SAN DIEGO – For mortgage lenders, a two-year party is ending, raising worries about the hangover to come.

Bankers gathered here for an annual convention predict their business will fall by 50 percent next year, with an accompanying loss of industry jobs and smaller brokers.

“We think 100 to 200 mortgage companies will disappear in the next 2 to 21/2 years,” said Douglas Duncan, chief economist for the Mortgage Bankers Association.

Low interest rates have powered a record-setting home refinancing boom in the last two years, with lenders adding upwards of 150,000 new workers to help process paper, work with customers and arrange financing. But as mortgage interest rates have risen to more than 6 percent from a low of 5.2 percent for 30-year fixed-rate loans in early summer, refinancing has become less attractive.

Duncan estimates that mortgage originations will total $3.3 trillion this year, with about 18 million to 20 million loans – a level he calls “not sustainable.”

Next year, originations are expected to fall to $1.6 trillion, with fewer than 10 million loans.

The result will be branch closings and job losses, up to 100,000 of the new positions added during the boom, Duncan said.

“Not necessarily all the disappearing companies will go out of business. Many will be absorbed by mergers and acquisitions. You may even see some big guys go,” Duncan said.

Duncan’s comments come at a particularly sensitive time for U.S. economic policy-makers. Since the late 1990s, the housing industry has been one of the few bright spots in an otherwise unenthusiastic economy where unemployment now hovers at 6.1 percent.

Refinancing and low interest rates are credited for much of the buoyant consumer spending in recent years, spending that propped up economic activity when business investment was slack and the stock market was falling.

Scott Anderson, senior economist with Wells Fargo and Co., said he has little doubt that refinancing will fall as interest rates rise next year.

He expects mortgage rates to reach 7 percent to 7.5 percent some time next year – higher than the current crop but still reasonable compared with historical interest rates.

But if interest rates trend higher, home sales will suffer and that could rattle the economy.

More pressing for the lenders, however, is the coming blow to their business.

“There will be a shakeout next year, as overcapacity is reduced,” said Paul Peterson, executive vice president and chief operating officer of Freddie Mac, the mortgage giant. “Some projections are that the market will be as little as a half of this year. Some large lenders already are shrinking and closing branches.”

Peterson added that most mortgage companies will shift their emphasis from refinancing to home purchase mortgages.

Not all lenders see next year’s outlook as quite so gloomy.

“The 50 percent drop that I’ve heard about is a little extreme. Our bank is forecasting that we’ll be 25 percent to 30 percent off from 2003,” said Gary Wong, senior vice president of Union Bank of California, based in San Diego.

“We had record production in the last two years, but now there will be layoffs, maybe even thousands from major lenders,” Wong said. “Companies increased staff to address the business, but now it’s going the other way. We’re planning for it and so are most lenders.”

Wong noted that the most susceptible to layoffs are processing people and originators working on commission.

He described the predicted decline as “just returning to normal business. The last 24 months have been an aberration. Anyway, our back-shop people need a rest.”

In a general economic forecast released later Tuesday, Duncan also predicted a drop in sales of new and existing homes in 2004. He was quick to emphasize, however, that the falloff follows a record-breaking year.

“Though we’re used to lower rates recently, many people forget that mortgage rates were over 8 percent in May 2000,” he said.

Existing home sales will dip from 5.9 million this year to 5.5 million in 2004 and 5.4 million in 2005. New home sales will fall from more than 1 million in 2003 to 965,000 in 2004 and 950,000 in 2005, Duncan predicted.

“But by historical standards, home sales still will be robust,” he stressed. “The 8 percent to 10 percent decline in the next two years will return us to the record levels of 2001.”

He also saw home prices rising 4 percent to 5 percent in the next two years.

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(Tribune staff reporter Robert Manor contributed to this report.)

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(c) 2003, Chicago Tribune.

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AP-NY-10-21-03 2019EDT