Stocks: Playing The Rush To Refinance

Homeowners aren't the only ones profiting from lower mortgage rates. With the average rate on a 30-year fixed loan approaching a 20-year low of 8%, refinancings are multiplying and the mortgage-banking business is booming. So much so that it's time for investors to take a closer look at the sector.

Keep in mind that mortgage banks aren't really banks. These companies borrow money from the capital markets to make mortgages. They then sell the mortgages to one or more intermediaries, such as the Federal National Mortgage Assn. (Fannie Mae), which securitize the loans and sell them to investors. Mortgage bankers make their profit from up-front finance charges, loan sales, and fees for servicing mortgages.

While many homeowners have already refinanced, a lot of potential business remains. Analyst Jonathan Gray of Sanford C. Bernstein estimates there's still upwards of $1 trillion in mortgages outstanding that carry rates of 9.5% or higher.

Countrywide Credit Industries is high on Wall Street buy lists. Thanks to low overhead, the Pasadena (Calif.) company has attracted even more business by offering lower rates than competitors, Gray says. In July, the company originated $2.6 billion in home mortgages vs. $814 million a year ago.

That means big returns. Gray projects Countrywide's earnings will rise by an astounding 85% this year, to $2.35 a share. For 1993, he sees a further 30% gain, to $3.05. And while the stock is trading at 12.6 times projected earnings, slightly higher than conventional banks, analyst Steve Eisman of Oppenheimer points out that Countrywide has none of the credit risks associated with banks.

Margaretten Financial, which was spun off by Primerica in January, is another pick. It's smaller than Countrywide, but the Perth Amboy (N.J.) company has cut a tentative deal with NationsBank to service $7.5 billion worth of mortgages. That would more than double its servicing business. Eisman says Margaretten's earnings could rise as much as 79% this year, to $1.70 a share. He sees a possible 21% climb, to $2.05, in 1993.

ON THE MOVE. Green Tree Financial of St. Paul, Minn., is also getting attention. Unlike other mortgage bankers, Green Tree specializes in loans for mobile homes. With the mobile-home market reviving, analyst Patrick Burton of Piper, Jaffray & Hopwood expects Green Tree's earnings per share to climb 16% this year, to $4.65, and 10% in 1993, to $5.10.

Also, watch out for new issues. Some banks and financial firms are cashing in on the mortgage boom by selling all or pieces of their mortgage units. And as long as rates remain low, chances are that many of them could prosper.

      Company     Share price    P-E
                  Aug. 3, 1992  ratio*
      CREDIT          30 1/4      12.6
         FINANCIAL    35 5/8       7.7
      MARGARETTEN     16 3/8       9.8
      BANK AVERAGE      --        11.5
      BANK AVERAGE      --        11.5
      *Based on projected 1992 earnings
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