One of the shooting stars in the super-hot field of lending to the credit-impaired took several hits this week, leading bearish observers to speculate that the home equity industry may soon fade.

Cityscape Financial Corp., Elmsford, N.Y., declared its first-ever earnings decline on Monday, due to a $15 million charge related in part to the expectation of smaller profits in its U.K. operations. The company was also downgraded by Moody's Investor Services because of a growing number of seriously delinquent loans.

The bad news may just be the first in a series of disappointments in the high-profit, fast-growing industry, some said. "There are problems throughout the whole sector," said Tom Foley, the Moody's analyst who downgraded Cityscape's debt. "Rising loan losses and intense competition are forcing companies to write lower-quality loans with higher loan-to- value ratios."

Moody's lowered Cityscape's debt rating because of the company's high level of loans 90 days or more past due, its slow progress in working out these problem assets, and a hostile regulatory environment in the United Kingdom, where Cityscape has a high-profit subsidiary.

More and more home equity companies are going to face rising delinquency and foreclosure rates, said Jerry Robinson, analyst with Stephens Inc. "It's just a matter of time," he said. "We are going to suffer high credit losses as we go forward."

Nonsense, say several who cover the sector. "Some companies have been writing loans with higher credit scores," said Luke T. Smith, analyst with Chesapeake Securities, who cited Mego Mortgage, Atlanta, as one company that has tightened its credit standards.

"I don't think you can paint the whole industry with that brush," Mr. Smith said.

The industry is undoubtedly getting more competitive, said Mike Diana, analyst with Bear Stearns. But he argued that individual company performance hinges on management. "Those companies with good management will continue to do well."

Cityscape was one of Wall Street's darlings in the year following its December 1995 initial public offering. Originations at the company climbed from $49.5 million in all of 1995, to $569.8 million for the second quarter of 1997 alone. The stock price climbed from an initial price of $18, to $36 in August 1996.

But Cityscape has been dogged since then by short-sellers who contend the company is taking too much risk. The high rates charged by Cityscape's unit in the United Kingdom have attracted unfavorable press.

Most other players in the home equity industry have recovered from a stock price slump in April, but Cityscape's stock still hovers at less than half of its 1996 high. The company was trading Wednesday afternoon at $13.875, down from Monday's closing price of $14.75.

Chief executive Robert Grosser said that the company should be judged by its performance. "Did we make some mistakes last year? I'm the first one to say that we did. But we've taken some steps to deal with that."

Cityscape brought on board several new executives at high levels in the past 12 months, he said.

Despite rumors, Cityscape is not shopping itself around, Mr. Grosser said. "We are grossly undervalued in the marketplace," he said.

Cityscape reported second-quarter net earnings of $3.6 million, down from $11.1 million a year earlier. Delinquencies in both the United Kingdom and the United States declined slightly. The company also increased its loan-loss provision to 3%.

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