Aames stock dive reflects lender woes.

Shares for L.A.'s high-flying Aames Financial Corp. have come crashing back to earth in 1997, falling from a high of nearly $39 last October to $10.875 at the end of trading on May 8.

The tumble at Aames, which specializes in mortgage lending to people with credit trouble, reflects a similar fall for sub-prime lenders nationwide, following several well-publicized events in the industry earlier this year.

Still, Aames' stock has fallen harder than most among sub-prime lenders - in part due to the recent announcement by Aames about its limited growth potential for the near term.

Company Chairman Gary Judis says the downturn is without basis - and analysts tend to agree. "I think our track record speaks louder than anything I can say," said Judis who blamed much of Aames' recent tumble on trends in the sub-prime lending industry as a whole.

"That's what happens when you're part of a sector. You have to live with those values" that investors give you, he said.

Judis and analysts traced the beginning of the current slump for sub-prime lenders to January, when Mercury Finance Co. announced it had inflated its earnings figures for the past three years. Mercury is a sub-prime lender that specializes in auto loans.

While Mercury is not involved in mortgage lending, the disclosure of its financial misstatements cooled off investor appetites for all subprime lenders.

Following Mercury's announcement, two subsequent developments further dampened investor appetites for sub-prime lender stocks, Judis said.

The first came in March, when the nation's ninth largest credit card issuer, Advanta Corp., said it was facing large losses due to bad credit card loans.

The second development came in April, when Moody's Investors Service lowered the rating on the subordinated debt for Cityscape Financial Corp., one of Aames' competitors. Moody's cited Cityscape's "increasing level of loans 90 or more days delinquent, and the lack of sufficient servicing capability to deal effectively with problem assets," in its decision to lower the rating.

Following those negative developments, some analysts further dampened investor enthusiasm by saying that sub-prime mortgage lenders were being too aggressive in their gain on so-called sale accounting estimates. This is the way sub-prime lenders determine how profitable their loans will be in the future, taking into account factors such as default rates and early loan repayments.

All those negative developments have hammered not only Aames' stock this year, but also the stock for most of its competitors.

Cityscape closed last Wednesday at $14,375, down 61 percent from its 52-week high of $36.875. Money Store closed last Wednesday at $23.125, down 29 percent from its 52-week high of $36.50; and IMC Mortgage Co. closed at $11.875, down 53 percent from its 52-week high of $25.375.

Within Aames, the company's stock was hammered by an announcement in early May that the company may reduce its bulk purchases of sub-prime mortgage loans from third-party lenders. That helped fuel a 20 percent stock drop.

ln the midst of all this, Aames announced last week that Judis would be vacating his posts as CEO and president, only retaining the position of chairman. Former COO Cary Thompson is assuming the role of CEO, and former vice chairman of the board Neil Komswiet is taking over as president.

Company officials say the moves will allow Judis to focus more time on broader strategic issues.

Aames' shares closed down five-eighths of a point the day of the announcement, though analyst Michael Abrahams of Sutro & Co. said the move had been expected.

"I think Judis wants to pass on some of the day-to-day responsibilities," Abrahams said. "It's important, but it's no surprise."

Judis has sold off over half of his holdings in Aames over the last three years - a move to diversify his holdings, he explained and not reflective of the company's situation.

"He's been selling consistently," said Michael Diana, an analyst at Bear Stearns & Co. Inc. "(Judis) started over two years ago and has been selling every quarter. In my view it's more a systematic diversification of his net worth" rather than a lack of confidence in the company.

Indeed, analysts say they see few problems with Aames' fundamentals apart from its early May announcement, and they noted that the stock may be a relative bargain at its current price.

"The company itself isn't suffering," said David Graifman, an analyst at Standard & Poor's Rating Service. "Capital markets have had a negative reaction to problems that have developed in sub-prime lending in general.

"Aames has been hit, but they're not alone," Graifman said.

Aames even received a minor boost on May 6, when Montgomery Securities issued a report with a "buy" recommendation for the company's stock.