Mortgage industry employment declined in July for the first time in 22 months, raising the specter of a tough period ahead as higher interest rates cut into loan demand.

Preliminary Bureau of Labor Statistics data released this week indicate that the number of mortgage bankers and brokers fell to 373,300, from 375,700 in June.

The largest independent home lender, Countrywide Credit Industries, slashed 517 jobs in its retail and wholesale production divisions, reducing those areas by 6.76% and 5.6%, respectively. That followed a much larger round of layoffs in February at the Calabasas, Calif., company, which is known for quick responses to changes in application volume.

I think this is the beginning of a long series of job losses in the industry. We'll see significant layoffs all through this year and into next, said Mark Zandi, chief economist at Regional Financial Association, a West Chester, Pa., economic consulting firm. We're in for a really tough time, especially compared to the salad days of the last couple of years.

It's like 1994 and 1995 all over again," said Brain Modiano, the chief financial officer of Banc One Mortgage Corp., referring to a wrenching period at the end of the last refinancing boom. Employment peaked at 271,000 in March 1994, then plummeted to 198,000 in just three months.

In the last 12 months the industry has added 81,300 to its ranks, even as interest rates bottomed out and started to rise again. Mortgage industry jobs climbed from 319,000 at yearend to 370,000 in April and 373,000 in May. The average rate on a 30-year fixed-rate loan jumped to 7.89% last week, up from 7.70% a week before and 6.94% a year earlier. Wednesday, the Mortgage Bankers Association said the decline in its application index continued with a 4.1% drop in the week ending Aug. 6.

But Mr. Zandi said that the falloff in loan demand probably will not lead to a market shake-out like the one in 1994, which put many companies out of business and left tens of thousands of people unemployed long-term.

If there had to be a time for this to happen, this is it, because the job market is so tight right now, Mr. Zandi said. It is better to be looking for a job now than it was in '94.

Mr. Zandi said that the rest of the financial services industry is doing quite well and mortgage skills are transferable to other sectors.

Banc One Mortgage avoided closing a small processing facility in Oakbrook, Ill., that employed about 50. The center will instead process third-party originations for Bank One Corp.'s home equity and home improvement lending unit.

We found ways to shift resources to other organizations within Bank One, which allowed us to shrink without incurring layoffs," Mr. Modiano said.

But Mr. Zandi said that some families would have to pick up and move in the hunt for those jobs.

Last year the industry made $1.5 trillion of loans, a total that is expected to fall to the $1.2 trillion range this year. Mr. Zandi forecasted that next year would only bring in $800 billion to $900 billion in loan originations.

He warned that some lenders might try to mitigate their losses by lowering loan standards to keep the pipeline full. This would result in higher credit losses, even if it did provide a near-term fix.

The American Bankers Association's chief economist, James Chessen, said he would be surprised if lenders resorted to more aggressive tactics like accepting lower credit standards.

It is natural that there would be some retrenchment in employment, as painful as that obviously is, Mr. Chessen said. Hard decisions will have to be made, but lowering standards would present a huge risk to businesses, and I can't imagine that any lender would be anxious to do that at this point in the business cycle.

Back in February, Countrywide eliminated 1,000 jobs, half of them temporary positions. But since then Countrywide has been hiring in its retail arm at the same time as it has been letting other workers go, a spokesman said. The hires have mostly been sales and business-development personnel; the reductions have been in back office and administrative functions. In fact, the head count in Countrywide's retail division grew steadily for four months, peaking at 3,609 in June.

By July, it got to the point where we did need to make some cuts, the spokesman said, and the retail division fired 202 employees.

In Countrywide's wholesale department, which buys loans from brokers, the number of employees has declined steadily since January. Last month it was 1,584, down 6.76% from June and 23% smaller than at the beginning of the year.

The company has found that in some parts of the country there were small wholesale offices near large ones, and as volumes declined, it saw fit to consolidate these branches, the spokesman said. Some employees were transferred to the larger branches, but not all, he said.

Most lenders are staffed more appropriately, have more variable costs and more temps than in 1994 and 1995, Mr. Modiano of Banc One Mortgage said.

However, he added, everybody has to look at their staffing levels. ?

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