Washington Mutual will lay off about 1,000 employees in its Home Loans Group around the country as it closes its Mortgage Banker Finance business and restricts WaMu Capital Corp. to securitizing only WaMu loans.

A WaMu Home Loans spokeswoman said the layoffs are a response to changing mortgage market conditions, but are taking place in conjunction with hiring that’s intended to accelerate growth in the company’s core businesses — retail, consumer direct and wholesale lending.

WaMu plans to hire up to 1,000 retail and banking loan consultants over the next several months, and increase its consumer direct sales force, said WaMu spokeswoman Sara Gaugl.

The Seattle-based company currently employs 1,000 banking loan consultants and 2,000 retail loan consultants, and operates more than 2,200 retail stores, Gaugl said.

“We … intend to grow our retail, consumer direct and wholesale businesses and are positioning the size of our sales and support organizations to ensure that we capture growth opportunities and address customer needs,” Gaugl said.

WaMu will integrate its remaining subprime lending business into its existing prime channels, eliminating the need for a dedicated subprime sales force, Gaugl said. The company will close loan fulfillment centers in Anaheim and San Diego, Calif., and San Antonio, Texas, moving work to other facilities.

WaMu Capital Corp. has “felt the effect of a greatly changed secondary market environment,” and has moved away from purchasing and securitizing loans originated by others to managing WaMu loan production.

WaMu will no longer participate in conduit flow operations, Gaugl said, which require ongoing relationships with mortgage bankers to buy loans on a loan-by-loan basis, and will conduct “an orderly wind down” of its Mortgage Banker Finance business. In wholesale lending, WaMu is combining prime and subprime sales channels to create a unified 450-person sales force, she said.

“We remain fully committed to assisting borrowers across the credit spectrum with obtaining new loans as well as with staying in their existing homes,” Gaugl said, noting the company’s announcement in April of a commitment to refinance up to $2 billion in subprime loans for WaMu customers who are current on their payments but facing interest-rate resets.

In its last quarterly report to investors, WaMu said second-quarter net income rose 8 percent year-over-year, to $830 million.

But provisions for loan and lease losses were up 66 percent, to $372 million, and rising delinquencies on subprime loans the company had previously securitized forced it to write down by $181 million the value of subprime residuals during the first six months of the year. Total revenue from the sales and servicing of home mortgage loans for the first half of the year was $425 million, compared with $486 million in the first half of 2006.

In a presentation to investors Monday, WaMu Chairman and Chief Executive Officer Kerry Killinger said the company began preparing for a downturn in the housing market two years ago.

Since the fourth quarter of 2005, Killinger said, WaMu has reduced staffing in its home-loan business by 28 percent, and exited the correspondent channel. As a result, Killinger said, WaMu fell from the third-largest mortgage originator in 2006 to sixth in 2007.

“I have commented several times over the past two years that many mortgage players appeared to be blindly adding staffing and capacity, even while mortgage demand was falling,” Killinger said. “This overcapacity had to be taken out of the system before satisfactory returns could return to the business.”

WaMu sold “nearly all” of its 2004 and 2005 subprime residuals two years ago, Killinger said, and the majority of its pay-option adjustable-rate mortgage (ARM) production during 2005, 2006 and 2007.

At the end of June, WaMu had only about $107 million in total exposure to subprime mortgage and Alt-A residuals, Killinger said, and just 3 percent of the company’s $106 billion home-loan portfolio had loan-to-value ratios above 80 percent and FICO scores less than 660.

“We feel that our proactive steps have been important in positioning us for the dramatic slowing of the housing market,” Killinger said.

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