After ascending from a 30-year low to a five-year high in 17 months, the average rate for a 30-year mortgage began retreating steadily at the end of May, prompting an uptick in lending volume and cautious optimism in the beleaguered business.

Noting economic data that suggest the Federal Open Market Committee may soon cease raising short-term rates, lenders said the rising-rate cycle appears to be ending without having put much of a dent in housing demand. What it did do, though, was cut into mortgage refinancing volume and hasten consolidation in the home loan industry.

"The borrower has lots of different options now to hedge the interest rate risk," said Greg J. Gwizdz, a divisional manager at Wells Fargo Home Mortgage of Des Moines. "We've got this 10-year wealth effect, this boom economy, and homes that have been appreciating at 6.4%." But "all of a sudden, the Wellses and the BofAs and the Countrywides of the world are getting bigger and bigger.

"Medium-sized players seem to be consolidating or going out of business, which is a good thing for us," Mr. Gwizdz added. "It means less competition."

The 30-year mortgage rate Friday appeared to have settled at 8.40%, according to HSH Associates. Economic indicators point to a slowing economy and lower inflation, observers said, and this could bode well for a business that was clobbered as the average 30-year rate rose from a low of 6.68% on Oct. 2, 1998, to a high of 8.82% May 19.

"We'll probably stay in the trading range we have for the next four or five months and then see a slight dip, with rates getting better," said Tom Black, vice president of secondary marketing at MortgageIT.com of New York. "People are starting to bet that the Fed might be done," he said.

Doug Duncan, chief economist for the Mortgage Bankers Association, said that though all economic indicators from the last month - including the producer price index released Friday - showed a decline in economic activity, it was a rise in the May unemployment rate, to 4.1% from April's 3.9%, that really stunned economists.

"Not a single forecaster saw that coming," he said.

The Federal Open Market Committee probably will not raise rates at its June meeting, Mr. Duncan said, but will instead wait to examine the next round of economic numbers.

"If the labor report turns out to be an aberration, they will raise rates one more time," he said. "But our expectation is that the Fed will wait until August if they do."

Mr. Black also said the fed funds futures rate has fallen below the actual rate of 6.5%, which indicates that the futures market is betting rates will come down.

Nonetheless, optimism in the mortgage industry was tempered. "It's a toss-up whether or not the Fed feels it's going to need to continue with the path of raising rates in order to make sure to keep inflation in check," said Todd A. Householder, executive vice president for secondary marketing at National City Mortgage Co., a Miamisburg, Ohio, subsidiary of Cleveland-based National City Corp. "But we're encouraged from the fact that this last month is the first that we've seen some economic indicators pointing to the economy cooling off a little bit."

"A bad report or a bad inflation report could easily [make] mortgage rates jump up a half a percentage point in a very short period of time," added Keith Gumbinger of HSH Associates in Butler, N.J. "It would be foolhardy to believe that one month's cooling numbers would be enough to keep the Fed at bay for any long period."

Most lenders, however, indicated that volume and applications have picked up significantly in the last month. For example, Countrywide Credit Industries Inc. of Calabasas, Calif., last week reported that its total fundings in May had reached $5.1 billion, up 15% from April, and that total purchases came in at $4.1 billion, an 18% jump.

"We are seeing volume come up across the board," Mr. Black said. "As long as the economy stays strong and consumer confidence stays strong, we'll continue to see a viable purchase market."

Mr. Householder said National City's application volume has picked up in the last couple of weeks, though he attributed some of this to "seasonality."

"There definitely are some potential homebuyers - consumers who were sitting on the sidelines - who after seeing rates go up over the last year, felt like this gave them an opportunity to step in," he said.

Mr. Duncan of the MBA agreed. "There's no question that part of this was people jumping in when rates fell," he said, adding that his association's seasonally adjusted purchase application index reached an all-time high during the week that ended June 2.

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