Resource Bancshares Mortgage Group may finally have something to celebrate.
The Columbia, S.C., lender, which has repeatedly disappointed investors in the past several months, is poised to benefit from a surge in refinance activity, analysts said.
Richard X. Bove, an analyst with Raymond James & Associates, initiated coverage of Resource Bancshares Mortgage last week with a "buy" rating. His 12-month target price for the stock is $20.
Mr. Bove said the mortgage origination market is already healthy because of low interest rates and a strong demand for housing. He added that the financial slowdown in Southeast Asia could cause rates to fall even lower.
"With a combination of a strong housing market and refinancing, the mortgage industry could do another trillion-dollar year" in 1998 or 1999, Mr. Bove said. The last time the mortgage industry originated more than $1 trillion was in 1993.
Mr. Bove also initiated coverage of Countrywide Credit Industries and Freddie Mac with "buy" ratings last month and upgraded his rating on Fannie Mae to a "buy."
Mr. Bove said a refinance boom would boost Resource's volume by 15% to 20% in 1998 and 1999, which would fuel earnings increases of more than 40% next year and more than 20% in 1999.
Resource will need to demonstrate a material improvement in earnings to recover favor with investors, following a high-profile merger plan that went awry.
In April, Resource announced it was buying Walsh Securities, a Parsippany, N.J., subprime firm.
Investor reaction was negative at first, but eventually Resource's stock began to rise on hopes that the addition of a substantial subprime operation would improve profit margins. The stock reached an all-time high of $19.75 in late June.
But shortly thereafter, allegations surfaced of fraud at Walsh. Resource put the deal on hold, and its stock plunged nearly 40%, bottoming out at $12.125 in October. In November, Resource terminated the deal.
E. Gareth Plank, an analyst with UBS Securities, said he also thinks increased refinance volume will help Resource get back on track.
"The company is refocused on the core business," Mr. Plank said. "It is not concentrating on a less-than-perfect takeover candidate."
Resource, which acquired another subprime company-Meritage Mortgage- earlier this year, now intends to focus its subprime efforts internally, Mr. Plank said.
But Mr. Bove pointed out that several subprime lenders have run into problems with higher than expected prepayment speeds. He said that if interest rates continue to fall, Resource would be better off focusing on its primary business.
"I don't think an aggressive move in the subprime business is the answer," Mr. Bove said.