Wall Street has been paying increasing attention to mortgage banking stocks as a result of the Protracted boom in originations. One analyst, Gary Gordon of PaineWebber Inc., initiated coverage of two mortgage banks last week: Countrywide Credit Industries, which received a "neutral" rating, and Fleet Mortgage Group, rated a "buy"

American Banker's mortgage editor, Edward Kulkosky, talked with Mr. Gordon about the new coverage.

Q.: Many people think the mortgage business may be peaking right now. Is this a a good time to start covering mortgage stocks?

GORDON: Yes and no. Short-term, it's not. If interest rates stabilize, there will be something of a shakeout in the business. The mortgage banking industry will be originating most of the country's loans going forward. Working with [Fannie Mae and Freddie Mac], they have developed a system that is more cost-efficient than that of portfolio lenders, thrifts, or commercial banks over the long term.

Q.: Who will the winners and losers be in the shakeout?

GORDON: The winners will be those who rely most on loan servicing. When refinancing slows, servicing becomes more profitable. The losers will be those who rely on loan production.

Q.: Where does that leave portfolio lenders like the thrifts?

GORDON: I think it's going to be extremely tough for thrifts to win back market share. Since the last period of heavy demand for [adjustable-rate mortgages], in 1988, we have had a big buildup in competition. Countrywide will be all over the product when the time comes. And plenty of mortgage brokers will be competing against the thrifts.

Q.: Is there any ray of sunshine for the thrifts?

GORDON: If anything, the situation may get worse. The commercial banks are building their presence in mortgage banking, and they have tremendous capital resources. There's not much else [in the way of loan demand] out there for them right now. And the mortgage banks have been pretty much distracted by refis. They will focus a lot more on ARMs when the time comes.

Q.: Do you like any other mortgage stocks?

GORDON: No. I'm neutral on everybody else but Fleet. I also follow Plaza, Imperial Credit, and North American.

Q.: Another analyst downgraded Imperial to a sell last week. Are you hanging in?

GORDON: Yes. Imperial has some unique things going that could help. One is a loan that allows people that don't quite qualify for Fannie or Freddie to get a mortgage. And they have found investors willing to buy such loans.

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