HomeSide Stock a Hot Pick, Three Brokerage Firms Agree

HomeSide Inc., one of the nation's largest mortgage banks, is now being touted by three Wall Street analysts.

Last week analysts from Smith Barney, Alex. Brown, and Tucker Anthony initiated coverage of HomeSide with "buy" ratings.

HomeSide went public Jan. 31. Smith Barney and Alex. Brown were two of the underwriters for the stock offering.

Tucker Anthony analyst Gerard Cassidy said in his research report that he expects HomeSide to be an active participant in the on-going consolidation of the mortgage industry.

HomeSide, based in Jacksonville, Fla., is the fifth-largest producer of home loans and seventh largest in servicing. It is a joint venture of Bank of Boston Corp. and Barnett Banks Inc.-whose mortgage units it combines-and two venture-capital firms.

In an interview, Smith Barney analyst Thomas O'Donnell said HomeSide is undervalued because many investors are skittish when it comes to mortgage banks.

This nervousness, Mr. O'Donnell said, is due mainly to interest rate risk. When rates go up, consumers are less likely to purchase homes or refinance mortgages.

Alex. Brown analyst George Bicher agreed that the biggest risk facing the company is rising rates. But in his report, Mr. Bicher said another main risk is the lack of diversity in HomeSide's production channels. Correspondent lending-purchasing loans produced by a network of smaller lenders-accounted for more than half of HomeSide's originations last year.

But Mr. O'Donnell said noted that HomeSide's mix of originations and servicing is more even. In fact, he estimated that HomeSide could generate 60% to 80% of its revenues from servicing loans. The value of servicing increases as rates go up, since consumers are less likely then to pay off their mortgages quickly and refinance.

"HomeSide has the things the market wants to see-production capacity and a large servicing portfolio," Mr. O'Donnell said.

Mr. Cassidy also wrote that HomeSide was one of the most efficient servicers in the industry. Citing independent surveys, Mr. Cassidy said it costs HomeSide only $44 to service a loan, while the industry average is between $90 and $100.

Before its public offering, HomeSide was owned entirely by the two banks and the venture-capital firms, Thomas H. Lee & Co. and Madison Dearborn Partners. The four now collectively own 81%.

HomeSide went public at $15 a share. The stock had risen 22% by Thursday, when it closed at $18.375. It has traded as high as $19.

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