Rally Seen Costing Mortgage Stocks Some of Their Recent Price Appeal

Prices of mortgage-related stocks have climbed with the market in recent months. As a result, analysts have downgraded some stocks on the basis of price rather than business fundamentals. And others are becoming more cautious about the durability of the rally.

At S.G. Warburg & Co., New York, Francis X. Suozzo has changed his recommendation on Federal National Mortgage Association to "hold," from "buy."

He first cites these positive developments:

*Sharply lower long-term rates.

*The decision by Congress to eliminate user fees from the budget.

*A decline in the market share of adjustable mortgages.

*Increased evidence of ARM sales into the secondary markets.

*A positive forecast by Fannie Mae supporting continued growth of 6% to 8% in mortgages outstanding.

But he adds that the positives have been well-recognized by investors. "Positive fundamental trends are already built into our earnings model, suggesting only modest room for increases in earnings-per-share estimates," he says.

Jonathan Gray, an analyst with Sanford C. Bernstein, New York, says he has not downgraded any stocks recently. He presently has "buy" recommendations on six issues.

"The stocks are obviously not as attractive if they have already run up 25%. The residual investment performance in Fannie Mae, Freddie Mac, and Ahmanson is somewhat more than in the other companies." His other buys are on Great Western, Golden West, and Sallie Mae.

At Smith Barney Inc., Tom O'Donnell says the thrifts on which he has made "buy" recommendations have moved higher, "but they have another 10% to 15% move left, and not much risk."

He recently upgraded North American Mortgage from neutral to "outperform," expecting benefits from new accounting rules, the improved macro environment, and perhaps some revival of takeover interest.

Joseph A. Jolson of Montgomery Securities, San Francisco, however, says the accounting change does not improve the quality of the earnings at North American, and he sees little comfort in the mortgage-originations outlook. He says he continues to recommend that investors use North American "as a source of funds to buy Imperial Credit Industries or Resource Bancshares Mortgage Group.

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