Last week Credit Suisse First Boston introduced a new manufactured housing default rate curve (MHD), showing that MH pools tend to have a front loaded spike in default rates, slowly trending down during the third year, and leveling off to about 60% of the peak.
CSFB asserts that using its curve can yield more precise loss estimates.
“A lot of time, people use the current CDR,” said Jeff Zhang, of the ABS research group at CSFB. “If the deal is three years old and you use current CDR, you’ll probably overstate the default rate.”
In this month’s ManuFacts, CSFB researchers argue that, “Simply extrapolating current default rates should result in an understatement of losses for deals early in the MHD curve and overstate losses for deals that are at the peak of the MHD curve.”
The pools improve with seasoning because MH borrowers generally do not prepay. As the pool ages, the low quality borrowers drop out, and the pool’s average credit improves.
“Many investors know that MH doesn’t have pre-pay risk,” said Rod Dubitsky, real estate ABS analyst at CSFB. “But they may not think about the implications this has in seasoning. Lack of refinance-ability has a clear impact on prepayments, but less clear an impact on the credit over time.”
Interestingly, the largest manufactured housing vintage (1999) is currently at its peak CDR period along the MHD curve. Theoretically, industry average default rates should decline going forward, when CSFB’s seasoning analysis is applied.
“The seasoning effect has implications for industry performance,” Dubitsky said. “But you have to think of the overall credit trends… The positive effects of seasoning could partially offset the economy’s impact [on the outlook].”
CSFB’s seasoning curve was derived from more than 15 years of MH data from nearly 20 issuers.
