Green Tree Prepayments Seen Triggering a Charge

Green Tree Financial Corp. is expected in a recent analysis to have to take an additional charge to cover faster-than-expected prepayments in its newer securitized mortgage pools.

Analysts Steven Eisman and Vincent Daniel of CIBC Oppenheimer said the St. Paul-based manufactured housing lender's 1996 loan pools are also prepaying faster than the company assumed.

Accordingly, CIBC Oppenheimer has cut its 1998 earnings per share estimate for the company from $3.64 to $2.50.

"I've concluded that the company's assumptions are inadequate," said Mr. Eisman.

Green Tree took a $150 million charge in mid-November because of rising prepayment rates in its 1995 loan pools. The move set off a massive sell- off of specialty finance stocks.

But despite the charge, the company still needs to raise its prepayment assumptions by one-third on its 1996 and 1997 manufactured housing portfolio and by 15% on its home equity portfolio, Mr. Eisman said.

Additionally, to regain its credibility among investors, Green Tree needs to double the membership of its board of directors, Mr. Eisman said.

After the December resignation of president Robert Potts, Green Tree's board consists of four members: two company insiders, a 65-year-old former Green Bay Packer, and the chairman of a medical financing firm.

A fifth director, Tania Modic of Principal Western Investments, left this year.

"We would prefer that these new directors come with backgrounds from the financial services industry," the CIBC report said.

Until the company takes the steps outlined above, CIBC Oppenheimer will not upgrade the stock, the report said. CIBC Oppenheimer has a "hold" rating on Green Tree.

The stock could trade as low as $15, the report noted, as Green Tree may be dragged down by negative year-end audits in the home equity sector.

Green Tree had no comment on the CIBC report.

Other manufactured housing executives are expecting higher-than- estimated losses for Green Tree because of its reliance on a controversial "5% down" program. The program allows borrowers to take out a loan for 95% of a manufactured home's value.

The program is risky, lenders say, because manufactured homes don't appreciate in value like traditional homes. In fact, most mobile homes depreciate in value when they leave the lot, leaving the lender with no equity to cash in if the homeowner defaults.

But increased competition has driven manufactured housing lenders to desperate measures.

Green Tree recently partnered with BonnaVilla Homes, an Aurora, Neb., manufactured housing retailer, to offer the 5% down program.

"Sales are a little slow, and this is the reason for the 5% Co-op Retail Down Payment program," reads a letter BonnaVilla sent to dealers in late November.

"This is the sort of thing that creates prepayment problems, and worse, repossession losses," one manufactured housing lender said.

Not everyone is knocking the company. Keith Menzel, analyst at John G. Kinnard & Co., initiated coverage of Green Tree with a "buy" rating Tuesday. "Despite the short-term distractions and events at Green Tree, the company is operationally strong and has consistently posted growth of at least 20%," he said.

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