Concerns over the quality of home equity loans at Money Store Inc. helped cool investors ardor for consumer lenders last week, causing a dramatic selloff in some of the year's hottest stocks.

But even as shares of Money Store plummeted 28% in two days last week, some analysts who follow stocks of home equity lenders believe the fundamental strengths of these companies remain intact.

The Money Store selloff came despite a record earnings report. The company simultaneously announced a 60% increase in third-quarter earnings and a 5-for-2 stock split effective Dec. 1.

The news was not enough to overcome concern created by a reported 118 basis point rise in home equity loan delinquencies, however.

Mike Diana, an equity analyst covering specialty finance companies for Bear, Stearns & Co., said the timing of the news, coming on the heels of an announcement by Houston-based American General Corp. that its consumer loan unit was having problems, led to the sharp drop in Money Store shares.

Over the past year, the company's share price has climbed from $11 to a high of $55.25 last week, adjusting for previous stock splits. On Wednesday, however, the market turned on the stock, sending it down $12.625. Shares dropped another $2.50 on Thursday. Shares dipped another 87.5 cents to close at 38.875 on Friday.

Fallout from Money Store's delinquency announcement spooked investors in other consumer stocks, as well. Shares of United Companies Financial Corp. and Aames Financial Corp. dropped sharply, as did the stock of credit card specialists.

But Mr. Diana said fears of a consumer credit meltdown are overblown. In a research report released Thursday, he noted that Money Store Inc. attributed the rise in delinquencies to the conversion to a new receivables-tracking software, not to a decline in credit quality.

"It is ironic that the Money Store would be the trigger to this. In my view, there is no credit quality problem at the company," Mr. Diana said.

Others are not so sure, however. John Heffern, an analyst covering specialty finance companies with Natwest Securities Corp., said he is concerned that the rise may indicate the company is making lower quality loans than before. "There is some evidence that they have been buying a deeper grade of home equity loan than they were originating a year ago. That would lead to more structural losses and delinquencies."

Even with the decline, Money Store is still selling at around 15 times next year's projected earnings. On the other hand, the shares of Aames and United Companies Financial are selling at multiples around 10 to 11 times next year's projections, Mr. Heffern said.

"It's more compelling than ever to own Aames and United Companies, but still sit on the sidelines with the Money Store," he said.

Both analysts agree the home equity lending business is strong.

Mr. Heffern estimates the market for nonprime home equity loans will reach $180 billion over time, due largely to changes in lifestyle caused by corporate restructurings. He believes that many Americans, forced out of well-paid manufacturing jobs and into lower-paying service positions, will turn to the equity in their homes to offset the cut in pay.

"This is mom and pop, blue-collar America suffering through a change from a manufacturing-based economy to a service-based economy," Mr. Heffern said.

For the companies filling this need, the ability to securitize loan production is key to driving this growth, said Mr. Diana. Prior to 1991, home equity lenders were not welcome in the securitization market and were forced to fund their loan production virtually on a loan-by-loan basis.

"All subprime mortgage lenders were constrained because they didn't have the ability to adequately fund the demand for loans," he said.

All that has changed, now. So far this year, lenders have securitized $10.5 billion of home equity loans, according to Asset Sales Report. And of this amount, $4.3 billion came in the third quarter alone.

The one fly in the ointment for the industry could be a recession caused by higher interest rates. Mr. Diana said he doubts earnings of these companies would suffer much even in that event.

"I think these companies could continue to pump out strong earnings even in a mild recession," he said. "How the stocks perform is another issue. It could take some time before they revert back to the valuations" seen before Wednesday.

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