The few remaining mortgage bank stocks are close to their 1995 highs, stimulated by a fortuitous combination of economics and the season.
The economy and interest rates have stabilized as the industry enters the spring homebuying season, the busiest time for mortgage bankers.
Thomas O'Donnell, a New York analyst at Smith Barney & Co., said mortgage bank stocks were strong because the market is shifting toward fixed-rate loans with the flattening of the yield curve, a condition favored by mortgage bankers.
"There is the feeling that rates are topping out," Mr. O'Donnell said. "We are returning to a more 'normal' mortgage market." Borrowers tend to favor fixed-rate loans over adjustables, he said.
In 1993, fixed-rate loans comprised 60% of the market, but their share fell last year to 20% or 30%, he said.
Another push for mortgage banking stocks is that holders of adjustable- rate loans, or ARMs, are likely to refinance to fixed-rate loans as rates continue to become more attractive, said Gary Gordon, an analyst at PaineWebber Inc., New York.
Jonathan Gray, an analyst at Sanford C. Bernstein & Co., said financial stocks in general, particularly mortgage bank stocks, look favorable now that interest rates have stabilized and the spring home-buying season has begun.
The mortgage industry will return to normal seasonality, Mr. Gray said, now that the refinancing boom of 1992 and 1993 is over.
"Refinancing is not seasonal," he said. "The first quarter is the weakest, so mortgage lending goes up about 50% from the first to second quarter."
Mr. Gray looks favorably on Countrywide Credit Industries, believing it is slightly undervalued and will outperform the market during the next several months.
He is also recommending purchase of Federal National Mortgage Association and Federal Home Loan Mortgage Corp. "We believe that a marked improvement in the operating environment for Fannie Mae and Freddie Mac lies just ahead," he wrote in a recent report.
Mortgage banks have been firing people during the last two years in light of the industry's consolidation, Mr. Gray said, but "all of a sudden there is a pickup in volume." The lean staffing and brisk business are resulting in strong mortgage stocks, he said.
The analyst added that the mortgage industry is now favorable toward mortgage banks, which do well with fixed-rate loans, and less favorable to thrifts, which capitalize on ARMs business.
Historically, interest rates are relatively low, said Smith Barney's Mr. O'Donnell. Coupled with seasonal factors, he said, mortgage banks should do rather well in coming months.
He has a neutral recommendation for Countrywide Credit but sees its fundamentals improving, particularly the interest rate scenario.
More sanguine about Countrywide is Michael Corasaniti of Alex. Brown & Sons, New York. He has rated the stock a strong "buy," and it has been put on the firm's focus list of stocks to buy.
The decline in competition may be detrimental to the mortgage industry. Mr. Gordon of PaineWebber said the few players left are so large that they will continue to wage price war.
But Bernstein's Mr. Gray said the industry's recent price war is waning. "It won't go away," he said, "but the ferocity of the price war is abating."