Analysts at Standard & Poor's are cautioning that changes on the horizon may alter the near-perfect conditions in the residential mortgage- backed securities market.

Despite a strong U.S. economy, attractive interest rates, and high levels of consumer confidence which have thrust the residential mortgage- backed securities market to record volumes this year, Standard & Poor's analysts presented a conservative forecast last week.

This year has been profitable for originators and investors, and some market participants remain optimistic that rates will stay where they are or move even lower, yielding increased mortgage volume.

In June, Standard & Poor's rated 64 deals totaling almost $24.5 billion of securities - the largest month in years - said Terry Osterweil, director of structured finance ratings at Standard & Poor's.

But the rating agency predicts that rising interest rates and a softening of the economy over the next year that will lead to slower growth rates in 1999 than in either of the past two years.

The sector has enjoyed 10-year highs in housing sales and starts and a home ownership rate close to 66%, but S&P said that three economic clouds were looming: Asia, inflation, and the possibility of corrections in financial markets, particularly the U.S. stock market.

Though the ratings agency expects a stream of refinancings and mortgages to continue at a "pretty steady clip," Mr. Osterweil said, a rise in rates and a slowing in the mortgage origination market could occur at any time.

But others, like Bruce R. Alpern, senior vice president and head of mortgage and asset-backed research at Donaldson, Lufkin & Jenrette, predict lower interest rates over the next five year period - and increased volume in residential mortgage-backed securities as consumers refinance existing loans.

"Volumes are not poised to slow down very much," Mr. Alpern said. "This year looks like a record year. If rates stay low or work their way lower, volume is going to go up."

Mr. Alpern said more than 80% of homeowners could get a lower rate by refinancing.

In the longer term, an aging population and a reduction in the number of people buying their first homes could begin to hurt mortgage volume, Mr. Alpern said.

"Even if rates stay the same, the refinancing boom will end, so that in itself is going to slow the market down" in the third and especially in the fourth quarter, said Robert Van Order, chief economist for Freddie Mac.

Mr. Van Order estimates that 1998 originations will reach a record $1.1 trillion to $1.2 trillion, and that for 1999 volume will slip back to $800 billion to $900 billion.

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