Mortgage banking may be in for some rough times in the next 12 to 24 months, said veteran bank analyst Thomas H. Hanley.

The sector could see a repeat of the difficulties it experienced during 1993 and 1994, said Mr. Hanley, of Warburg, Dillon, Read, in a Nov. 10 report with analyst Thomas Hain, initiating coverage of the sector.

In 1993 and 1994 the transition from a high-refinancing environment to one in which loan originations were much slower caused earnings to fall and companies to fail or sell, Mr. Hanley said, while high competition squeezed margins.

"With 1994 in mind, we believe that investors will rightly continue to envision bad news is in the making for the sector, and therefore will not invest in it," the report said.

Problems such as the recent bankruptcy of Capstead Mortgage and losses at Avondale Financial, BankAtlantic, Peoples Heritage Financial, Dime Bancorp, and BankAmerica may dampen investor interest, the report said.

Nonetheless, over the longer term mortgage banking will be driven by the bias toward homeownership in the United States, the report said.

Warburg, Dillon, Read predicts a 7% to 8% growth rate for the mortgage industry over the next five years.

The investment bank assigned a "buy" recommendation to Countrywide Credit Inc., with a 12-month price target of $57. The company was trading Friday afternoon at $43.125.

Countrywide has positioned itself to expand earnings throughout the interest rate cycle, the report said. Warburg, Dillon, Read expects Countrywide's earnings to grow 12% a year over the next five years.

The firm assigned "hold" recommendations to Flagstar Bancorp., Headlands Mortgage Co., and Resource Bancshares Mortgage Group Inc.

Mortgage banks are appropriately trading at a lower price-to-earnings multiple than the average S&P 500 stock, the report said. "We believe the risk/volatility adjusted earnings of this business do not justify a high multiple valuation."

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