The anti-Countrywide

Hudson City Bancorp is the biggest winner in the S&P 500 the last month, up 21%, and it's a mortgage bank. How did one lender escape the subprime carnage?

By Rob Kelley, staff writer

NEW YORK ( -- Mortgage companies have dominated the headlines lately, and the news has been uniformly bad, so it might be a bit of a surprise to some investors that the best performer in the S&P 500 the last month is a lender.

New Jersey-based Hudson City Bancorp (Charts), whose main line of business is making traditional mortgage loans, albeit big ones, has more than just weathered the subprime storm. Its stock has jumped 21 percent since the market peaked in July, while competitors like Countrywide (up $1.98 to $21.79, Charts, Fortune 500), the nation's largest mortgage lender, have tumbled on concerns about rising delinquencies on subprime mortgages that sparked a broader credit crunch in markets around the world.

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For much of the past five years, Hudson's stock growth lagged that of its larger, more diversified rival, but all that changed in July when the credit crunch, well, crunched.

"If we compare this to the Titanic going down, then Hudson City is the lifeboat for some of these mortgage broker firms," said James Abbott, an analyst with the investment bank Friedman, Billings, Ramsey & Co (FBR). "A lot of small mom-and-pop mortgage brokers are looking for places to send their business, and Hudson is one of the few appealing options right now."

Back when credit was easy, Countrywide expanded its offerings into low down-payment mortgages and launched a business focusing on subprime borrowers, with less than top credit ratings. In other words, it went for the risky stuff.

Hudson weathered the recent storm by focusing exclusively on the prime mortgage market - borrowers who have strong credit histories. It is very conservative in who it offers loans to, and as a result has only written off $557,000 in loans over the last 10 years - a remarkable statistic considering the major write-downs that subprime lenders are taking now.

And it is a true thrift lender, whose only investments are mortgages.

"We call our product 'dull and boring,'" Hudson City CEO Ron Hermance told "Our main concern is credit quality. We lend money to people who almost don't need it."

Accordingly, Hudson doesn't - and has never - issued subprime or low down-payment mortgages. And unlike many other lenders, they hold onto all mortgages they originate rather than selling them on the secondary market.

While other lenders offered exotic loan deals, sometimes for the full value of a house, Hudson says its average borrower put down 42 percent of the home's value the last two years and financed the rest.

And it serves the greater New York market, with an ample supply of wealthy real estate buyers and valuable properties.

"It's a very focused model here. We do mostly jumbo mortgages to people who could probably get more leverage from another lender," said Hermance. "But they can't get better prices - so we trade that price differential for credit quality."

Hudson is about two-thirds the size of Countrywide, with a market cap of about $7.4 billion, compared to its rival's $12.5 billion.

Nor does it hurt that the real estate markets that Hudson covers - New Jersey, New York and Connecticut - have stayed strong, despite the downturns in other regional markets.

But things haven't been all easy for Hudson in the current market. The company raises all of its money by offering attractive short-term deposits to clients. It then lends that money long-term for higher rates.

But with a relatively narrow spread between short- and long-term rates, the company's margins have been slimmer than usual.

As such, analysts say that Hudson, along with other lenders, would be a big beneficiary of a Fed rate cut, which would spur business.

Hudson is also unusual among mortgage lenders in that it has so much money on hand - it is feeling no credit crunch at the moment.

"They have so much capital at their disposal, they don't have this liquidity crunch like their competitors do," said analyst Jaime Peters of Morningstar. "They can buy and hold mortgages for a very long time. They might be the only people out there in good buying position at this point, and at these current prices those could be a good deal."

The company also buys adjustable- and fixed-rate mortgages from other lenders.

"We view Hudson City as a tremendous beneficiary of this market because they're one of the few pure-play thrifts," said FBR's Abbott. "They are also one of the few mortgage companies out there with low execution risk right now."

After its huge recent spike, Hudson's stock is currently trading just north of $14, about in line with Morningstar analyst Peters' fair value estimate of $14.

Analysts expect the company to earn 57 cents a share this year, for a price-to-earnings ratio of 24.7. Battered Countrywide's P-E is about 8.8.

So while Hudson has certainly enjoyed success lately, it has also seen many safe-haven investors bid its price up. Does that cut the stock's upside?

"[Hudson] is not likely to experience meaningful earnings growth until the Fed starts cutting interest rates," wrote Bear Stearns analyst Sal DiMartino in a late July research note.

Hudson City itself appears quite confident about its prospects, planning to buy back a huge chunk of stock at current prices. The lender recently OK'd the buyback of more than 50 million shares - or more than 10 percent of its total outstanding.

FBR's Abbott does not own shares of Hudson City, but the company has done investment banking business with Hudson. DiMartino does not own shares of the company, but Bear Stearns has pursued investment banking business with Hudson. Morningstar analysts do not own shares of the firms they cover, and their company does not do business with Hudson. Top of page