CHICAGO (Reuters) -- The production of U.S. home loans will slide 19 percent this year to $2.46 trillion, the fifth-highest year on record, then drop another 14 percent in 2007 before stabilizing the next year, the Mortgage Bankers Association said on Tuesday.

The U.S. housing market is "normalizing" after a record five-year home sales and price surge that was unsustainable, MBA chief economist Doug Duncan told reporters at the MBA's 93rd annual convention.

Mortgage loan creation was at least $3 trillion in each of the past three years, reaching an all-time high of $3.9 trillion in 2003.

Mortgage creation should drop to $2.12 trillion in 2007 and hold at that level in 2008, with rates on 30-year fixed-rate loans rising "modestly" in that time to 6.8 percent from just below 6.4 percent now, the trade group said.

Economic growth will keep slowing through the rest of this year but should return "'to near normal growth' during 2007 and 2008," the MBA said.

he Fed likely will keep interest rates unchanged with the federal funds rate at 5.25 percent rate through 2008, the trade group predicts.

The difference between fixed and adjustable loan rates is at its skimpiest in over five years, decreasing the incentive for borrowers to take out adjustable-rate mortgages (ARMs).

The share of ARMS - which have been a huge driver of loan origination, particularly as borrowers sought to get into costlier or bigger homes - has been sliding and should continue to decline, the MBA said.

ARM share should drop to 19 percent of total loans by the end of 2008 from about 30 percent at the beginning of this year.

Some $1.1 trillion to $1.5 trillion of ARMs will be eligible to reset next year, the MBA estimated. How those loans play out could have a significant impact on the housing and mortgage debt markets.

Some $600 billion to $700 billion of those loans will likely refinance into various loan products, including fixed rate loans, while $500 billion to $800 will reset.

Delinquencies and foreclosures will rise along with homeowner mortgage payments, though MBA is not forecasting levels.