Subprime mortgage lenders have one piece of good news to look forward to this week as they attend their industry's largest conference: The coming year couldn't possibly be much worse than last year.

Last March, executives at the annual conference in Hawaii were breezily optimistic-despite major blow-ups at subprime auto lenders that some said foreshadowed problems in the home sector.

Since then, these lenders have taken a beating. Companies have been plagued by writedowns, lawsuits, federal scrutiny, bad press, and evaporation of capital markets.

As the lenders gear up this week for the National Home Equity Mortgage Association conference in West Palm Beach, Fla., there is no denying that the mood is much more subdued.

"Basically, the issues have changed dramatically" since last year, said Reilly Tierney, an analyst with Fox, Pitt Kelton. Last year, companies were focused on building volume exponentially. Now, many are scrambling to restore credibility in the investment community.

Several events have caused this sea change. Among the most significant: Lenders including Green Tree Financial Corp., Mego Mortgage Corp., and Aames Financial Corp. took multimillion-dollar writedowns in the past year when loans didn't perform as expected, and investors suddenly shied away from the sector.

The ensuing lack of available capital has driven lenders to the auction block. Cityscape Financial Corp., Beneficial Corp., and Aames Financial Corp. are up for sale. One of the most respected family-run companies in the business, Money Store Inc., has already inked a deal with First Union.

Founding chief executives at both Aames and Cityscape resigned in the wake of criticism and falling stock prices. Green Tree's president resigned, and the company's chief executive was forced to return some of his 1996 bonus.

Restoring faith in their earnings seems to be the goal of most lenders in the year ahead. Many are eliminating the controversial accounting method called gain on sale, and the year ahead should see some sobering figures.

Lenders that haven't already done so will completely change their accounting methods in the year ahead, said Jeffrey Moore, chief executive of Mego Mortgage Corp., Atlanta. "That will affect the anticipated profitability of a lot of the players."

The company was recently rumored to be using Merrill Lynch to execute a merger with a specialty finance start-up, but the merger has fallen apart, said parties close to the deal.

Some analysts are expecting the next 12 months to be a litmus test for the industry.

"This year, we'll see who survives and who doesn't," said Steven Eisman, an analyst in New York with CIBC Oppenheimer. Consolidation may play a minor role, he said.

Jennifer Scutti, an analyst with Prudential Securities, New York, said she doesn't expect any more major writedowns. Instead, the "mature growth stage" sector can expect acquisitions to heat up, she said.

Lenders pointed out that there were some positives in the past 12 months.

"There were lowlights and there were highlights," said Mark Mason, chief financial officer at Irvine, Calif.-based First Alliance Corp.

On the plus side are the significant growth of the high-loan-to-value market and that all the major subprime players have had significant origination volume growth, indicating that "the industry has not yet hit its plateau,." he said.

Some analysts are optimistic about the sector.

"These companies have had a hell of a month and a half in the stock market-maybe it will survive," Mr. Tierney said. "Portfolio earnings will be much lower, but some of these companies will be thriving this year."

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