Aames Financial Corp.'s earnings report was almost a month late-and contained jarring news instead of the acquisition announcement analysts had hoped for.

Aames disclosed a net loss of $14.1 million for the quarter ended June 30, and net income of $17.1 million for fiscal 1997, versus $29.8 million the previous year.

The subprime mortgage lender's statement prompted no less than four negative reports by analysts, a 12.5% drop in the share price to $19.25, and new scrutiny of its debt ratings.

Aames also confirmed that it was putting itself up for sale. But analysts said the results in the report argue for a price of $20 or less per share, instead of the $26 to $30 a share that some projected before the report.

Aames' problems included an expected nonrecurring charge of $28.1 million for severance pay related to Aames' acquisition of One Stop Mortgage Inc. A $28 million hit to compensate for underperforming loan pools caught analysts by surprise and raised new concerns for the subprime market.

The hit was necessary because borrowers are refinancing their mortgages at a faster clip than previously anticipated, Aames executives explained in a conference call Monday evening.

Because the company, like many subprime lenders, books profits when loans are securitized and sold rather than when they are actually paid, unexpected selloffs result in a loss.

Aames adjusted its conditional prepayment rate, or percentage of borrowers it expects to refinance with another lender, to 30.5% from 26%.

Early Tuesday, Aames' stock was cut to "hold" from "buy" at Prudential Securities, and to "outperform" from "buy" at Smith Barney. Later in the day, both Standard & Poor's and Fitch Investors Service placed the company's debt on their ratings watch lists.

Standard & Poor's will cut the company's debt rating if Aames needs to write off any more losses due to rising prepayment rates, said analyst Thomas Abruzzo, who emphasized that additional charges were not expected.

Aames' previous assumptions about its prepayment rates were just "too aggressive," given the current scramble to capture higher yielding subprime loans, said Reilly Tierney, analyst at Fox Pitt Kelton, New York.

"A lot of their borrowers that have been current are finding other people willing to give them loans," he said.

Although Aames' rates are competitive with most other subprime lenders, peers are pulling away customers with offers of larger loans, Mr. Tierney said.

Aames is going to have to make high loan-to-value loans to stay competitive, he said.

An increase in prepayment speeds as competition heats up will affect all subprime lenders, Mr. Tierney said, and "may be the smoking gun that will sink the industry."

Aames also announced that it would be selling off 5% to 10% of its loan portfolio outright, rather than relying solely on securitization and that it had opted out of the United Kingdom because of increased regulatory pressure there.

The short position in the company's stock, a gauge of investors' expectations of a decline in price, was at a two-year high Aug. 15, at 6.352 million shares, and has increased since, one short-seller said.

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