Sean Aurigemma, an analyst with BT Alex. Brown, has initiated coverage of the mortgage giants Fannie Mae and Freddie Mac and has taken over coverage of Countrywide Credit Industries, all with "buy" recommendations.

In a research report last week, Mr. Aurigemma called these stocks "attractive, relatively conservative vehicle(s) to invest in the growing market for residential home loans."

Fannie Mae and Freddie Mac buy loans from mortgage bankers and bundle them into securities, which are sold to investors.

They also hold large portfolios of mortgages and mortgage-backed securities. Countrywide, of Calabasas, Calif., is the largest independent mortgage banker in the nation.

"The fundamentals of the U.S. mortgage sector remain near-perfect due to low interest rates and inflation, rising incomes, and other macroeconomic factors," Mr. Aurigemma wrote.

The analyst said Countrywide, Fannie, and Freddie allow investors to reap the benefits of the continuing home loan boom without subjecting themselves to the earnings volatility experienced by smaller home equity companies. Although the smaller companies may grow faster, Fannie, Freddie, and Countrywide are more reliable, with established brand names and proven track records, he said.

The secondary-marketing "duopoly" of Fannie and Freddie dominates an industry that is growing 6% to 8% each year, he said. Countrywide, he said, has "scarcity value" as one of the few independent mortgage banking companies left.

Because Countrywide focuses on mortgages, it can "take share in the product from the less-focused players." Though banks tend to use profits from their better-performing operations to subsidize their weaker areas, "category killers" such as Countrywide reinvest all their capital in their core businesses, he said.

Mr. Aurigemma said Countrywide's strategy of maintaining a large servicing portfolio and an active origination business-known as the "macro hedge"-helps it maintain "a more stable and predictable earnings stream and less interest rate sensitivity."

Countrywide's origination business is well balanced among retail, wholesale, and correspondent production, he said, and it has the opportunity to dominate "the fourth or emerging channel," the Internet. Countrywide, he said, is "well positioned, because it already has a significant presence on the Net and its investment in its brands should pay dividends in that medium."

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