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Non-Tech : Green Tree Financial (GNT) -- Ignore unavailable to you. Want to Upgrade?

To: MichaelR who wrote (57)	11/16/1997 7:26:00 PM
From: bhuvanarama	Respond to of 169

In general, yes, due to less loans being made. But for a company like GNT this can be also profitable. Interest rates are bound to rise and GNT should be able to handle at least 30yr. rate of 6.5%. I think once interest rates do rise initially more people will finance or refinance and should be beneficial. In response to your question here is an excerpt from motley fool(who explains it very well). I also would not reccomend buying until the conference call since the stock probably has some downside left and may even go into the high $20's in which case it would be a very good buy. Boring Portfolio Report Friday, November 14, 1997 by Greg Markus (TMFBoring@aol.com) Green Tree held a conference call at 11am Eastern time to elaborate upon the press release and to respond to questions from analysts. Management explained that the MH loan prepayment activity is partly a result of markedly lower interest rates in 1997 as compared to what they were when the loans were made in late 1994 and early 1995. The recent rate drop has prompted many home owners to refinance their loans. The trend was exacerbated by the entry of competitors who have been contacting Green Tree's retail customers and luring some of them away with attractive refinancing offers. Green Tree's management admits that they were slow in reacting to this targeting of their customer base. They say they've become far more aggressive in retaining customers, however, and that they've recently seen a marked reduction in prepayments as a result. To understand what all of this means to a Green Tree shareholder, it may make sense to review quickly how Green Tree grows earnings -- because it's those earnings more than anything else that drive the price of the stock in the long run. Green Tree makes a profit primarily through a continuous process of (1) making loans, (2) bundling the loans together and selling the expected income stream from the bundle to purchasers in the asset-backed securities market (a process known as securitization), (3) reaping a "gain on sale" profit from each securitization, and (4) using the proceeds from the securitizations as the source of capital with which to make new loans, thereby restarting the cycle. Figuring out what the "expected" income stream will be for a loan portfolio is the tricky part. Fluctuations in rates of default and loan prepayments can affect those expectations significantly. Not surprisingly, holders of Green Tree's asset-backed securities are not particularly pleased by declines in the value of their paper, and Green Tree's ratings in the securities markets could be affected unless the company takes appropriate remedial actions. What Green Tree announced on Thursday is that it has taken such actions. But what does all this have to do with holders of Green Tree's stock, as opposed to holders of its asset-backed securities? The answer to that question remains unclear. I have a phone call in to Green Tree seeking clarification, but my provisional conclusion is that the sell-off in the stock is an over-reaction. You'll reach your own conclusions, of course, but here's why I say that. First, we're talking about a one-time, non-cash accounting charge that relates to a fraction of a fraction of Green Tree's business. MH retail loans are an important but proportionately declining component of Green Tree's total operations. The company also makes loans to commercial MH dealers, it finances a host of other consumer and commercial purchases on everything from pianos to horse trailers, and most importantly it has a rapidly growing home equity and home improvement loan business. Green Tree said that those other business lines are performing according to its models, and that whenever they have departed from the models in the past, the company has added to reserves, as it is doing now. Moreover, it is only one part of Green Tree's retail MH loans that is experiencing unusual prepayment rates: loans made in late 1994 and early 1995. Those loans make up a bit less than one-fourth of the MH portfolio, according to the company. Second, Green Tree says they decided to take the large write-down now in order to minimize the possibility of having to make a second adjustment in the foreseeable future. Management said in the conference call that MH loan rates would have to drop more than two full percentage points -- and perhaps as much as 4.5 points -- in order to prompt a change from the newly revised assumptions. Third, the prevailing low interest-rate environment is not at all an unmitigated negative for Green Tree. It stimulates new loan activity, and it widens the profit spread the company enjoys when it securitizes its loan pool. Also, should interest rates increase later on, that would work to the advantage of prepayment rate assumptions in the revised models, just as the declining rates disadvantaged them right now...