With growth in the housing market slowing from its record pace, some industry experts fear that lenders may be loosening their standards to make up for lost volume.

Housing industry economists say the market remains nearly as strong as it was last year. But lenders "are hungry for earnings maintenance and are reaching down," said Weston Edwards, chairman of the Housing Roundtable and head of the consulting firm Weston Edwards & Associates, Laguna Beach, Calif.

Price competition and lower underwriting standards pose a risk that could snowball. Significant defaults and foreclosures could ultimately hurt property values, not to mention lenders' income statements.

"Price competition has increased, forcing lenders to have thinner margins, and the number of people coming to the market has lessened," said Bryan W. Ridley, senior vice president of consumer lending for PNC Bank Corp., Pittsburgh. In some places, demand has slackened because "people have already gotten their mortgages and refis."

Mr. Ridley said many expect the creditworthiness of potential borrowers to decline because less-affluent people tend to come into the market after the wealthier borrowers.

"To sustain volume momentum, some lenders may resort to relaxing underwriting standards," Mr. Ridley said. "We have not done that, but we've seen fewer people come in as a result."

He said demand for college tuition, debt consolidation, and remodeling tends to increase in autumn and that creates an opportunity in home equity lending to make up for lost mortgage volume.

Mr. Edwards said that after a "cleansing" last year, underwriting standards have improved in the home equity sector, suggesting that this type of loan may be a viable alternative.

But he warned that a switch to second mortgages could spell trouble if volume recedes further and lenders push riskier products such as 125% loan- to-value deals.

Mr. Edwards added that in anticipation of year-2000 problems many consumers are buying in advance, and this could lead to a weakening during the first half of next year.

The National Association of Home Builders' director of forecasting, Stan Duobinis, said it is unfair to conclude that the market is significantly weaker.

Housing starts are "still 100,000 units better than what we had in all of 1997," he said. "To get total (annual) starts above 1.7 million, you would have to go all the way back to 1986.

"The numbers we were experiencing last year and the beginning of this year were unsupportable. You can't build two million housing units for very long and expect to get rid of them all."

Mr. Duobinis added that demand for second homes had declined as rates rose and the number of new, young homebuyers stayed small.

"The homeownership rate has been rising as people are shifting from renters to buyers" rather than by creating entirely new households, Mr. Duobinis said. "Except for last year, these are the best numbers for the decade."

He said that taking into account the first six months of this year, and assuming a continued slowdown in housing activity, there should be 1.608 million starts this year, down from 1.623 million.

The Commerce Department reported last week that seasonally adjusted housing starts dropped 5.6% in June, to an annualized rate of 1.571 million units.

Starts have not been this low since May 1998's rate of 1.541 million. June's index was well below economists' forecasts of a 1.667 million pace, after a 5.6% increase in May.

The Mortgage Bankers Association said Wednesday that refinancing activity had fallen 2.6% in the week ended July 16.

Home prices have been rising 5% a year since 1997-about double the inflation rate. More expensive homes, combined with higher rates, are likely to cause a downward trend in the housing market.

Freddie Mac has projected that the average interest rate on 30-year, fixed-rate mortgages will hover between 7.5% and 7.8% for the rest of the year. Last week this rate averaged 7.52%, down from the previous week's 7.58%. But these are more than a percentage point higher than the 6.5% prevailing last October.

"We kind of had a rush to the market early in the summer as rates increased and the (applications) pipeline moved up," said Brian Carey, an economist at the MBA. "There is a lag between applications and sales, but expect a drop-off in July applications and a trend down in home sales starting in August."

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