When Washington Mutual, the country's second largest mortgage lender, cut its earnings projections for 2003 and 2004, the news sent stocks down for home builders and mortgage banks alike. Did the December announcement from WaMu, as the Seattle-based lender is known, indicate trouble ahead?

Not quite, says Paul Miller, managing director at investment bank Friedman, Billings, Ramsey Group. "Everybody has an itchy trigger finger on anything with a 2x4 in it because they're all afraid it's going to come tumbling down," he says, even when bad news is unique to one company, not universal to the sector.

That's the case with WaMu. After a two-year acquisition spree that added five major mortgage lenders to its fold, WaMu (also known for its consumer-friendly retail banking) is a rollup with "too many platforms," Miller says. "They're not broken, but they sure are coming under a lot of stress."

A key pressure point: the rapidly shrinking refinancing market, which is expected to plunge from $2.2 trillion in 2003 to $460 billion in 2004, according to Doug Duncan, chief economist for the Mortgage Bankers Association of America. So, many lenders are trimming costs as quickly as they can. WaMu certainly is. Last fall, it sliced the equivalent of 4,500 full-time, mortgage-related jobs.

Other lenders are doing just fine. On the same day that WaMu cut its earnings forecast, big lender Countrywide Financial of Calabasas, Calif., reaffirmed its earnings guidance for 2003 and 2004. "Countrywide is positioned correctly," Miller says.

While refis fluctuate, new-purchase activity remains solid. New-purchase originations are projected to hover around $1.17 trillion in 2004, which is considered a strong and sustainable level.

Both Miller and Duncan say that employment volatility is normal in the mortgage industry. "That's how mortgage bankers are," Miller says. "They expand when times are good, and they contract quickly." The first to go: the mortgage brokers who take the applications. "It's easy to get in and out of that business, so those people exit by the thousands, depending on refis," Duncan explains.

Such movement has already begun. According to the Bureau of Labor Statistics, the number of employees working in mortgage-related jobs was 409,600 in November, a drop of 7,500 since October. Last summer, the mortgage industry employed 435,000 people, says Duncan, who predicts the sector could lose as many as 100,000 jobs as lenders adjust to reduced loan volumes.

Learn more about markets featured in this article: Seattle, WA.