Origen Financial Sinks on Ambac Agony

Manufactured home lender and residential mREIT Origen Financial (ORGN) has seen its shares sink by some 40% over the last three months. I surmise much of the recent tumble, despite improved operating results, is fallout from the turmoil at Ambac Assurance (ABK).

Ambac has underwritten Origen's last three securitization deals, and the credit enhancement it provided Origen's tranches of manufactured home loans were crucial to securing a AAA rating, particularly for the $126.7 million in notes issued and placed through the 2007-B trust in October. Even with the Ambac guarantee, the AAA tranche priced at one-month LIBOR plus 120 basis points.

Securing cheap financing is critical for Origen, which disclosed a net interest spread of just 1.86% as of September 30, 2007. As the Company noted in its 10-Q, "[c]ontinued access to the securitization market is very important to our business."

Ambac's downgrade from AAA to AA and the implications of writing no new business creates a spiraling effect for Origen.

With respect to existing securitizations, although Origen sold most of the tranches, it has retained approximately $43 million in residual interests. These residuals are financed by a repo facility with Citigroup, which has already increased the haircut on the residuals once during the third quarter and also exercised margin calls. Additionally, even though Origen sold the tranches, the sales did not meet the true sale requirements of FAS 140 and were recorded as financing transactions, meaning that Origen will have to absorb any mark-to-market losses. While such losses have no economic recourse to the Company, it will impact GAAP equity and book value.

Perhaps more importantly, however, is the impact on future securitizations. If Ambac discontinues writing new business, Origen will have to try find credit enhancement guarantees from another monoline insurer or significantly increase its overcollateralization in order to profitably securitize future loans. If Origen cannot attractively price future securitizations, the Company has few alternatives for financing its originations.

Origen has a unique niche within the residential lending universe, and although it has difficulty securing acceptable ratings for its collateral, its loans have performed remarkably well given the nature of manufactured home lending. The Company has already secured funding from insiders, and given the depressed share price, Origen could be a candidate for a management-led or private equity takeout.

Disclosure: none