Despite the intensifying battering of the broader stock markets over the past week, mortgage stocks have held up well, falling from their recent peaks but remaining well above their 12-month lows.

Over the last year, while the Nasdaq swooned and the Dow and S&P receded and then stalled, mortgage-related stocks soared. In fact, shares of West Coast thrifts such as Washington Mutual, Golden West Financial, and Golden State Bancorp gained more than 100%.

Yet while many other financial services and banking stocks appeared to weather the storm in 2000, they have buckled under the weight of the markets this week as the bears stomped through Wall Street.

Citigroup, at $46, is up just 7% from its 12-month low of $42.75, and down 20% from its 12-month high of $58.079, while Morgan Stanley Dean Witter, at $58.49, is up just 2.5% from the 12-month low of $56, but remains down 46% from the 12-month high of $109.563. And J.P. Morgan Chase & Co., while up 23.4% from its low of $36.875, is off 31% from its 12-month high of $65.67, trading at $45 Thursday.

By contrast, Freddie Mac, which peaked at $69 on Dec. 28, is still up 60% from its 12-month low of $38.938, trading around $62 this week. And Fannie Mae, which peaked at $87.813 on Dec. 18, still trades 56% above its Aug. 2 low of $48.188. Fannie traded above $75 this week.

"It makes all the sense in the world" that these stocks are doing well, said Gary Gordon, an analyst with UBS Warburg. "Home mortgage credit is about the safest credit you're going to get, and the housing market right now is in pretty good shape."

Mr. Gordon noted that in a weaker economy with lower rates, earnings for mortgage companies rise because of the combination of increased loan origination volume and widening interest margin.

And the thrifts have fared even better.

Washington Mutual traded at $48 this week, down 14% from its high of $56 but still 91% above its May 4 low of $25.125, while Golden West Financial, despite sliding to $54 from its high of $69.438 in late December, stayed 68% above its 12-month low of $32. Moreover, Golden State Bancorp, at $26 Thursday, is 100% above its 12-month low of $13. Golden State peaked at $31.5 in late December.

Scott Valentin, an analyst at Friedman, Billings, Ramsey, said he is still bullish on thrifts and that their relatively solid performance could last all year.

"This is a good environment for thrifts," he said. "We think there is room for them to move up." The only fear, he said, lies in the current refinancing boom. Borrowers have been moving from adjustable-rate mortgages to fixed-rate loans, which can hurt the thrifts' origination operations and loan portfolios.

Mortgage companies are countercyclical, explained Steven F. Herbert, chief financial officer at Resource Bancshares Mortgage Group in Columbia, S.C. - when rates drop, stock prices usually rise because business picks up, he said. Though Resource had a tough year - an overhaul caused it to lose $42 million - its stock is up 158% from its 12-month low of $3 and was trading at $7.75 Thursday. It peaked at $8.5 on Jan. 10.

"As people look at a slowing economy, the earnings prospects for a growth company don't look as good as they did," Mr. Herbert said. "They're selling the growth companies and buying mortgages, because we should perform well in a slowing economic environment."

Michael McMahon, associate director at Sandler O'Neill & Partners, said many investors have a wait-and-see outlook on the sector.

"It is a deceptively alluring business, because in the good times the profitability is immense," he said. "But those good times are somewhat few and far between - and the bad times are terrible."

But UBS Warburg's Mr. Gordon said mortgage stocks have become almost a hedge stock in the waning economy, and they should perform well as long as investors stay nervous about the broader markets.

"There's always a point - I don't know if it's tomorrow or a year from now - when people decide the worst is over and go back to buy the recovery stories," he said. That's when mortgage stocks "will fade. But they're very good safety" stocks, he said.

Tom Fernandez contributed to this article.

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.