The housing market is red hot, but one couldn't tell that from the performance of mortgage stocks this year.

Last year's $1.4 trillion of mortgage lending shattered records. The Mortgage Bankers Association's application index has continued to edge higher. And the Commerce Department last week reported housing starts at a 13-year high in January.

Yet shares of Fannie Mae and Freddie Mac are down 0.9% and 4.8%, respectively, for the year to date. The American Banker thrift index is off 3.1%. Shares of Countrywide Credit Industries-the largest independent mortgage bank-have plummeted 18.2%. And mortgage insurers' stocks were down an average of 9.8%, according to a report last week by Lehman Brothers.

Investors tend to look for hidden gems, and may have concluded that the opportunity has passed in the mortgage sector. Investors figure that last year was "so good in terms of housing that it can't get any better," said analyst Bruce Harting, the author of the report.

Institutional investors are moving money out of the mortgage sector, because they fear the operating environment for mortgages-with low credit losses and a favorable yield curve-can only get worse. Some may be betting on other sectors, such as technology, Mr. Harting said.

Contrarian investor psychology may not be the only factor.

Fannie's and Freddie's stocks have been hurt by profit-taking and by a proposal by the Office of Federal Housing Enterprise Oversight to impose a risk-based capital regulation, Mr. Harting said.

Mortgage insurers' stock was driven down by investor concern over Fannie Mae's mortgage insurance initiative, in which requirements would be rolled back for loans with low down payments, the Lehman Bros. report said. The stocks all dropped sharply Jan. 14, the day Fannie announced its program.

As for Countrywide, some investors are worried about a decline in loan volume as interest rates stabilize and consumers stop refinancing loans.

Mr. Harting said some investors worry that new Internet loan companies could draw business from portage banks and thrifts or could undercut them on price.

Some analysts say the concerns are overblown and that the stocks are due to rebound.

The market is "treading water for now, until some of these trends become clearer," Mr. Harting said. "You're not seeing a lot of money pouring in or out right now."

Investors have forgotten that Countrywide's earnings are riven not by volume but by servicing, added James J. Fowler, principal with BankAmerica Corp.'s NationsBanc Montgomery Securities.

Countrywide has had "greater net servicing income in a slower origination market than in the refinancing wave of the second half of last year," he said.

The same holds true, he said, for other mortgage banks, such as Resource BancShares Mortgage Group, whose shares are off 14.3% for the year.

As for challenges from on-line lenders, Mr. Harting said, most of the companies he covers have viable Internet strategies.

He also said investors had fretted last year about what a flat yield curve would do to bank and thrifts' net interest margins. This year, the yield curve has widened by about 50 basis points, meaning the companies could enjoy higher net interest margins, he said.

Thomas O'Donnell, a senior analyst for Citigroup Inc.'s Salomon Smith Barney, agreed the selloff has been "unwarranted."

A strong housing market is a clear positive for Fannie and Freddie, though it is a "mixed blessing" for thrifts, he said. Low rates help mortgage banks to thrive, as they tend to be fixed-rate lenders. Thrifts, which generally specialize in adjustable-rate lending, benefit as rates rise.

Going against the general trend is Washington Mutual Inc. Its stock, which had slipped when it appeared that the acquisitive thrift was behind schedule in wringing efficiencies from its mergers, has climbed 4.6% this year.

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