Bank of America Mortgage Co. is laying off 720 employees, as rising rates continue to take a toll on the home loan business.

"The cuts represent about 11% of our total mortgage employee base," spokeswoman Shirley Norton said Friday. She attributed the layoffs to a decline in demand as higher rates discourage new borrowing, and said the layoffs would take effect Nov. 30. "We are in the process of telling people now," she said.

Lenders got a brief reprieve from rising interest rates late last month as Treasury securities -- the benchmark for mortgage rates -- rallied in the wake of the Federal Reserve's 25 basis-point rate hike on Aug. 24. But the rally fizzled when investors decided that further rate hikes might be in the offing. Rates resumed their climb, and the Bank of America Corp. unit is just one of many mortgage companies battening down for an extended slump.

"Rates are back up with a vengeance," said Paul F. Bognanno, president and chief executive of Principal Residential Mortgage Inc., a unit of Principal Financial Group in Des Moines.

"We did get below 8% for a while, and we saw a nice pickup with that improvement in rates,'' said Mel Steele, senior vice president for secondary marketing at PNC Mortgage in Vernon Hills, Ill. But he added, "This is very much a cyclical business, and we're having to deal with that cycle now."

A report issued Friday by the Labor Department showed a 2,000-person decline in mortgage industry employment from July to August and a 6,000-person decline since May, as mortgage bankers and brokers shed employees for the third consecutive month after four years of growth. The declines came as overall employment and overall financial services employment rose.

The Mortgage Bankers Association reported that mortgage applications were up 4.5% in the week that ended Aug. 27, reflecting the brief rally, but that the pressure to reduce staff was unabated. The MBA predicted that mortgage lending will drop to about $1.2 trillion this year, from $1.5 trillion last year, when volume was driven by homeowners refinancing loans. The association also said that originations would decline further next year, to $935 billion.

"I was having CEOs calling me up and asking, 'Where is the business? Our pipelines are really drying up,' " said the association's economist, David Lereah. "Plus, we are going to do about half the refi business that we did last year, so it's going to have to impact staffing as well.".

After the brief rally, fear that the Federal Reserve would have to raise rates again prompted selling of Treasury bonds. At the same time, the difference in yields, or spread, between Treasuries and mortgage-backed securities widened, pushing mortgage rates even higher. According to HSH Associates in Butler, N.J., the average 30-year fixed mortgage rate at the close of business on Thursday was 8.11%, up from 7.92% the previous Friday and a 12-month low of 6.68% last Oct. 2.

The brief uptick in late August was mostly due to borrowers who wanted money to purchase a home, lenders said. "People who were looking for specific transactions found rates that worked for them and made the transaction affordable, and they went ahead with the transaction," Mr. Steele said.

Mark Ulmer, a regional manager for Bank of America who was interviewed before the layoffs were detailed by the bank, said the market contraction would prove to be a "cleansing" period. After any boom, he said, "you are going to have staff consolidation.

"Our sales force is commissioned in terms of compensation. So when they're not making loans, they're not making money," Mr. Ulmer said. "Sense of urgency? You bet it's there." He said refinancing accounted for less than 10% of all mortgages at Bank of America in some recent months, off about 40% from last year's levels. "With rates going up, we have fewer customers who qualify for our traditional A-products."

Mr. Lereah said conditions today are not as bleak as those after a previous refinancing boom ended in 1994. "This time around, servicing portfolios have been built up so much that I think banks are set up for alternate ways to receive steady cash flows," he said.

The shrinking of the originations pie has prompted some lenders to cut their pricing to maintain volume so much so that they would have to take losses to sell the loans in the secondary market.

"We've seen a number of players try to deal with the cycle by being especially aggressive on price for a while," Mr. Steele of PNC said. "We've seen them drop back a little when they realize they can't do that forever. Sooner or later you have to acknowledge that the general level of rates has moved."

Mortgage brokers, Mr. Bognanno said, have more flexibility to lower their pricing than large organizations, in part because the brokers have less overhead, but also because they have a greater incentive to pull in as much business as they can. "They're more willing to cut their price and get by with less as long as they make something," he said. Mr. Ulmer agreed that aggressive pricing is an important concern now.

"We're looking at a crazy pricing war with these rates. You have to view it just like any desperate person grasping for air," Mr. Ulmer said. "We're always competitively priced, but have had to dig a little deeper to compete with pricing."

Most agree that the industry is better equipped to deal with a down cycle than in 1994, when the end of the early-'90s boom prompted massive layoffs For example, refinancing a loan was much less labor-intensive in 1998 than in 1993, Mr. Steele noted.

Still, there have been layoffs on the production side at many shops, including PNC. "As with any cycle, we've had to adjust our staffing to deal with the shift in volume," Mr. Steele said. "We feel like we're well-positioned now, and we don't see any additional adjustments as necessary at this point." Mr. Ulmer said Bank of America is also better positioned than in 1994.

"We bit the bullet and consolidated a lot of operations, reengineered our back-office processes, and invested in technology," Mr. Ulmer said. "You can't have a $1 trillion business drop by 40% and not be affected."

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