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By JENNY ANDERSON and VIKAS BAJAJ
Published: August 23, 2007
Lehman Brothers, a leader in packaging subprime mortgages into securities, is shutting down one of its home lending units and laying off 1,200 employees. The bank said it would take a $52 million hit to third-quarter earnings.
“Lehman Brothers announced today that market conditions have necessitated a substantial reduction in its resources and capacity in the subprime space,” the firm said in a news release.
Lehman’s decision to shutter the lending unit, BNC Mortgage, makes it the latest casualty in the subprime mortgage meltdown that started earlier this year and rippled into the broader credit markets starting in late July.
In recent weeks, several mortgage companies that specialized in risky home loans have stopped making loans, shut down or encountered other distress. Also today, Accredited Home Lenders, a subprime lender based in San Diego, stopped making loans through brokers and laid off 1,600 people, more than half of its staff. Earlier this month, Lone Star Funds, a private equity firm, pulled out of a deal to buy the company for $400 million.
On Monday, Capital One Financial shut down its GreenPoint mortgage business, which specialized in making loans to people who did not fully document their income and assets. And Aegis Mortgage, which is controlled by Cerberus, the private equity giant, filed for bankruptcy protection, last week.
Earlier this year, Cerberus, which controls GMAC, struck a deal to buy Option One, the mortgage subsidiary of H&R Block, the tax preparation firm. The widening problems in the mortgage market could jeopardize that acquisition. In the last nine months, about 120 mortgage lenders have shut down, or declared bankruptcy, according to Lehman.
Lehman Brothers is a major player in the mortgage market and a top player in underwriting securities backed by mortgages made to home buyers with weak, or subprime, credit histories. In 2006, the investment bank was the top underwriter for subprime mortgage backed securities with a roughly 11 percent market share, according to Inside Mortgage Finance, a trade publication.
Big Wall Street banks package subprime mortgages into securities and sell them to hedge funds and institutional investors looking for high yielding assets. In the last 12 months, defaults on mortgages have surged as home prices have started falling. The worsening performance of the loans has squelched demand for mortgage-backed securities.
Sources at Lehman say that between 85 and 90 percent of the loans written by BNC from 1999 until 2007 are either current or paid off, which is roughly in line with the industry average. Lehman has absorbed the losses of the remainder of the loans, these people say. The firm stated earlier this year that 3 percent of its revenues in recent quarters derived from subprime-related businesses, or roughly $500 million in 2006.
Lehman took an ownership stake in BNC Mortgage in 2000 after helping to take the firm private. It fully acquired the business in 2004. Earlier this year, the bank announced it would merge its Aurora Mortgage business and BNC, but that combination never came to pass.
Aurora, which focuses on so called Alt-A loans, those made to borrowers with good credit, will continue to operate and may, over time, resume making subprime loans if the market for them revives, according to people briefed on the firm’s plans.
Lehman said that all approved loans by BNC will be honored.
Published: August 23, 2007
Lehman Brothers, a leader in packaging subprime mortgages into securities, is shutting down one of its home lending units and laying off 1,200 employees. The bank said it would take a $52 million hit to third-quarter earnings.
“Lehman Brothers announced today that market conditions have necessitated a substantial reduction in its resources and capacity in the subprime space,” the firm said in a news release.
Lehman’s decision to shutter the lending unit, BNC Mortgage, makes it the latest casualty in the subprime mortgage meltdown that started earlier this year and rippled into the broader credit markets starting in late July.
In recent weeks, several mortgage companies that specialized in risky home loans have stopped making loans, shut down or encountered other distress. Also today, Accredited Home Lenders, a subprime lender based in San Diego, stopped making loans through brokers and laid off 1,600 people, more than half of its staff. Earlier this month, Lone Star Funds, a private equity firm, pulled out of a deal to buy the company for $400 million.
On Monday, Capital One Financial shut down its GreenPoint mortgage business, which specialized in making loans to people who did not fully document their income and assets. And Aegis Mortgage, which is controlled by Cerberus, the private equity giant, filed for bankruptcy protection, last week.
Earlier this year, Cerberus, which controls GMAC, struck a deal to buy Option One, the mortgage subsidiary of H&R Block, the tax preparation firm. The widening problems in the mortgage market could jeopardize that acquisition. In the last nine months, about 120 mortgage lenders have shut down, or declared bankruptcy, according to Lehman.
Lehman Brothers is a major player in the mortgage market and a top player in underwriting securities backed by mortgages made to home buyers with weak, or subprime, credit histories. In 2006, the investment bank was the top underwriter for subprime mortgage backed securities with a roughly 11 percent market share, according to Inside Mortgage Finance, a trade publication.
Big Wall Street banks package subprime mortgages into securities and sell them to hedge funds and institutional investors looking for high yielding assets. In the last 12 months, defaults on mortgages have surged as home prices have started falling. The worsening performance of the loans has squelched demand for mortgage-backed securities.
Sources at Lehman say that between 85 and 90 percent of the loans written by BNC from 1999 until 2007 are either current or paid off, which is roughly in line with the industry average. Lehman has absorbed the losses of the remainder of the loans, these people say. The firm stated earlier this year that 3 percent of its revenues in recent quarters derived from subprime-related businesses, or roughly $500 million in 2006.
Lehman took an ownership stake in BNC Mortgage in 2000 after helping to take the firm private. It fully acquired the business in 2004. Earlier this year, the bank announced it would merge its Aurora Mortgage business and BNC, but that combination never came to pass.
Aurora, which focuses on so called Alt-A loans, those made to borrowers with good credit, will continue to operate and may, over time, resume making subprime loans if the market for them revives, according to people briefed on the firm’s plans.
Lehman said that all approved loans by BNC will be honored.
