Two Ways to Play Mortgage Lenders

"They're getting squeezed by lower gains on sale margins. That business is under severe pressure," says an institutional broker who is advising hedge fund clients to sell IndyMac's stock.

"I don't see the capital markets coming back anytime soon on the gain-on-sale mortgage business," the broker says.

In a research note Friday, Bank of America analyst Robert Lacoursiere reiterated his sell rating on IndyMac and Countrywide Financial(CFC Quote).

The demise of two leveraged mortgage funds managed by Bear Stearns(BSC Quote) "could be the tipping point of a broader fallout from subprime mortgage credit deterioration that would lead to cascading deleveraging and ultimately ending with higher rates to new mortgage borrowers," Lacoursiere wrote in his note.

The Bear Stearns fallout "foreshadows pressured gain-on-sale margins and more residual writedowns for originators while feeding back into weaker house prices by taking the marginal buyer out of the market through higher rates and further credit tightening," he wrote.

"We believe that Countrywide and IndyMac's credit risk and anticipated increase in future credit losses are not yet reflected in their current stock prices and that their risk/reward profile support our sell rating," he wrote.