Subprime woes sink real estate stocks

The hypothetical Inman Index was a sea of red ink in March as nine of the 10 brokerage, mortgage and technology companies that comprise the index lost ground. Hardest hit were mortgage company stocks, which suffered from their association with the nation’s subprime lending sector.

Shares of Countrywide Financial opened March 1 at $37.44, only to close 30 days later at $33.64, a one-month decline of 10.1 percent and a 21.4 percent drop since Jan. 1. A Forbes.com story noted that less than 9 percent of Countrywide’s loans are subprime, yet an increase in the subprime default rate compared with the prior year appeared to have “spooked investors.”

Analysts at Goldman Sachs reiterated a “sell” rating on Countrywide with a lowered target price of $33, according to NewRatings.com, while a Standard & Poor’s analyst maintained a “sell” rating with target price reduced to $24. “We believe the company’s gain-on-sale margin will come under pressure due to concerns about loan defaults in the secondary market. We are also wary of CFC’s heavy exposure to option-ARM loans,” the analyst wrote.

Other analysts took the opposite view. An analyst at Morningstar hung a “buy” tag on Countrywide (along with mortgage insurer MGIC Investment Corp. and Washington Mutual) during a radio interview, according to a MarketWatch story. Analysts at Friedman Billings upgraded Countrywide from “market perform” to “outperform” with a target price of $45, according to NewRatings.com.

In an ironic twist, the federal Office of Thrift Supervision in March approved Countrywide’s application to operate as a federal savings bank and savings-and-loan holding company instead of a national bank. The change was effective March 12.

Shares of IndyMac Bank posted the largest decline this year on a percentage basis among the 10 stocks in the Inman Index. Shares opened at $46.21 Jan. 1, crossed the $33.60 mark March 1 and closed at $32.05 March 30.

IndyMac CEO Michael Perry said volatile conditions in the mortgage market could hurt the company’s results this year, despite strengths he also citied in an annual open letter to shareholders. The company also issued a statement intended to “clarify” its position as “predominantly a prime/Alt-A lender” and a credit loss analysis of Alt-A and subprime loans.

Not all analysts (or, incidentally, reporters) were swayed by IndyMac’s protestations of differentiation. A Standard & Poor’s analyst downgraded the company’s shares from “hold” to “sell” and cut the target price to $26, according to a Forbes.com report. Analysts at Banc of America Securities reiterated a “sell” rating with a target price reduced to $27, according to NewRatings.com.

Both IndyMac and Washington Mutual joined a dubious “club” of stocks that fell to 52-week lows in early March. IndyMac, which was “caught in the sell-off,” traded as low as $27.60, compared with a 52-week high of $50.50. Washington Mutual’s shares were clocked at $39.58, compared with a 52-week high of $47.01.

In other company news, IndyMac leased 105,000 square feet of office space in Austin, Texas, to house a loan servicing center that’s expected to employ at least 400 people by next year. IndyMac is headquartered in Pasadena, Calif., and has approximately 8,000 employees.

Investors also took another swipe at shares of HouseValues, which fell from $5.39 to $5.06 in March, a one-month loss of 6.1 percent. The closing price makes HouseValues cheaper on a per-share basis than rival Move Inc., for the third consecutive month.

An analyst at SeekingAlpha, which owns shares of HouseValues, opined that the stock is “worth a strong look” for investors who “haven’t already loaded up on enough housing-related plays.” The company “remains well-positioned for growth as the real estate industry migrates to the Internet” and “has been aggressively repurchasing shares,” the analyst noted.

The only Inman Index issue in plus territory in March was Realogy, which gained 0.1 percent to close at $29.61, a $0.39 discount off Apollo Management’s acquisition price of $30 per share. If the deal, which stockholders approved at month-end, closes as scheduled April 10, shares of Realogy will cease to be listed on the New York Stock Exchange and will be replaced by another company in the Inman Index.

Nine losers pushed the Inman Index overall into the red in March with a drop of 4.5 percent, a significantly worse performance than the Standard and Poor’s 500, Dow Jones Industrials and Nasdaq Composite indices, which gained 1.4 percent, 1 percent and 0.9 percent, respectively.

Marcie Geffner is a real estate reporter in Los Angeles.

Copyright 2007 Marcie Geffner. All rights reserved. No part of this article may be used or reproduced in any manner whatsoever without written permission of the author.