The slump in home mortgages is getting deeper and deeper.

With rising interest rates killing the long refinance boom, the nation's two largest independent mortgage banks announced that their lending volumes plunged in May -- not only from a year earlier but just since April.

Countrywide Credit Industries, the No. 1 mortgage originator, said it produced $2.3 billion of residential loans last month, down 44% from the $4.1 billion of a year earlier. Far more telling was the 23% drop from the $3 billion funded in April.

David Loeb, chairman of the California-based company, attributed the decline partly to vanishing refinancings. He also cited a strategic decision by Countrywide to protect its profit margins rather than defend share in a market marked by severe price cutting.

North America Mortgage Co., Santa Rosa, Calif., reported similar numbers: a 43% drop in originations for May from volume a year earlier and 21% since April.

Price Subsidies Rise

But Terrance Hodel, president, said North American was remaining aggressive in the marketplace. "We have had to increase the level of price subsidies to our borrowers in April and May and therefore experienced an overall loss on sales of loans for that period," he said.

Little relief from the market shrinkage is in sight. Economists who follow the mortgage market have been trimming their projections for total originations steadily.

Economist Cuts Estimate

The most recent was David Lereah, chief economist for the Mortgage Bankers Association. On Friday, he cut his estimate for the second time this year, to $712 billion, from $850 billion late last year.

More bearish is Joseph Hu, director of mortgage research at Oppenheimer & Co., New York. He is now projecting $675 billion in originations this year.

At the Federal National Mortgage Association, chief economist David Berson is now setting originations at $716 million or a bit less for this year, against an estimate at yearend of about $850 billion.

"That $850 billion was a substantial decline. We were looking for a drop of about 16% from a little over $1 trillion in 1993," he said. "We assumed rates would rise, but they went up much faster than we expected. We thought refinancings would drop by half, but it has actually been two-thirds, and may end up at a three-quarters drop."

Compounding the problems of the mortgage banking companies is the surge in popularity of adjustable-rate mortgages that has accompanied the upward spike in interest rates.

Regaining Market Share

Portfolio lenders such as thrifts and commercial banks have long specialized in adjustables, and the favorable environment has stimulated their competitive instincts. Eager to build assets, the portfolio lenders are regaining the market share that they have lost during the refi mania, which was largely a fixed-rate phenomenon.

Although mortgage banks have developed the ability to originate adjustable-rate loans, the secondary market they depend on to absorb these originations is not well developed, and some of them are looking to sell their loans to portfolio lenders.

A key strategy for mortgage banks has been to tap the growing market for loans to buy homes. Countrywide reported an increase in the volume of such loans, to $1.5 billion in both April and May of this year, from $900 million in April 1993.

Mr. Loeb also said Countrywide was emphasizing "production infrastructure control," presumably a reference to staff reductions and tightening of overhead.

Buying Servicing

Countrywide has also been buying servicing rights to maintain its portfolio growth.

Mr. Hodel of North America also said North America was emphasizing purchase mortgages, especially for first-time homebuyers. Downsizing is also under way.

He added that the company had customarily sold servicing to fund its marketing costs and geographic expansion. But he said the company was now determined to protect its servicing portfolio and would not sell servicing in excess of originations.

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