein, the president and chief executive officer of Birmingham, Mich.-based Bingham Financial Services Corp., said in an interview.
Other competitors worry that to raise cash Conseco may try to sell its inventory of 16,700 repossessed homes, further depressing prices in an industry that has been in a three-year slump.
If the Carmel, Ind., company "suddenly decided to dump those, it would be tough for the market to absorb those homes without driving the prices way, way down," said Don Glisson, the president of Triad Financial Services Inc. in Jacksonville, Fla.
And if Conseco simply quits the market, a big source of financing for prefab-housing retailers would evaporate.
Carl Koella, the vice president of investor relations at Clayton Homes Inc., a manufactured-housing builder in Maryville, Tenn., said Conseco finances many independent retailers. "Anything that is bad for the independents is consequently bad for our manufacturing group," Mr. Koella said.
Despite the potential difficulties, some sources focused on the potential benefits if Conseco departs. The noted, for example, that prices firmed and lending standards tightened in recent years as a number of large players - including Associates First Capital Corp. (later bought by Citigroup Inc.) and CIT Group - abandoned the business.
Though still a dominant force, Conseco's share of the pre-fab housing business has shrunk from 45% of the market five years ago to under 20% today. Mr. Glisson, who associates Conseco with the lax underwriting standards that he blames for much of the market's problems, sees an advantage in its complete exit.
"They would be gone forever," he said. "We can all play on a level playing field, and we don't have to worry about the guy who was buying so deep down the credit ladder."
As the insurer and consumer finance company struggles, rumors are flying over which assets might be sold to help satisfy its crushing $6.5 billion of debt. For Conseco Finance's manufactured-housing business, speculation has focused on Minneapolis-based GMAC Residential Funding Corp., the leading issuer of subprime mortgage-backed securities.
The General Motors Corp. unit is "in some types of financing for the development of manufactured-home communities but … not in the retail loan business," said James Clifton, vice president of economics and finance at the Manufactured Housing Institute in Arlington, Va., the industry's trade group.
"There are a lot of rumors that they are looking to get into it," he said, noting that Conseco Finance's pre-fab housing division is also in the Minneapolis area.
GMAC Residential Funding said it would not discuss the rumors.
Conseco was a successful life insurance company until it entered the manufactured-housing market in April 1998 with the purchase of Greentree Financial Corp. The market had been booming, but 1998 turned out to be its peak. Shipments hit 372,000 that year, having begun the decade at 188,000. Last year 193,000 pre-fab homes were produced, according to Mr. Clifton.
Little more than a year after the purchase Greentree ran into trouble as credit losses began rising, according to William Ryan, an analyst with Portales Partners LLC in New York. Conseco injected about $1 billion, but the business continued to founder.
"They bought a company they didn't understand, a business they didn't understand, and that was where it started to go downhill," said analyst Colin Devine of Citi's Salomon Smith Barney in an interview Friday.
Two key executives, including Conseco founder Stephen Hilbert, were ousted in May of 2000. Gary Wendt of GE Capital fame was hired that June to turn Conseco around. His plan: gradually reduce debt through revenue growth and asset sales, including the pre-fab housing division.
But on Aug. 9, Mr. Wendt announced that Conseco had suspended payments to bondholders and hired Lazard Freres & Co. to renegotiate its debt. Five days later he said that Conseco would declare bankruptcy if creditors did not agree to make concessions and restructure the debt.
In an interview Friday, Chuck Cremens, Conseco Finance's president and chief executive officer, insisted that the unit's future remains bright.
"When you look at Conseco Finance it's a company that has a couple billion dollars of equity on its balance sheet, earned $40 million on a pretax operating level this quarter, and by all estimates it's pretty self-contained operationally and financially and is performing pretty well," he said.
"No matter what form the restructuring takes, even if it ends up in a bankruptcy I don't think it should have a direct impact on Conseco Finance," he said.
Mr. Cremens joined the company Jan. 1 from WMF Group Ltd. in Vienna, Va., where he was the president and chief operating officer. WMF is now a unit of Prudential Insurance Co. of America and the largest originator of Fannie Mae and Federal Housing Administration multifamily loans. Mr. Cremens, 48, has 16 years of finance experience with the former Bank of Boston and was the president of Aetna Inc.'s real estate division.
According to Conseco's second-quarter earnings release, net credit losses on manufactured housing loans have risen steadily, to 2.23% of its average portfolio on June 30 from 1.25% in December of 1999.
But Mr. Cremens said that Conseco Finance will not stop financing the homes.
"It is a drag at this point," he acknowledged, but he added that the loans' portion of the unit's overall originations is down to 15%, from 60% in 1999.
"We're now much more of a private-label credit card company and a home equity company on an originations basis, and therefore, over time, we're committed to manufactured housing, but it's going to be a much, much smaller piece of the company," he said.
Home equity lending is also a trouble spot, though, something Mr. Cremens attributed to the slow economy.
"Our type of customer is one of those that gets hit a little bit harder than the average guy, so when you have the kind of economy that we've had over the past 12 months, we get whacked a little bit," he said.
Conseco reported a second-quarter net loss of $1.3 billion. Before a $2.9 billion writedown of goodwill, operating earnings totaled $1.3 million. Of the total, Conseco Finance kicked in $40.6 million, up 23% from the first quarter but off 50% from the year-earlier period.
The New York Stock Exchange halted trading of Conseco's shares when it stopped paying interest on its bonds. The company's share price has dropped to 35 cents from $9.46 a year ago.
