J.P. Morgan & Co.'s decision to sharply curtail part of its mortgage business will shake the market for mortgage securities, but not hard enough to do much lasting damage, industry experts say.

Morgan may briefly push market prices down by selling its inventory, observers said. But once that bottleneck is cleared, products are expected to move as smoothly as they had before the New York investment bank cleaned house.

For lenders, Morgan's chief role is as an underwriter that buys mortgages, structures them into securities, and sells them to investors.

Earlier this week, the firm laid off 20 people as it shut down a unit that underwrote esoteric mortgage investments known as collateralized mortgage obligations, or CMOs. Morgan is, however, staying in the business of underwriting more typical mortgage securities, a spokesman said.

"We've taken resources away from a segment of the market where there was diminished activity and placed them in areas of our mortgage business where there is growing client demand," the spokesman said.

These areas include prepayment hedging, securities backed by commercial mortgages, and asset-backed securities, he said.

Morgan's shuffling won't stifle mortgage lenders' ability to sell into the secondary market, observers said.

"They just weren't that big a force that their exit will have a large impact on banks," said David N. Bernstein, a principal with Furash & Co., New York.

The cuts "have very little impact on mortgage lending activities," said David Lereah, chief economist at the Mortgage Bankers Association of America. "This will not affect consumers whatsoever."

In shutting down its CMO unit, Morgan is exiting one of the riskier parts of the business. CMOs fluctuate sharply during interest rate shifts, making them more risky than standard mortgage securities.

Right now, pension funds and mutual funds are the primary purchasers of CMOs, using them to hedge, or buffer, losses that other securities in their portfolios may experience.

Morgan's move follows other cutbacks at investment banks that have seen soft demand for mortgage-backed securities.

Bankers, also feeling the pinch, have been doing less securitization than in years past. UJB Financial Corp., for instance, is holding on its books a large percentage of originations.

Right now, the bank is better off earning interest income on the loans rather than trying to gain fee income by selling them into the secondary market, said Anthony Allora, executive vice president of UJB, based in Princeton, N.J.

Statistics support Mr. Allora's sentiments. The market is soft this year, after the refinancing boom of 1993 and early 1994 made secondary markets sizzle.

Mortgage banks issued $149 billion of mortgage-backed securities, including $16 billion of CMOs, for the first seven months of this year, according to Inside Mortgage Securities.

The figures compare with $525 billion of mortgage securities, including $103 billion in CMOs, during the first seven months of last year, the industry newsletter said.

Still, the market itself remains large, with a total $2.3 trillion of mortgage securities outstanding at the end of July.

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