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Delinquent Or Not?

TheStreet.com reported last week that Conseco (NYSE: CNC) is employing lax lending practices to hide bad loans, according to three former employees, as well as internal company documents obtained by TheStreet.com. The comments by the ex-employees , individual loan records (including one account with 2 extensions for 7 months total during 1 year) and a July memo sent to collectors, suggest that the credit quality of a portion of Conseco’s $26 billion mobile-home loan portfolio is worse than the company publicly reports.

Ex-employees say Conseco keeps losses down by allowing delinquent borrowers to defer payments, TheStreet.com reported. The skipped payments are added to the principal of the loan, which is then classified as current, they say. “Our managers were most concerned about reducing loans that were more than 60 to 90 days past due, so that they didn’t get into numbers reported to Wall Street,” Joan Busch, a former Washington State Conseco Finance collector was quoted as saying. “Extensions were demanded of us.” She went on to say that most recipients of extensions showed little, or no, willingness or ability to repay their loans.

In a posted reply to TheStreet.com story, Conseco Executive Vice President, Mark Lubbers said, “The reason that Conseco Finance is arguably the most successful company in this niche is that we are expert at executing effective loss mitigation practices.

“In the market served by this unit of Conseco Finance, it is imperative that we work with customers to take a delinquent account and turn it back into a performing loan,” the finance executive continued. “Doing this is good for the customer and the company. And given the track record of these practices, it would be barbaric treatment of customers and grossly negligent toward shareholders if we DIDN’T utilize them”.

The July memo told collectors to avoid repossessions by using extensions, interest rate cuts and loan transferals, according to the TheStreet.com. Conseco reportedly says 2.2% of its mobile-home loans were more than 60 days past due at the end of June, while losses were equivalent to 1.93% of the portfolio. Loans on repossessed houses totaled 2.18% of the portfolio. Monthly delinquency numbers reportedly released by Conseco appear to show a further deterioration since June.

The Conseco executive added, “I also hope you have the facts on” what fraction of 1% of the 16,000 accounts handled by the Washington office end up utilizing one of these loss mitigation practices. He said that the “ex-collectors” were dismissed from the company, and suggested that TheStreet.com report the circumstances of their dismissal, for which he made no comment about.

TheStreet.com pointed out that while a recent Conseco securitization SEC filing states “no more than one extension under a [loan] contract may be granted in any 12-month period,” it may be contravening its own internal guidelines on granting extensions. However, there is no direct evidence that Conseco Finance has extended the terms of these securitized loans.

Conseco said that these statements are demonstrably false and take their publication is evidence of intentional malice.

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