ST. PAUL -- The year was 1988 and it was a bad one for Green Tree Acceptance.

The company's former parent, now-defunct Midwest Federal Savings, filed suit against Green Tree, charging the company with bilking Midwest out of $100 million on a $188 million sale of mobile-home loans.

The suit left many wondering whether the company could survive. Then the Resolution Trust Corp. took over Midwest, instantly eliminating half of Green Tree's loan servicing income.

By 1989, Green Tree stock had fallen below $7 per share, from a 1987 high of $37.

'Good Thing Going'

Those were dark days for St. Paul-based Green Tree Financial Corp. A nasty feud erupted between chief executive Lawrence Coss and Midwest boss and Green Tree founder Hal Greenwood, which company officials don't want to talk about.

Mr. Coss declined to be interviewed for this article. "We've got a good thing going, and he doesn't want to publicize it," says chief financial officer John Brink.

But over the past five years, Green Tree's management team has tightened its focus on a handful of boom niches, which have delivered impressive returns. A 1992 settlement with the RTC cleared the way for a significant turnaround.

The company has done so well, that Mr. Coss last year raked in $14 million in salary and bonuses. So well, that $100 invested in Green Tree at the end of 1984 was worth $1,580 nine years later, ranking its stock among the top performers in the nation.

In second quarter earnings reported Tuesday, Green Tree posted net income of $44.2 million, a 52% increase from yearago results. Annualized return on equity equaled approximately 28%.

Loan originations shot up 50% from the second quarter of last year, hitting $1.03 billion. Meanwhile, the company's loan servicing portfolio grew by $700 million, totaling $8.3 billion at June 30.

Niche Leader

Today, Green Tree is the nation's largest lender in the fastgrowing manufactured housing market, with 27% market share. With the knockout second quarter results, the company is poised to break its 1993 record of $2.7 billion in loan originations.

"They know what they're doing," said Beverly Schmidt, coowner of First Home Systems, a Blaine, Minn., seller of mobile homes that regularly uses Green Tree to finance purchases.

Green Tree also turns a tidy profit as the world's fourth-biggest issuer of asset-backed securities. It has sold $8.5 billion over the past several years, making money on the spread between what borrowers pay in interest rates and what it pays investors who buy its paper.

In March, the company completed one of the first known securitizations of excess servicing rights.

Stock Has Soared

The results have been an investor's dream. In 1993, Green Tree's net earnings grew by 111% from the previous year, while equity rose 83%. Assets were up 49% for the same period, to about $1.7 billion.

The stock has soared, hovering in the $57 per share range, before it split two for one last month, and analysts gush over its future.

"They're a dominant player in a market that's growing," said Patrick Burton, an analyst for Piper Jaffray Inc. He sees "steady growth" in earnings per share of 20% a year over the next several years. "If they were a retailer, you'd call them a category killer."

The credit for Green Tree's recent run goes to Mr. Coss. The 55-year-old former car salesman arrived in 1975 to show $3.5 billion-asset Midwest, then a traditional housing lender, how to manage higher-yielding trailer-home loans.

Respected by industry analysts and the dealers he serves, Mr. Coss has a reputation as a hard-driving manager, who has, in the past, quickly chewed through executive teams. But the crew on today has stuck around, due to the company's success.

At a recent conference, Green Tree officials used a battery of statistics to promote their niches to investors. In 1993, about 90% of Green Tree's loan originations came from new manufactured housing, a market that is expected to grow by 20% annually over the next several years.

There are 7 million manufactured homes in the United States today, accounting for one in every four new homes built.

Betting on Price

The market is not what it was in decades past, when manufactured housing conjured up images of dirty, low-rent trailer parks. Today's homes are, to all appearances, regular houses. They are popping up in neighborhoods across the country, featuring spacious bedrooms, dining and living areas with vaulted ceilings, and fully equipped kitchens.

Indeed, the biggest difference between manufactured and sitebuilt homes, Green Tree officials say, is the price: The average manufactured home costs about $22 per square foot to make, compared with $53 per square foot for a site-built home.

"These units are built in factories ... efficiently in large quantities," Mr. Coss told investors. "They're not affected by weather. They have very efficient production. They are good quality products.

"It's affordable housing," he added. "That's a big issue in this country today. There are a tremendous amount of people that cannot afford a site-built home."

50-State Network

Making inroads into the right market is half the battle. The flip side is working it to your advantage.

Green Tree provides point-of-sale financing through a network of 2,800 dealers in all 50 states, and 43 offices nationwide. That is supplemented by a centralized service center in St. Paul, which stays open evenings and weekends to handle applications.

The company uses 10 separate proprietary credit scoring systems, based on geography, and geographic balance to maintain a loan portfolio with enviable quality.

"No more than 10% of Green Tree's loans come from any one state. No more than 1% comes from one ZIP code. No more than 1% comes from any one dealer," Mr. Brink, the chief financial officer, said. "All of that helps insulate Green Tree against any economic downturns in any one area."

A 'Very Tough Bank'

As of the end of March, only 1.3% of Green Tree's accounts were more than 30 days pastdue, compared with an industry average of about 4%.

"They're a very tough bank," said Ms. Schmidt, who used to buy repossessed mobile homes from Green Tree, but now often finds the company has none. "They reject a lot of loans that we think should be approved. But they're doing well, so you can't knock them."

But with 27% of the market already locked up, Mr. Coss knows it will be difficult to make more big gains in manufactured housing. So he has unleashed Green Tree's proven formula on other markets - most notably the home improvement and recreation (motorcycles, boats, etc.) loan areas, as well as used manufactured homes.

The company also provides physical damage and term life insurance to nearly 180,000 Green Tree borrowers.

Rate Risk

Aside from credit risk, the biggest vulnerability for a company like Green Tre is interest rate risk.

Green Tree has the problem licked as best it can with its aggressive sales of loan-backed securities. The sales provide cash to the balance sheet and free up more money for loans, while reducing the company's exposure to interest rate variations.

The company has been a pioneer in issuing such paper, making more than 70 sales since 1986. One analyst credits Green Tree for "changing the funding dynamics of the business."

"All that Green Tree originates are fixed-rate contracts," Mr. Brink explained. "We sell those contracts on the secondary market, and lock in the differential.

"Basically what we have done is to take out the interest rate risk, because we've locked in that spread," he added. "And we've taken out the future funding risk, because we're selling pass-through securities."

Flush with Cash

The pace of those sales has increased recently, thanks to rising interest rates, Mr. Coss said. In the second quarter, Green Tree held three sales of securities backed by manufactured-housing loans.

In March, Green Tree made an innovative move, with a public sale of $493 million in excess servicing receivables.

The irony i all this is that Mr. Coss says he would be happy to carry a higher loan inventory. With more than $700 million in liquidity, Green Tree's balance sheet today is flush with cash.

"We would like to carry more of these loans for a longer period of time," he said. "But we're not inclined to do so in certain interest rate environments."


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