Originations by two of the largest mortgage lenders fell in May as higher interest rates continued to reduce demand.

Countrywide Credit Industries, the nation's second-largest lender, originated $3.3 billion in May, an 11% drop from the level a year earlier. North American Mortgage Co., 12th-largest last year, produced $792 million, a 6% reduction.

Analysts attributed the decline to a slowdown in refinancing this year. But there are signs that the rest of the market is healthy.

Angelo R. Mozilo, Countrywide's vice chairman, said purchase loans in May, at $2.5 billion, were near a record, indicating that the new housing market has remained strong despite the higher rates.

And both lenders reported increases in loan applications. Countrywide's average daily applications in May increased 9% from last year, while North American's monthly applications rose 3%.

The two companies have also been increasing their presence in the subprime market, originating loans to people with poor credit histories.

Countrywide, which began originating subprime and home equity loans in 1995, produced $97 million of subprime loans and $93 million of home equity loans last month, increases of 90% and 133% respectively.

North American produced $37 million in B and C loans and had $87 million of subprime loan applications in May. The company began originating B and C loans late last year.

Gary Gordon, a PaineWebber analyst, said subprime lending had bolstered earnings for the two companies, since rates are much higher on these loans. But he added that margins may shrink as competition increases.

On the servicing side, Countrywide's portfolio was $163.4 billion at the end of May, 14% higher than last year. North American, on the other hand, is still selling servicing. Its portfolio size decreased 15%, to $12.7 billion.

Each company also reported a higher level of delinquent loans in their portfolios. Including foreclosures, Countrywide's delinquency rate was over 100 basis points higher than a year earlier, and North American's rate increased by more than 50 basis points.

But Mr. Gordon said delinquencies are still relatively low and will be a cause for concern only if Fannie Mae and Freddie Mac decide to impose stricter underwriting standards on lenders.

"Find a consumer lender where delinquencies aren't going up. The key issue is not so much delinquency, but losses," he said.

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