The two largest publicly traded mortgage lenders reported strong second-quarter results this week.
Countrywide Credit Industries' net income rose 76% compared to the same quarter of 1996, to $109.72 million, including a $34.7 million gain on the sale of a subsidiary. Without the gain, Countrywide's earnings per share increased 12%, to 67 cents, in line with analysts' expectations.
HomeSide Inc.'s net income increased 100% from last year, to $20.1 million. On a per-share basis, earnings were up 59%, to 46 cents, topping the analysts' consensus by 2 cents.
Margins on lending at both companies were lower than some analysts had expected. Gary Gordon of PaineWebber Inc. said production margins at both companies were not "overly impressive," considering that volume was up due to lower rates.
"Countrywide implied that they had become more competitive on pricing in order to pick up purchase volume," noted Michael McMahon, an analyst at UBS Securities.
But Mr. McMahon said Countrywide's subprime and home equity businesses made a substantial contribution to overall production earnings.
More than one-third of Countrywide's production income came from the subprime business, although subprime and home equity loans accounted for only 7% of all loans.
On an annualized basis, Countrywide will produce $3.1 billion of subprime and home equity loans, a total that would put it among the top three producers of B- and C-rated loans, Mr. McMahon said.
Thomas O'Donnell, an analyst at Smith Barney, said earnings probably could have been higher at Countrywide but noted it has chosen to invest in the higher-margin subprime business. "They are investing today for the sake of tomorrow. It is good news that Countrywide is taking this long-term view of itself," he said.
Mr. O'Donnell added that both Countrywide and HomeSide benefit from loan-servicing revenue. Servicing protects them from rises in interest rates because its value increases when rates go up.
Countrywide's $169 billion servicing portfolio is the second-largest in the nation, and HomeSide ranks seventh with about $96.5 billion.
"There are economies of scale in servicing, so if you have a large servicing portfolio in this rate environment, you're probably in good shape," Mr. O'Donnell said.
Other analysts said HomeSide cut expenses by buying back loans that have the potential to become problems and by issuing medium-term notes that allowed it to pay down bank debt.
Analysts said HomeSide's stock has not been trading on fundamentals but on rumors of a takeover by NationsBank Corp. NationsBank announced last month that it was buying Barnett Banks Inc. Barnett owns 27% of HomeSide.
Since the Barnett announcement, HomeSide's stock is up more than 20%. Several analysts said NationsBank may eventually buy the rest of HomeSide, but none thought a takeover was imminent.
