Rising interest rates are taking a toll on the mortgage business.

The latest data show a dramatic decline in U.S. housing starts in April and a sharp drop in mortgage applications last week. Economists say the market was bound to cool off at least somewhat from 1998's unusually robust level as rates rose. And the 30-year, fixed-rate mortgage rate was at 7.10% last week, up from a 30-year low of 6.49% last October.

Lenders said their focus has shifted from refinancing to home-purchase loans as rates have risen. And though most report that business remains brisk, some are predicting layoffs and consolidation, as lenders - who increased staffing during the refinancing wave - scramble to readjust.

"If we had spent a lot of money on bricks and mortar and had radically expanded the staff for the last couple of years, we would probably be pretty nervous right now," said Kevin D. Race, president and chief operating officer of HomeSide Lending in Jacksonville, Fla. "You will start to see some announced layoffs in the next 60 to 90 days that are substantial in some retail shops."

Mortgage applications for the week that ended May 14 fell 10.3% from the week before and 5.9% from the same week a year earlier, according to the Mortgage Bankers Association. Housing starts slipped in April, for the third consecutive month. The 10.1% decline was the largest since January 1994.

A Merrill Lynch senior economist, Stan Shipley, attributed the decline in housing starts to higher mortgage interest rates. But he also said the statistics may have been distorted, as mild winter weather let builders complete many homes ahead of schedule.

Lenders are saying their focus has been shifting, with more volume going to purchases, and less to refinancing. They also say the staff and technology they added last year to handle refinancings will be used, but differently.

"Technology and staff are scalable up and down," said Ed Feuer, the director in charge of Republic National Bank of New York's consumer lending group. "The change in the industry is that the majority of business is now purchases, which take much more attention. Customer service is more important in a purchase environment than in a refi environment, and that's where staff will be used."

Mr. Race said HomeSide Lending, a unit of National Australia Bank, is insulated from a downturn because it does not have retail branches and gets most of its mortgages from brokers, correspondents, and banks that agree to sell HomeSide all their loans.

"That's the trade-off we made. We did not see some of the boom in terms of origination volumes that some of the retail-oriented players did the last year-and-a-half," Mr. Race said. "By the same token, we are not going to have the issues to deal with in terms of layoffs and fixed-cost structure going into this part of the cycle."

Mr. Race said lenders with large retail networks and brokers may have something to worry about in the coming months.

Countrywide Credit Industries, the largest independent mortgage company, laid off about 5% of its work force in February.

Brokers historically have been "very sensitive to refinance changes," Mr. Race said. In last year's refinance wave, brokers were the source of 50% of originations industrywide, he said; in "nonrefinance years" they account for only 30%.

David F. Seiders, the chief economist for the National Association of Home Builders, said the 10% decline in housing starts "is certainly higher than we expected." But he predicted that starts could rise next month despite rising rates.

"A lot of fence-sitters are spurred to buy, because they are afraid the rates might go even higher," Mr. Seiders said.

Steven Berman, a statistician at the U.S. Commerce Department, which released the housing figures Tuesday, said the sum of the first four unadjusted months of 1999 are still the best first four months of a year on record.

"If Mark McGwire hits 60 home runs this year, are you going to say his production plummeted? Of course not - it is expected," Mr. Berman said.

The decline brings the seasonally adjusted annual rate to 1.574 million units. Housing starts peaked in January at an annualized rate of 1.82 million units. Last month's decline is the greatest since a 17% drop more than five years ago and the lowest number of starts since an annual rate of 1.541 million units in May 1998.

Mr. Shipley said that despite April's figures, housing starts are likely to be up this year over last year, and loan demand should far outstrip that of 1998.

The Federal Reserve began a policy meeting Tuesday and indicated no immediate change in interest rates. But the policy-setting Federal Open Market Committee said it adopted a formal "bias" in favor of higher rates if it feels the eight-year U.S. economic expansion is in danger of overheating.

Mr. Seiders said the cooler housing numbers suggest that a change in the bias is not needed.

HomeSide's Mr. Race predicted that leaner volumes this year would accelerate consolidation in the mortgage industry - but on the originations side of the business. The servicing end of the business has been consolidating quickly in the last 18 months.

Some lenders with large retail networks have refrained from cutting staff, thinking they could take market share away from their competitors, Mr. Race said.

"When the overall market contracts 15%, it's very difficult to take share," he said. "They're going to have to rationalize their organizations."

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