Home lenders face some tough staffing choices, with business expected to drop 40% to 60% next year.

Optimistic companies will consider holding on to employees in the hope that a pickup in home-purchase loans will offset a probable decline in refinancings.

Pessimists will proactively cut back, starting with temps and contractors, discounting an expected extension in the first-time homebuyer tax credit.

If the lenders strategize correctly, they stand to either make or save themselves a lot of money. But there are serious downsides to being wrong. For example, if interest rates rise and volume plummets, the cost of maintaining legions of employees would be prohibitive. Conversely, if a lender begins layoffs, it could get caught if interest rates unexpectedly drop and mortgage applications flood in without enough staff to process them. Bottlenecks could hurt lenders' reputations among consumers, and hence future business.

One way to avoid layoffs, already in use at some lenders, is moving underwriters, title reviewers and other production employees to servicing arms, where their skills can be used to process troubled borrowers' requests for loan modifications.

"Everyone is getting ready for a tough year next year," said Dan Cutaia, the president of Fairway Independent Mortgage in Sun Prairie, Wis. This year, "a lot of companies made good money in production, but if that goes away due to reduced volumes, and they have to cut costs, it could be a bad year on both the production and servicing side," he said.

Mortgage origination profits have buoyed banks this year, and their absence next year could hinder the fledgling industry recovery even as credit losses decelerate, analysts said.

"Even though banks are marginally profitable on the origination side, they're still sweating bullets on the credit side," said Carole Berger, a banking analyst at Soleil Securities Corp. "I'm convinced [mortgage] profits will be down and first-half comparisons will be difficult" next year.

Michael J. Brauneis, the director of regulatory risk consulting at Protiviti Inc., a unit of Robert Half International Inc. in Menlo Park, Calif., said he does not expect lenders to lay off full-time employees "at a level commensurate with the drop in volume."

"A very significant percentage of the increase in capacity that we've seen this year" came from temporary or contract employees, he said. "In other words, capacity that can quickly be dialed back as volumes drop."

Many lenders are furiously trying to strategize, he said, because "few, if any, industry executives think the 2009 refi boom is going to carry into 2010."

Bank of America Corp. and Wells Fargo & Co., the two largest originators, with a combined 44% market share, are aware of the problem.

B of A has moved a few hundred employees from former Countrywide Financial Corp. branches that had back-office fulfillment operations to its home retention center, said Jumana Bauwens, a B of A spokeswoman.

She would not discuss the company's strategy for 2010 and maintained that B of A has made no large-scale layoffs other than the 7,500 related to integrating Countrywide.

Kevin Waetke, a Wells spokesman, said his company steadily adjusts staffing based on internal data, including interest rate projections and loan application volume.

"The marketplace is fluid, and we make sure, as demand increases, we staff appropriately and, as demand decreases, we can respond appropriately," he said, adding that Wells expects industrywide production to drop to $1.7 trillion next year.

That is a higher forecast than the Mortgage Bankers Association's latest projection of $1.1 trillion to $1.5 trillion of mortgage originations in 2010, down from $2.6 trillion estimated for this year. Jay Brinkmann, the trade group's chief economist, said an extension of the homebuyer tax credit, which the Senate approved on Monday, was not factored in to the forecast.

Tom Kelly, a spokesman for JPMorgan Chase & Co., said some employees at its mortgage arm have moved to loss mitigation, but he would not specify how many.

Smaller mortgage lenders also are trying to prepare — by looking to larger firms for direction.

Matthew Pineda, the president of Castle & Cooke Mortgage LLC in Salt Lake City, said he is taking a cue from Wells, which has been telling correspondents that interest rates could rise by as much as 150 basis points next year.

"If that happens, they will be able to handle capacity without having too much staff," he said. "The overall question is, how do you maintain efficiency and profitability no matter what the market does?"

When mortgage volume drops, fraud tends to increase as originators stretch to get those fewer borrowers into mortgages, said Pineda. Combating fraud and imposing more stringent compliance and risk-mitigation guidelines inflate expenses at the same time that revenue is falling, he said.

Terry Wakefield, the chief executive of Wakefield Co., a Grafton, Wis., mortgage consulting firm, said that because of the housing downturn, few, if any, mortgage lenders have made the necessary investments to automate originations.

"The only way they can deal with increases or decreases in volume is to lay off or hire people," Wakefield said. "In this day and age, that is so inefficient and expensive that it creates an archaic cost dynamic."

Compounding the problem is that so much is riding on whether the Federal Reserve can engineer a smooth exit from its commitments to buy up to $1.25 trillion of mortgage-backed securities from Fannie Mae, Freddie Mac and the Government National Mortgage Association, analysts said.

Those purchases sparked the refi boom that began in late November 2008 and peaked in the second quarter, analysts said. If the Fed stops buying on March 31 as planned, the likely result will be steeper funding costs and higher mortgage rates.

Walt Schmidt, a senior vice president at First Horizon National Corp.'s FTN Financial Capital Markets Corp., said refis have fallen off because "most of the people who can refinance already have."

A looming concern is that with unemployment expected to hit 10%, "fewer and fewer households have the ability to buy a house," Schmidt said, which would dampen the home-purchase market.

"All the large originators see the same data, so it makes sense they're paring back," he said. "Mortgage rates would be a lot higher if it weren't for the Fed."

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