The stock market has slumped and foreign economies are crumbling, but the U.S. mortgage industry's drive for a record-breaking year is picking up speed.

The Mortgage Bankers Association, which has forecast a record $1.3 trillion in home loans, may set its target even higher if interest rates continue to drop, said David Lereah, the trade group's chief economist. The previous watermark was set in 1993, when the industry originated $1.0 trillion.

As other markets swooned, mortgage refinancing activity jumped 44% last week, and home purchase activity increased by 13.3%, according to the MBA's latest indexes.

Low interest rates and a healthy U.S. economy are a "dynamic duo" when it comes to the housing market, Mr. Lereah said, and the mix is about to get better.

There are roughly $350 billion in mortgage loans with 7.5% interest rates, and all of them become refinancing candidates if interest rates go to 6.5%, Mr. Lereah said.

"The world markets are in disarray, the U.S. is the safe haven for funds-I think we're going to get there," he said.

On Thursday, Freddie Mac reported the average rate on a 30-year mortgage fell last week to 6.77%, from 6.82% the previous week. And the continued flight from equities to bonds this week suggests the trend has continued.

"Volumes will be out of sight, housing markets are booming, and we're looking at record home sales," Mr. Lereah said.

Lenders are hiring, with staff working extra hours in response. "Yes, the phones are ringing off the hook," said Thomas M. Garvey, retail channel executive, Chase Manhattan Mortgage Corp.

Though last week's dip in interest rates may signal the start of a second surge this year, Mr. Garvey said, 1998 has felt "like a continuous boom. Application activity has been strong all year.

"We've gone through a beautiful cycle," Mr. Garvey added. Chase Mortgage had just enough time to "digest" all the applications it received during January's upsurge in lending activity, before the most current wave started to come in.

"Volume is very strong," said Sterling Edmunds, chief operating officer of Crestar Mortgage Corp. The bank has hired about 150 temporary personnel to deal with the increased bulk, he said.

Loan volume may break records, but Crestar, like many lenders, is using technology to help it cope.

"We've done a lot to streamline operations," Mr. Edmunds said. "It takes us a lot less time to process a loan."

On the darker side, the onslaught of prepayments is expected to further damage hedge funds and servicers that are still reeling from January's refinancing activity.

It's great for consumers and originators; "just remember that someone has to be on the losing end," said Kenneth Posner, analyst with Morgan Stanley.

Lenders, hedge funds, and mortgage-backed securities issuers are facing another wave of adjustments to servicing portfolios, writedowns, and blowups, he said, adding, "It's going to be more of the same."

Several hedge funds and lenders have been hammered this year by loans that were prepaid faster than expected, and Mr. Posner predicted further earnings adjustments in the months ahead.

First City Financial Corp. said Wednesday that it expects to take a $10 million to $14 million provision in the third quarter to cover rising prepayments.

The company also canceled a proposed public offering of its cumulative preferred stock.

"Servicers that haven't hedged are going to have problems," Mr. Lereah said. "Hopefully, they are a little more ready for it" than they were in January.

Specialty finance companies have been particularly hard hit by falling interest rates this year, with some seeing share prices tumble 50% following writedowns.

The worst is not over in that sector, Mr. Posner said. "Obviously, there's going to be more pain."

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