As high interest rates cut into mortgage demand, Countrywide Credit Industries is ramping up home equity and subprime mortgage lending to partially make up for lost volume.

The Calabasas, Calif., lender reported Wednesday that its total loan production was off 34% from September last year, to $4.7 billion. But it said home equity lending was up 67%, to $346 million, and subprime lending 35%, to $306 million.

Countrywide's monthly report underscored a shift in strategy throughout the mortgage industry. Now that the refinancing boom has ended, lenders are making more loans to people who previously might not have qualified for a mortgage. And that is beginning to fuel concern that credit losses could rise and that increased competition -- spurred in part by programs unveiled this year by Fannie Mae and Freddie Mac, the major secondary-market buyers of mortgages -- could freeze out smaller players that serve local markets or specialize in the subprime loans.

Analysts said big players like Countrywide and the big bank-owned mortgage banks like Wells Fargo & Co.'s Norwest Mortgage can lend profitably in the subprime sector, in part because their technology enables them to price loans according to risk.

"Delinquencies might rise, but you might not see a commensurate rise in losses,'' said Joel J. Houck of A.G. Edwards & Co. "But for those issuers who stretch for volume, they'll have problems down the road."

Mr. Houck noted that Countrywide is staying away from risky 125% loan-to-value home-equity loans, and that most of its subprime loans are to customers whose credit is only slightly impaired.

The "Norwests and Countrywides are more disciplined,'' said Howard Shapiro of PaineWebber Inc.. "It'll be the smaller players that get hurt" as they struggle to keep market share by pricing loans too cheaply.

Countrywide said its applications were off more than 50% from September 1998, to $314 million; and its pipeline of loans in process shrank by 38%, to $9.8 billion. Since January, Countrywide has cut its lending staff by about 17%, to 5,010.

Countrywide has said that it is using the so-called "macro-hedge" strategy: leaning on servicing revenues to compensate for the reduction in new loans. Its servicing portfolio increased 21%, to $239 billion, in the 12 months ending Sept. 30.

Countrywide's executive vice president of corporate finance, David Bigelow, said though the current rate environment make home-equity and subprime products more of a priority, Countrywide would continue to use conservative assumptions in pricing the loans.

"There is a lot of business out there, and I think we could grow very rapidly. But we are looking for controlled growth in a conservative and rational manner," Mr. Bigelow said. "There is a lot of room for growth before we level off," he added.

He noted that home-equity loans always rise when refinancings slow, because they become a better way for consumers to tap into the value of their homes.

Salomon Smith Barney analyst Thomas O'Donnell agreed that the key to success lies with pricing. "If losses go up to 40 or 50 basis points, you have to make sure that you're charging 50 to 100 basis points to offset it. If you have good underwriting standards, your losses should be small."

Mr. O'Donnell added that Fannie Mae's official entrance into the sector last week, when it launched a program aimed at providing lower-cost mortgages for people with slightly impaired credit, would spur interest in serving the sector and provide liquidity to help lending increase their subprime business.

Countrywide blamed some of its production losses to closing 90 branches on the East Coast for two days as Hurricane Floyd strafed the region, but analysts said the loan growth would continue to be difficult.

"This year, we had been hoping that the company would generate 10% growth, and we're more than likely going to have to reduce our production estimates for the full year," Mr. Houck said.

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