The sudden drop-off in subprime and alternative-A lending from $700 billion in the first half of this year to $300 billion in the second half will be "very disruptive" for mortgage banks that relied on nonagency originations for the bulk of their profits, according to a Friedman Billings Ramsey report.The FBR report notes that lenders are quickly switching their production to loans that meet the requirements of the secondary-market agencies -- Fannie Mae and Freddie Mac -- since the secondary market for nonagency loans has "basically dried up." But selling loans to Fannie and Freddie is "not profitable today," FRB analyst Paul Miller says in the report. "We believe it will take two or three quarters before originators make the proper adjustments and profitability returns." FBR analysts are forecasting that nonagency originations in 2008 will total $500 billion, down from $1.9 trillion in 2006 -- a 75% decline over that two-year period. Meanwhile, agency originations will increase from $1.1 trillion in 2006 to $1.4 billion in 2007 and remain at that level in 2008, according to FBR's forecast. FBR can be found on the Web at http://www.fbr.com.

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