Stocks of subprime mortgage lenders have been disproportionately battered by the slumping stock market.

Even the industry's well-established behemoths have been taking it on the chin. Aames Financial Corp., Los Angeles; Contifinancial Corp., New York; and Money Store Inc., Sacramento, Calif., have all seen their stock prices decline 20% or more in the past month.

Relative newcomers Cityscape Financial Corp., Elmsford, N.Y., and FirstPlus Financial, Dallas, have lost more than a third of their value.

The downturn, analysts say, results from a combination of previous overinflation, fears that interest rate hikes will reduce loan volume, and new apprehension about the quality of the subprime market.

"These stocks may have gotten a little too hot" in previous months and may now be "coming out of that momentum," said Luke Smith of Chesapeake Securities, Baltimore.

Wall Street's skittish attitude toward the subprime sector followed the well-publicized blowup of auto lenders Mercury Finance Corp. and Jayhawk Acceptance Corp. in January. Despite the negative perceptions, credit quality at most subprime mortgage companies is strong, said Mike Diana, an analyst with Bear, Stearns & Co. in New York.

"The home equity guys are well reserved" against losses, he said.

Fears that a hike in interest rates will hurt subprime lenders are unfounded, Mr. Diana added. "The year 1994 proved that earnings and origination volumes for these companies are relatively rate-insensitive," Mr. Diana said.

In some cases, there are mitigating circumstances. Cityscape Financial has lost more than a third of its stock value in the past month, in part because of rumors that the Wall Street Journal will be publishing a negative article about Jay Botchman, a former consultant to the company.

Lenders are dismissing the downturn as a lot of unexplainable static. "I'm a mortgage banker, not a stockbroker," said Gary Judis, chief executive at Aames. "The vagaries of stock market perceptions are foreign to me." Aames has had 11 record-breaking quarters in a row, he added.

Declining stock prices are not necessarily an indication that investors have lost faith in the companies, added Hugh Miller, chief executive of Delta Funding Corp., Woodbury, N.Y. Investors are just spooked by the interest rate hike, he said.

Mr. Smith said the price decline may spark consolidation or make these companies more attractive to potential acquirers. "It's definitely time to bargain-shop," he said.

The industry, Mr. Smith added, needs to be cleansed of "weak operators."

First-quarter earnings reports, due out in the next two weeks, should help pull some of these stocks out of their slumps, Mr. Diana said.

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