ORLANDO – How severe is the current shakeout in the mortgage lending business? The number of industry professionals, including both residential and commercial operations, has fallen from 504,000 at the peak to 369,000, a 27% drop, says chief economist Doug Duncan of the Mortgage Bankers Association. Duncan anticipates that number to bottom out at 350,000.

“All of this downturn in the housing sector has led to a downturn in the employment in our industry,” remarked Duncan during a sobering speech delivered Tuesday to several hundred attendees of the annual Commercial Real Estate Finance and Multifamily Housing Convention & Expo. The three-day event was held at the Walt Disney World Swan and Dolphin hotel.

The odds of a recession are now 50-50, says Duncan. He expects growth of gross domestic product (GDP) in the U.S. to average less than 1% for the first half of 2008, due in large part to a moribund residential construction market. That’s a far cry from the nearly 5% growth in the third quarter of 2007. Duncan is more optimistic about the second half of 2008, when he expects GDP growth to average 2% to 2.5%.

After 52 consecutive months of job gains, non-farm payrolls dropped 17,000 in January. It was the clearest evidence yet of a weakening U.S. job market. The economy generated a monthly average of 95,000 non-farm payrolls monthly in 2007, nearly half the 187,000 achieved in 2006 and well below the 212,000 notched in 2005.

Some of the most oversupplied markets in single-family housing are in California and Florida, which Duncan refers to as “Califlorida.” California and Florida account for 18.5% of the U.S. GDP and roughly the same share of the housing market. The industry is watching how quickly that excess supply will burn off. In contrast, the housing crisis in Michigan — where property values have dropped significantly — is due to lack of demand, not rampant construction. The motor state’s population continues to shrink as job seekers pursue better opportunities elsewhere, says Duncan.

“To this point, while the downturn in [housing] construction has been greater than the average of the last 10 downturns, it is not the greatest that it’s been. However, it may well be the largest downturn you will see in modern times by the end of the downturn,” says Duncan, who expects the housing market to hit bottom in the third quarter of this year. The annual rate of housing starts nationally in December dipped to just over 1 million, less than half the 2.1 million rate for 2005.

Compounding the problem is a growing list of foreclosures in the single-family home market linked largely to subprime mortgages. Subprime adjustable-rate loans make up only 6.8% of all residential loans outstanding, but constitute 43% of foreclosure starts. In contrast, 63% of loans outstanding are prime fixed-rate deals that account for only 18% of the new foreclosure starts.

Duncan believes that there has been a misunderstanding to some degree of what really happened in the debt markets beginning this past summer. “The way that I would characterize it is that subprime was a triggering mechanism, but the real event in the capital markets revolved around leverage,” he says.

He cites the buyout of auto giant Chrysler Corp. by private equity firm Cerberus Capital Management this past summer for $7.4 billion as an example. The closing of the transaction had been delayed when bankers postponed a multi-billion-dollar syndicated loan to finance the deal. The deal eventually was completed through a different financing arrangement.

“If the issue was simply subprime, then why did Cerberus have trouble getting funding? Well, it was a leveraged buyout,” Duncan says. “It became clear to the capital markets that the issue was who was levered in what way, and who were their partners in that leverage.”