Morgan: Mortgage Stocks Undervalued

Mortgage stocks as a group are undervalued, according to a new research report issued by Morgan Stanley.Morgan analyst Ken Posner says he envisions a healthy rebound in profit margins for residential originators "once the industry has cut capacity," but adds that he is uncertain on the timing. Mr. Posner writes that the industry's "shake-out" is just beginning and that, if the housing market turns bearish, the correction he foresees could last into 2007. National Mortgage News recently reported that mortgage bankers funded $925 billion in loans in the third quarter, the industry's best quarter in two years. Lenders and analysts alike are predicting production declines in the quarters ahead. In his new report, Mr. Posner upgraded his rating on Fannie Mae from "equal-weight" to "overweight."