The theory is that mortgage banking companies have a natural hedge that tends to stabilize their earnings. When interest rates rise, the reasoning goes, loan originations fall but servicing portfolios become more valuable because of declines in prepayment speeds.

That's in normal times. But the past 12 months have been far from normal. The unusually swift turnaround in interest rates early this year has meant a messier and costlier transition to fewer originations than anyone expected, and the mortgage stocks have paid the price, especially with the waning of takeover speculation.

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