Fitch Lowers 3 & Affirms 2 RMBS Classes from Merit MH Series 13

Business Wire, Sept 3, 2004

NEW YORK -- Fitch Ratings has taken the following rating actions on Merit Securities Corp. (Merit) manufactured housing contract, Series 13:

--Class A3 affirmed at 'AAA';

--Class A4 affirmed at 'AA-';

--Class M-1 downgraded to 'BBB-' from 'BBB ';

--Class M-2 downgraded to 'B' from 'BB ';

--Class B-1 downgraded to 'C' from 'B '.

The downgrade rating actions reflect the poor performance of the collateral pool and its potential impact on the above-referenced subordinate certificates. Downgrades affect nearly $89 million of certificates while the affirmations affect $141 million.

The manufactured housing (MH) industry is experiencing its worst downturn ever. Relaxed credit standards, overbuilding by manufacturers, and the difficulties relating to servicing this unique asset have all contributed to poor performance of MH securities. Fitch believes the industry will continue to struggle for some time. Servicers must still contend with saturated repossession inventories, and Fitch does not expect recoveries on sold repossessions to improve in the near future. In addition, given the depreciating nature of the assets, as pools have seasoned, recoveries have generally declined. For these reasons, Fitch expects recovery rates to remain at low levels for some time.

Credit enhancement in the form of overcollateralization (OC) was exhausted in November 2003 and there is no monthly excess spread to help cover losses. However, this transaction benefits from an additional credit enhancement feature. At closing, Merit deposited $15.11 million of additional MH loans into a separate collateral fund. The cash flow generated by this separate pool of loans is available to support the subject transaction. There currently remains approx. $6.7 million of MH loans outstanding in this fund. However monthly losses in the Merit 13 transaction far exceed this supplemental cash flow and result in the continuing write down of the most subordinate class (currently class B-3, which along with class B-2, was privately placed).

This program's pool factor (the percentage of mortgage principal outstanding to the initial mortgage pool at closing) is just over 58%. The MH loans supporting Merit 13 were originated and continue to be serviced by Origen Financial (Origen), previously under the name Dynex Financial, Inc. Origen's outstanding servicing portfolio is $1.3 billion as of year-end 2003.