One of the biggest bulls in the subprime mortgage lending corral is recommending that investors stay out-at least for now.

Industrywide, the rate at which borrowers are prepaying loans has accelerated beyond companies' expectations, said Oppenheimer & Co. analyst Steven Eisman in a report dated Sept. 24. Competition in the correspondent sector has increased significantly, encouraging originators to refinance loans to boost profits.

At the same time, delinquencies in some companies are reaching worrisome levels, the report said.

The accuracy of gain-on-sale accounting, which is used by many publicly traded home equity companies, is directly affected by changes in prepayment speeds and losses, the report explained. This accounting method played a role in the slump of the subprime auto sector this year, when lenders were forced to cut earnings projections. Several lenders in that sector have since restated earnings, and at least two have filed for protection from their creditors under bankruptcy law.

Mr. Eisman has recommended stocks in the subprime home equity sector since the industry's initial-public-offering boom more than two years ago. Analyst Vincent Daniel, a relative newcomer to Oppenheimer's home equity coverage, was co-author of the report.

Companies whose investment ratings were directly affected include Cityscape Financial Corp., Elmsford, N.Y., downgraded by Oppenheimer from "buy" to "market perform," on the basis of high delinquencies and uncertainty in the U.K. market.

Mego Mortgage Corp., Atlanta, was downgraded to "market perform" from "outperform." It makes relatively untested, high loan-to-value mortgages to customers with good credit, which will experience higher losses than traditional home equity products. In addition, the company will "be tarred with the same brush" as subprime lenders, the report said.

For some lenders that Oppenheimer downgraded, the move was solely a case of guilt by association:

IMC Mortgage Corp. was downgraded to "market perform" from "outperform"; Money Store Inc., Union City, N.J., was knocked down from "buy" to "market perform"; and Aames Financial Corp., Los Angeles, was downgraded to "market perform" from "buy," despite the fact that it is still an attractive takeover candidate, the report said.

Although these companies are still performing strongly, it is difficult to make money in a group where risks are increasing, the report said. "We believe that the better part of valor is to walk away from the group and wait."

Mr. Eisman reaffirmed "market perform" ratings on United Companies, Baton Rouge, La., and Southern Pacific Funding, Lake Oswego, Ore. u

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