THE two largest mortgage lending banks, Hongkong Bank and Hang Seng Bank, recorded drastic falls in new loan applications in September, following the tightening of their mortgage policies in late August. Last month, new loan applications with Hongkong Bank plummeted 37 per cent and Hang Seng Bank 43 per cent. Mortgage levels had skyrocketed to unprecedented levels before the introduction of the stringent rules. Last month, the amount taken up by successful applicants dropped 31 per cent for Hongkong Bank and 34 per cent for Hang Seng Bank. ''Mortgage lending volume can include those loans approved earlier, say in May or June,'' Hang Seng Bank general manager Alice Lam said. She pointed out that another useful indicator, the number of people seeking early redemption of mortgages as they sell one home and buy another, showed the same trend. Hang Seng Bank's early redemption volume fell 13 per cent. ''That means less transactions in flats changing hands,'' she said. Though both banks found comfort in arresting the runaway mortgage lending growth, they are still taking a cautious approach. Hongkong Bank assistant general manager Edwin Lau said: ''The figures are still far above the annual average figure for 1992 and the bank would further monitor the market before deciding whether to relax the present mortgage policies.'' Mrs Lam conceded that residential property prices had stabilised, but the risk still existed. ''In September, the price of residential properties in those marginal locations where transportation is not good has declined by five to 10 per cent, yet those in good locations had no change,'' she said. While prices were still high, the risk was there, she added. ''We need to give the new policies a bit more time,''she said. The volume of sale and purchase agreements recorded by the Land Registry has plummeted since a flurry of speculative activity sent the monthly figure soaring to 18,881 in June - the fourth highest monthly figure ever recorded. Analysts expect the September figure, when announced, to be between 7,000 and 8,000 and remain roughly around this level for the foreseeable future.