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Green Tree Financial Corporation is the only company in the United States to specialize in manufactured home loans. As such, it captured over 25 percent of that business by 1993. The corporation originates, pools, sells, and services manufactured home loans using a vehicle known in the industry as conditional sales contracts. Green Tree offers point-of-sale financing through its network of 2,800 dealers in all 50 states, support via 43 offices nationwide, and a centralized dealer service center in St. Paul, Minnesota. Patrick Burton, an analyst for Piper Jaffray Inc. characterized Green Tree as "a dominant player in a market that's growing" to American Banker in July 1994. The company also makes home improvement, consumer products (such as watercraft, motorcycles, sport utility trailers, and certain musical instruments), commercial finance (over-the-road trucks and aircraft), and used manufactured home loans, and sells property, casualty, and mortgage life insurance to its customers. Green Tree emerged from legal troubles in the late 1980s to record outstanding earnings growth throughout the 1990s.
Green Tree was founded by Lawrence Coss, a 36-year-old who approached Midwest Federal Savings & Loan Association (then one of America's 30 largest savings and loans) in 1975 with a proposal for a new subsidiary. The former car salesman convinced the traditional home mortgagor to begin offering higher-yielding manufactured home loans through Green Tree Acceptance, Inc. the following year.
The new entity faced competition in its small but financially significant market from regional banks, consumer finance companies, and savings and loans; however, its exclusive concentration in the industry gave it a distinct advantage. Green Tree quickly cultivated a reputation for excellent service among manufactured home dealers. It was often able to conduct thorough credit checks in 24 to 48 hours, and its efficient paperwork allowed dealers to process loans in an astounding 10 minutes. This speed, however, did not preclude judicious lending. Green Tree also became known for its tough credit standards: 40 percent of applicants were rejected, and the company's loan delinquency rate ran under 2.25 percent, well below an industry average of over 4 percent.
Green Tree increased its share of the fragmented market for manufactured home loans from about 7.5 percent in 1982 to 15 percent by 1986. The firm entered the recreational vehicle loan segment (lending primarily for motorcycles) in 1984 and captured 10 percent of that business in just two years.
Green Tree pioneered the securitization of manufactured home loans in the mid-1980s, when it became independent of Midwest Federal. The company transformed the funding dynamics of the industry by pooling and packaging the loans it held and selling them to private institutional investors like pension funds and insurance companies. Loans guaranteed by the Federal Housing Administration and Veteran's Administration were converted into Government National Mortgage Association certificates issued by Green Tree and sold on the secondary market. Green Tree makes its money on the difference between the rate it charges manufactured home buyers and the rate it pays on the securities. The firm's strict credit standards made its securities a safe investment. The company also continues to service the loans after it sells them, thereby garnering income from loan servicing fees as well.
Former parent Midwest Federal became one of Green Tree's first securities customers, purchasing $800 million in manufactured home loans in addition to paying about $190 million for a significant portion of Green Tree's future projected loan servicing cash flows relating to loans originated from 1985 to 1988. The relationship soured in 1988, however, when Midwest Federal sued Green Tree, charging that the former subsidiary had sold it $57 million in loans of "inadequate quality and documentation" and asserting that the loan servicing cashflows had been overvalued. Midwest blamed Green Tree for its loss of $100 million on the transactions. Green Tree countersued, but Midwest's subsequent failure and takeover by the federal Resolution Trust Corporation (RTC) eliminated half of Green Tree's loan servicing income. In 1988, the company suffered a $12 million loss.
Not surprisingly, the legal imbroglio erupted in what American Banker reported as a "nasty feud" between Harold W. Greenwood, then chairman of Midwest and Green Tree, and Lawrence Coss, president and chief executive officer. When Greenwood stepped down from Green Tree's top post in 1987, Coss took on the third title, which he would continue to hold into the 1990s. As chairman, Coss negotiated an annual bonus of 2.5 percent of Green Tree's annual pretax income, placing his salary in the "executive compensation stratosphere," as Forbes' Gretchen Morgenson noted in a May 1990 piece. In 1993, Coss' salary had vaulted to $14 million.
Manufactured home sales also slumped in the late 1980s as an overabundance of rental units made renting more attractive. The number of manufactured units sold annually declined by 30 percent from 1985 to 1990 to about 200,000 per year. Wall Street quickly lost faith in Green Tree--its stock dropped from $37 per share in 1987 to $7 in 1989. Some competitors, including Valley Federal of California and Financial Services Corporation of Michigan also gave up on the industry and stopped making manufactured home loans during this difficult period. Their exit would give Green Tree the opportunity to increase its market share to 20 percent--double its nearest competitor--by 1992.
In spite of its legal troubles and depressed stock price, Green Tree's per-share earnings increased an average of 36 percent annually from 1987 to 1992. Loan originations increased one and a half times over the same period, from $878 million to $1.32 billion. Having sewn up a significant portion of the new manufactured home loan market, Coss began to shift Green Tree's growth focus to new niches. The company applied its proven strategies to the home-improvement loan market. By 1991, it had established a network of 1,200 contractors and loaned over $112 million. Profits in that segment alone increased 43 percent in 1992. Green Tree also started to make loans for previously owned manufactured homes, an estimated market of 500,000 units suitable for Green Tree's lending purposes. Because the majority of these homes were not sold through dealers, Green Tree created its own sales force to make contacts with sellers, brokers, and manufactured housing community managers.
Green Tree's conflict with Midwest Federal and the RTC was not settled until 1992, when the former subsidiary agreed to repurchase $388 million of its manufactured home loans (at a $20 million discount) and $102 million of its own preferred stock still held by Midwest. A subsequent debt swap lowered Green Tree's interest costs and lengthened maturities and raised the company's debt ratings to investment grade. Green Tree changed its name that year, exchanging "Acceptance Inc." for "Financial Corporation."
Debt restructuring and the resolution of Green Tree's conflict with the RTC combined to earn the financial services company more favorable credit ratings and open the door to unparalleled financial growth. Net earnings increased 111 percent, equity rose 83 percent, and assets grew 49 percent from 1992 to 1993. In a 1994 American Banker article, Chief Financial Officer John Brink counted the geographical diversity of Green Tree's loans as a key to the company's success, noting that, "No more than 10 percent of Green Tree's loans come from any one state. No more than 1 percent comes from one ZIP code. No more than 1 percent comes from any one dealer. All of that helps insulate Green Tree against any economic downturns in any one area." The company's share of manufactured home loans advanced to 27 percent on a record $2.7 million in loan originations in 1993, and it was recognized at the National Manufactured Housing Congress as the "Lending Institution of the Year." Wall Street responded favorably as well, pushing Green Tree's stock up to $57 per share before a June 1994 two-for-one split.
Early in 1993, Green Tree began to diversify the types of "special products" or recreational vehicles it financed to include snowmobiles, personal watercraft (jet skis) and all-terrain vehicles. An agreement to provide "the nation's largest boat manufacturer" (unnamed in the 1993 annual report) with consumer financing launched the company into the $5 billion marine products market the following year.
At the end of 1993, Green Tree ranked as the world's fourth-largest issuer of asset-backed securities and carried over $700 million in liquid assets that Coss was eager to lend. American Banker analyst John Engen forecasted that the company would have borrowers through the mid-1990s: shipments of new manufactured homes grew 21 percent in 1993, and Engen predicted 20 percent annual increases for the industry. It has often been noted that manufactured housing accounts for 25 percent of new single-family homes sold in the United States. However, as interest rates began to rise in late 1993, it was certain that Green Tree would begin to feel a margin squeeze on its securities issues.
As of 1994, there did not appear to be any significant threat to Green Tree's continued success. Lawrence Coss, known as a tough leader who had forged an equally tough executive team, was only 55 years old. Growing acceptance of factory-built homes--indicated in part by their increased placement on private land instead of mobile home parks--portended well for Green Tree's primary market. And the company's entry into new markets showed that it was not about to rest on its laurels.
Principal Subsidiaries: Green Tree Financial Corp. (Kentucky); Green Tree Financial Corp. (Louisiana); Green Tree Financial Corp. (Mississippi); Green Tree Financial Corp. (North Carolina); Green Tree Financial Corp. (Ohio); Green Tree Financial Corp. (Texas); Green Tree Credit Corp.; Green Tree Consumer Discount Co.; Consolidated Acceptance Corp.; Rice Park Properties Corp.; Woodgate Consolidated Inc.; Woodgate Utilities Inc.; Woodgate Place Owners Association; Green Tree Finance Corp. One; Green Tree Finance Corp. Two; Green Tree Finance Corp. Three; Green Tree Finance Corp. Four; Green Tree Finance Corp. Five; Green Tree Agency, Inc.; Green Tree of Montana, Inc.; Green Tree of Nevada, Inc.; GTA Agency, Inc.; Green Tree Life Insurance Co.; Consolidated Casualty Insurance Co.; Green Tree Guaranty Corp.; Green Tree Vehicles Guaranty Corp.; Mahcs Guaranty Corp.