Specialty finance companies are being subjected to the equivalent of a head-to-toe physical as Wall Street scrambles to reevaluate these volatile lenders. High-profile writedowns in recent months have burned investors and analysts to the point where few will take a company's earnings projections or accounting assumptions at face value. Instead, analysts are revamping their ways of assessing companies' worth.

First up is CIBC Oppenheimer. Analysts Steven Eisman, Vincent Daniel, and Meredith Whitney released a lengthy report on Jan. 12 that reexamines home equity and subprime auto companies. The report has roiled lenders in the sector.

"There are a couple of things that need to be done before investors should buy any of these stocks," Mr. Eisman said during a conference call last Wednesday explaining the report.

Yearend audits are going to be especially tricky, in part because of the consolidation taking place among accounting firms, Mr. Eisman explained. Investors should wait until companies release audits before signing on, he warned.

Oppenheimer is expecting several firms to take writeoffs this quarter to realign loan performance expectations with reality.

The sector's reliance on securitization-and particularly on gain-on-sale accounting-has been its Achilles' heel. Green Tree Financial Corp., St. Paul, and Mego Mortgage Corp., Atlanta, among others, have already had to revise earnings expectations.

Lenders will need to adopt more conservative and uniform gain-on-sale accounting, the Oppenheimer report said, before investors will reconsider the sector.

To this end, Oppenheimer has developed a three-part formula for recalculating home equity companies' earnings estimates. The method uses an Oppenheimer-built data base to calculate prepayment and loss assumptions, disregards pending income from capital placed in a company's overcollateralization accounts, and places a 15% discount rate on gains for all companies.

Running lenders through the model substantially reduces their 1998 earnings-per-share estimates. For example, United Cos., Baton Rouge, La., has a 1998 earnings-per-share estimate of $2.03 under the new method, versus a First Call Corp. estimate of $3.44.

Several other analysts, including Piper Jaffray's Jeffrey Evanson and Fox, Pitt, Kelton's Reilly Tierney, are busy developing home equity valuation models of their own.

But the emerging variety of analytical methods-and the range of earnings estimates they are likely to produce-may only further confuse investors looking at the sector, lenders say.

Most lenders reacted to the heightened scrutiny, weakened stock prices, and gloomy forecasts with a mixture of exasperation and resignation.

Few were willing to be named criticizing Oppenheimer's research, but many had strong opinions on the subject. "Mr. Eisman didn't do his homework," said one disgruntled home equity chief executive. Oppenheimer's across-the-board 15% discount rate is a "completely arbitrary number," he argued.

"It's just not that simple," objected another finance company executive, who asserted that the only way to understand how loan pools will perform is to look at each company individually. Perhaps specialty finance executives' moods were best summed up by Daniel Phillips, CEO of FirstPlus Financial Group, Dallas.

The company revised its accounting methods in December to virtually eliminate gain-on-sale accounting in hopes of encouraging investors to differentiate it from other home equity lenders.

Initially, FirstPlus was rewarded by Wall Street with a jump in its stock price. But in recent weeks, the company's stock has sunk to pre- revision levels. "We decided that in '98, we're just going to run our business and let the market take care of itself," Mr. Phillips said. "We're getting treated so badly out there," he said, that he doesn't care what people say.

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