Though consolidation, losses, and general misfortune have come to characterize most of the mortgage industry for 18 months and counting, several mortgage-related ticker symbols have been quietly rebounding - scoring high-double-digit or better gains.

Countrywide Credit Industries Inc., for example, reached a 12-month high on Monday, trading at $43.50, up 88% from its 12-month low of $23.125 on March 8. Fannie Mae and Freddie Mac have also posted large gains; Fannie's stock price has jumped 59% since early September, while Freddie's shares are up 53% in the same period. Most impressive are Washington Mutual and Golden State Bancorp, up over 120% since March.

In addition, Radian Group, a mortgage insurer, is up 75% since Jan. 1, and even Resource Bancshares Mortgage Group, which lost $22.8 million over the last year, matched its 12-month high on Monday. It hit $6.50 at one point, up almost 54% from its low for the year.

"The deceleration in economic growth, which has hurt earnings growth in some nonfinancial sectors of the economy such as technology and telecom, is actually a boon to the financial sector," said Jonathan E. Gray, an analyst with Sanford C. Bernstein & Co. "Investors are also looking for financials that pose very low credit risk, and the mortgage finance sector represents that."

Mr. Gray explained that the mortgage finance sector has historically represented a safe haven for investors concerned about credit risk. Residential mortgage-related investments are usually very low-risk, he said - which is exactly what investors fleeing nonfinancial sectors are seeking.

But what is really fueling the gains, analysts agree, are declining mortgage rates and the widespread belief that the Fed may be eyeing interest rate cuts over the next six months.

Thomas O'Donnell, an analyst with Salomon Smith Barney, said that for Countrywide and other mortgage lenders, the stock increase is more of a rate play - when rates go down, their stocks go up.

"When the economy slows and the market believes the Fed's going to take rates down, these stocks, in rather the knee-jerk and expected fashion, go up, and that's what's happening," he said.

Mr. O'Donnell said his savings and loan index is up more than 90% since March, and that most of the stocks in the mortgage sector stack up well against other financial and high-tech stocks.

Michael McMahon, an analyst with Sandler O'Neill & Partners, wrote Tuesday in a note on Countrywide that interest rates now bode well for the industry. For example, he wrote, rates on 30-year fixed mortgages have steadily declined from an average of 8.52% in May to 7.75% in November, the lowest monthly rate this year.

"We've had six consecutive months of declining rates and rising refinance volumes," Mr. McMahon said in an interview. "The market clearly sees what's going on and they're driving the share prices higher."

Mr. McMahon explained that though several factors have contributed to the mortgage sector's strong performance in the stock market, it is generally expected to perform well under current economic conditions.

"Mortgage companies tend to be counter-cyclical because they do well when rates decline," he said.

In his note on Countrywide, Mr. McMahon observed that refinancings have increased since June, when they represented 16% of total originations. That number rose to 17% in July, 18% in August, 20% in September, 24% in October, and 27% in November.

And adding to the mortgage companies' good fortune is that conditions for refinancing have improved, but not to the detriment of the economy at large.

"The economy is slowing, but it's still is still strong," Mr. McMahon said. "There's still a lot of repurchase business going on as well - we've got all the cylinders firing." He added that for Countrywide in particular, "the future is looking increasingly good."

For the sector in general, Mr. Gray said there is a good chance shares will remain at current levels and even increase. Mortgage finance stocks are within 10% to 20% of being fairly valued, he said, but a slowdown and the resulting rate cuts would make them still more attractive.

Should there be a bona fide recession, Mr. Gray said, the benefits from lower interest rates for Fannie Mae and Freddie Mac, savings and loans, and Countrywide Credit would outweigh the negative consequences of rising credit loss.

"The economy is slowing, and if we have a soft landing, it reduces the risk of rising rates and makes these stocks more attractive," he said. "If we have a hard landing, and the Fed would ease aggressively, and these stocks would generally do even better relative to the rest of the market."


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