underscored the toll that higher rates are taking on mortgage lenders.

Flagstar Bancorp of Bloomington Hills said Wednesday that weakness in its mortgage banking earnings will hurt its results for the third quarter and the year. The $3.7 billion-asset company owns Flagstar Bank, the largest thrift in Michigan and the 17th-ranked originator of residential mortgage loans in the United States in the second quarter, according to National Mortgage News.

"This is the most challenging type of environment for a mortgage originator, particularly those with smaller servicing businesses," said Tom Hain, an analyst for Lehman Brothers. Mr. Hain said the stock of Resource Bancshares Mortgage Group Inc. of Columbia, S.C., and Dime Bancorp of New York have also suffered from fear that higher rates would crimp their profits.

Even the largest independent mortgage bank, Countrywide Credit Industries, reported a falloff in loan volume in its latest quarter, noted Gary Gordon, an analyst for PaineWebber. "Every mortgage company is going to have a tougher year than a year ago," he said. "As volumes go down, economics says profit goes with it."

Mr. Gordon predicts that this difficult environment will persist for the next two quarters.

Flagstar responded to the rising rate problem by firing 212 people, said Thomas J. Hammond, chairman of the board and chief executive officer. That reduced the staff to 1,701 and is expected to save $3.9 million annually. But the company still doubts it will meet analysts' earnings targets for the fourth quarter.

Countrywide also announced staff reductions, Mr. Gordon noted, and others in the industry may also follow suit or go out of business because of increased competition, he said.

Flagstar's Mr. Hammond said customers had locked in rates with this company through broker channels but then closed their loans with competitors instead when rates dropped. He said Flagstar is developing technology to permit faster turnaround, to prevent this problem from arising in the future.

Countrywide's profit margin on loan originations fell to 51 basis points in the quarter that ended Aug. 31, the second of its fiscal year, from 64 basis points a year earlier. Loan originations slid to $19.5 billion from $23 billion.

Flagstar expects it loan volume to come in at $3.4 billion in its current quarter, which ends next week, down from $4.9 billion a year ago. Its profit margin, 61 basis points in the 1998 quarter, could plunge to 5 basis point in the current quarter, Mr. Gordon said.

One big difference between the two companies is that Countrywide has focused on purchase loans and gets only about a third of its loans from mortgage brokers. Flagstar is "more tied to the refinancing market" and gets many of its loans from mortgage brokers, Mr. Gordon said.

In addition to slashing its work force, Flagstar announced that it would buy back as much as $15 million of its common stock by Sept. 30 of next year.

"I hope they are aggressive with the buyback," said Terry Maltese, president of Sandler O'Neill Asset Management. "Given where their stock is trading, the smartest thing they can do with their capital is buying back massive amounts of their stock."

Flagstar shares have dropped from $26 to $17, Mr. Maltese noted. He said any decision by the company to use its capital for other purposes would signal the market that its stock is not a valuable investment.

Craig Woker contributed to this article.

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