A recent rise in mortgage interest rates has cast a pall over the stocks of the nation's major mortgage banking companies.

The shares of Countrywide Credit Industries Inc.. Fleet Mortgage Group Inc., and Margaretten Financial Corp. have fallen sharply in the past couple of weeks.

They racked up modest gains last week but remained well off the pace of the overall stock market, which rallied on favorable economic news.

8.5% Threshold Broken

Wall Street analysts blame the slump in the mortgage stocks on the recent rise in the 30-year fixed mortgage rate beyond 8.5% - believed to be the resistance level for homeowners who are thinking of refinancing.

"Recently, we've been seeing investors take profits on the expectation of lower mortgage loan origination volume next year," said Bruce W. Harting, an analyst at Salomon Brothers Inc.

As rates in general declined over the past two years, the boom in refinancing has been a key factor in the expansion of loan volume and the rise of earnings at mortgage banking companies.

As a result, investors in the stocks have monitored rate moves closely.

The national average rate for the 30-year mortgage has been slowly rising since bottoming at 7.89% on Sept. 11, according to HSH Associates, a research firm in Butler, N.J.

The volume of new applications for mortgage refinancing peaked about six weeks earlier, in late July, according to an index of this activity published by the Mortgage Bankers Association of America.

Not coincidentally, the mortgage stocks have weakened steadily since July.

Pasadena, Calif.-based Countrywide Credit, the nation's largest publicly traded mortgage banker, is off about 13%. Fleet Mortgage, Providence, R.I., has tumbled 17% since its market debut on July 3 1. And Margaretten, based in Perth Amboy, N.J., is down about 8%.

Interest Rises Anticipated

The surpassing of 8.5% for the 30-year mortgage rate, which tends to follow rates of shorter maturities but at a slower pace, set off new selling in the stocks.

Rates have generally been on the rise since the election of Bill Clinton on Nov. 3. Bond market investors fear he will attempt to stimulate the economy, thereby quickening inflation and causing interest rates to rise.

Despite enticing price levels, many investors have been unable to shake off worries that future profits of these companies will be dampened if higher rates act as a brake on mortgage refinancing.

The Mortgage Bankers Association's refinancing index has already fallen 60% since peaking last July 24. Many analysts do not think the index offers a complete picture of mortgage financing activity, but it strongly influences the market.

The stocks rallied fractionally last week after the government announced that the nation's gross domestic product advanced at a surprisingly strong 3.9% annual rate during the third quarter, according to revised estimates.

Existing-home Sales Up

And there was even more specific good news. Sales of existing homes hit their highest level in four years as buyers continued to be spurred by low mortgage rates, according to the National Association of Realtors.

At the same time, many economists are not certain that interest rates will continue to rise. "The assumption that rates have only one way to go may be easy, but it also may be quite wrong." Robert G. Dederick of Northern Trust Co., Chicago, recently noted.

Analysts on Wall Street, who have mostly issued buy recommendations on the mortgage companies, have been disconcerted by the stocks' sagging prices.

They expect earnings to continue improving and cite other factors besides the much-watched refinancing index.

"The index has been a good predictor of stock prices, but not of earnings or even loan volume for the mortgage companies." said David Hochstim of Bear. Stearns & Co.

Steady Gains at Top Firms

He noted, for instance, that Countrywide Credit has set records for loan production each month since July, even as its stock price has fallen.

What the market is missing. he contends, is that the top mortgage companies are making steady gains in market share and efficiency, which offset any slumps in refinancing activity.

Margaretten's acquisition in September of a $7.5 billion mortgage servicing portfolio from NationsBank Corp., Charlotte, N.C., bolstered its stock, only temporarily, Mr. Hochstim said. even though the move is already contributing to earnings.

Analyst Eric I. Hemel of Morgan Stanley & Co. has a few "concerns and reservations" about the cost savings in Magaretten's acquisition and also pointed out that the company has "no track record as a large-scale servicer."

Nevertheless, he recently gave the stock a buy rating, saving the risks are justified since the stock is trading "just marginally above liquidation value."

His 12-month price target for the stock is $17. On Friday the stock was trading at $14.375, down 50 cents and well below the $21.25 peak last January after its initial public offering.

The recent fall in the mortgage stocks prompted analyst Joseph A. Jolson of Montgomery Securities to upgrade his rating on fleet Mortgage to "buy" from "hold." He has a 1993 price target of $27 on the stock. which was unchanged Friday afternoon at $19.375.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.