Mortgage lenders are bracing for a sea change in the market, with demand for refinancing expected to dwindle and home sales to recede from last year's high-water mark.

Nineteen ninety-eight was a record year for the mortgage sector, thanks to declining interest rates, which led to a surge in home sales and refinancing. The Mortgage Bankers Association estimates loan volume for the year at $1.4 trillion, 50% of it to help customers lock in lower rates. The association is predicting that refinancing will account for only 38% in 2000.

Refinancing is expected to fall enough this year to result in an overall decline in mortgage lending, said John Matthews, executive vice president in charge of national production for CTX Mortgage in Dallas.

"It does not pay for a borrower to refinance again unless rates have dropped substantially," Mr. Matthews said. "Those lenders who had 50% to 60% of their business from refis will be greatly impacted."

He predicted that companies that focused on loans to homebuyers and builders last year will have a competitive edge.

Ed Feuer, managing director in charge of the consumer lending group at Republic National Bank of New York, said that the housing market had not peaked yet, and that mortgage lending will not decline drastically.

"Given rates and the overall state of the economy, 1999 will be as strong-if not stronger" than 1998, Mr. Feuer said. "Originators did very well in 1998 because of the refinance boom, but in 1999 purchases will be a bigger drive in the market."

Mr. Feuer said lenders will have to make changes in markets where purchases are especially strong, such as California, Seattle, Chicago, Atlanta, and Florida.

"If the volume switches from refi to purchase, the resources needed may be a little heavier-you may need to bulk up on employees and revamp computer systems," Mr. Feuer said. "Lenders understand the business is growing, and customers have a lot of choice of where to get a mortgage. Speed and ease will be a huge determinant of where customers end up."

Mr. Feuer said Republic has been upgrading its origination and servicing systems and hopes they will be ready by the third quarter.

"All lenders are looking how to handle bursts of business through technology, and it's a huge struggle with every new increase in volume," he said. "Competitive systems make your originations much more elastic, and there is not a breakdown if you're hit with a wave of applications."

Mr. Feuer said Republic National's loan volume tripled last year and will probably rise 25% to 30% this year.

Sales of single-family homes set a record last year, as did the homeownership rate, and mortgage interest rates were the lowest in 25 years, according to the National Association of Home Builders.

Single-family sales rose 7.8%, to 870,000 homes. Housing starts, which include multifamily buildings, rose 8.97% to 1.61 million units, the most since 1987.

"Refis over the past 12 months have been so significant that it might be good for the market to settle down," said Charles J. Ruma, president of the National Association of Home Builders.

Donald D. Martin, former president of the home builders association, said it forecasts 1999 gross domestic product growth of 2.5%-down from last year's 3.7%. He also said the group expects unemployment to rise to 5.1% next year.

He warned of possible changes outside the industry that might further affect home buying, such as tax increases. "Two thousand being a presidential election means that you never know what is going to happen," he observed.

Even so, the association says more homes will probably be sold this year than in 1996 or 1997. It also forecasts that mortgage interest rates, which averaged 7% last year, will decline this year, to a 6.5% average, and again in 200.

Mr. Ruma said any softening in home buying or mortgage lending this year would occur in the second half, with the success of 1998's business carrying over into the first.

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