The MCS Linux system uses your Desktop Services password to authenticate you against the Novell service that supplies your file system. Until you quote your password your home directory is not available on the MCS Linux server, so it cannot do key checking.
A twist on this is that once you have logged in by quoting your password your home directory is available and any subsequent attempt to log in using key exchange (i.e. not quoting a password) during the same session will work.
Last updated: October 2011