NEW YORK (Reuters) -- Washington Mutual Inc.'s chief executive said Wednesday that he expects 2007 to be another tough year for the U.S. mortgage industry, which faces overcapacity and unsustainably low margins.

Kerry Killinger, CEO of the largest U.S. savings and loan, acknowledged that a sweeping correction in U.S. housing prices would lead to higher delinquencies and loan losses, but that they would stay within forecasts, thanks to previous cautionary moves at the bank.

WaMu, as the thrift calls itself, has moved aggressively to cut costs at its home lending unit, which is now its smallest business in terms of profit contribution.

"In our guidance we've assumed that the mortgage industry would be about as tough next year as this year," Killinger said, adding that he would not be surprised to see "multiple years" of housing prices lagging inflation and other asset classes.

While WaMu has slashed head count at its mortgage unit by about one-fifth, part of an overall work force reduction of 9,742 jobs, or 16 percent of its work force. Many of its rival mortgage lenders have yet to take the needed steps to reduce capacity, he said.

Industrywide, mortgage origination fell by 35 percent between 2003 and 2006, while industrywide head count rose 8 percent in the same period, he said.

"There is a total disconnect in mortgage banking between realistic levels of production that are going to happen and the level of employment," he said. WaMu, the No. 3 U.S. mortgage lender after () and (), has been hurt by rising short-term interest rates and narrower lending margins, like many banking companies, and its mortgage business has been hurt by slowing housing demand.

Killinger also said the bank expects to emphasize share repurchases over investing in loan growth next year and that it could look at asset sale opportunities, in which case share buybacks could be increased further.

In one such move, WaMU in July agreed to sell its WM Advisors Inc. asset management unit to () for $740 million in cash.

() shares finished slightly lower Wednesday on the New York Stock Exchange, underperforming the KBW Bank Index, which was up 0.4 percent.

So far this year, Wamu shares are up 2.1 percent, underperforming the bank index, which has gained 11.5 percent over the same period.

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