The U.S. housing slowdown may threaten the biggest providers of loans, not just those catering to subprime borrowers.

Tuesday's disclosure by Tennessee's First Horizon National Corp. that an atypical summer lending decline will help push third-quarter operating profit as much as 23 percent below analysts' average forecast weighed on mortgage lenders' shares.

But now mainstream lenders appear caught in the downdraft. Investors are taking cover amid growing signs that the five-year housing boom is over.

Issues affecting First Horizon are the kinds of issues that affect even the top lenders, said Jaime Black, an analyst at Morningstar Inc. in Chicago. This is our first major report confirming the fears that many investors have had.

Shares of No. 1 mortgage lender Countrywide Financial Corp. and No. 3 Washington Mutual Inc. on Tuesday fell as much as 4.2 percent and 2.5 percent. No. 2 Wells Fargo & Co., which is better diversified, fell as much as 1.4 percent. The 23-member KBW Mortgage Finance index fell as much as 1.3 percent.

Much of the recent selling had focused on lenders that offer exotic loans with rates resetting at higher yields, or subprime loans to less credit-worthy


H&R Block Inc., best known as a tax preparer, last week set aside $61.3 million because borrowers at a subprime unit were falling behind on payments.

First Horizon is different because it emphasizes more traditional mortgages and does little subprime lending.

It said third-quarter loans may fall $1 billion from the second quarter's $7.48 billion. The third quarter is usually busier. Margins on sales of mortgages are also shrinking. The Memphis-based company's shares fell as much as 5 percent.

Like other lenders, First Horizon is suffering after 17 Federal Reserve interest-rate increases have pushed short-term rates above long-term rates.

Borrowing costs are up and applications down. Delinquencies are rising. California is a concern because lenders made many riskier loans there. Thousands of mortgage jobs are being cut.

An inverted yield curve is not a happy environment for mortgage lenders, said Gary Townsend, an analyst at Friedman, Billings, Ramsey & Co. in Arlington, Virginia. It is difficult to hedge, and there has been a lot of volatility.


In recent weeks, shares of mortgage lenders that concentrate on subprime loans, California or both have been hard hit.

Among these: Accredited Home Lenders Holding Co., Downey Financial Corp., IndyMac Bancorp Inc. and New Century Financial Corp.

Unfortunately, slack demand for homes might broaden the profit squeeze. Sales of new and existing homes each fell more than 4 percent in July, data released last week by the U.S. Commerce Department and National Association of Realtors show.

Countrywide shares have fallen by roughly one-fourth from their May 11 record high. Much of the drop has come in the last three weeks, after July loan volume fell 15 percent from June.

Chief Executive Angelo Mozilo has said he plans by next July to eliminate $500 million of redundancies and waste, but has yet to say how. Calabasas, California-based Countrywide did not immediately return a call seeking comment.

Despite the industry's travails, Black said some of the selling might be overdone.

There are still plenty of people buying houses, she said. Investors may not want to punish mortgage lenders too much, especially those with other businesses.