Jan. 2 (Bloomberg) -- Mortgage Lenders Network USA Inc. stopped making new loans through its wholesale arm, becoming the third mortgage company in a month to curtail operations as housing sales slowed and defaults by borrowers rose.

The company, known as MLN, said today in a statement it will ``temporarily discontinue'' wholesale lending. The Middletown, Connecticut-based company is ``involved in strategic negotiations with several Wall Street firms'' about the unit, which includes a network of independent mortgage brokers who bring in applicants and the employees who field their calls. Workers at the wholesale unit were furloughed for two weeks, Executive Vice President James Pedrick said in an interview.

``The economics of this market are not good, and it deals with the performance of loans, and to a lesser extent the value of homes,'' Pedrick said. The company will continue lending to retail customers and handle billing and collections for its $17.8 billion mortgage-servicing portfolio, he said.

Lenders including Ownit Mortgage Solutions Inc. and Sebring Capital Partners LP, which also specialize in ``sub-prime'' mortgages, were among companies that closed operations and cut staff in 2006 as loans to high-risk customers soured. Nationwide, late payments on sub-prime loans rose during the third quarter to 12.56 percent of the total, the most since the first quarter of 2003, the U.S. Mortgage Bankers Association said.

Sub-Prime Shakeout

Ownit, based in Agoura Hills, California, and the 16th- biggest issuer of sub-prime home loans, filed for bankruptcy court protection last week. Sebring, of Carrollton, Texas, closed in December. Morgan Stanley bought mortgage lender Saxon Capital Inc. for $706 million early last month and announced plans to slash 170 jobs.

``What you're seeing is a shakeout as it relates to the lower-tier mortgage players,'' said Rui Pereira, a managing director in the residential mortgage group at Fitch Ratings.

MLN opened a decade ago with seven people. It grew to employ 1,800 people as falling interest rates early this decade spurred record mortgage applications. As recently as Dec. 8, Chief Executive Officer Mitchell Heffernan, 49, said in a statement that MLN was ``actively accepting loan submissions'' and that the company, which operates nationwide, ``continues its growth and expansion.''

In May, the company broke ground on a 305,000-square-foot headquarters in Wallingford, Connecticut, in a ceremony attended by Governor Jodi Rell and the town's mayor, William Dickinson. Heffernan said he planned to add almost 1,000 jobs in the state within the next three years.

Brokerages Are Buying

The company told officials the project, which is now in early construction, would cost $60 million to $70 million, Dickinson said in an interview. MLN separately announced plans to open a 180,000-square-foot facility with 650 jobs in Phoenix and expand offices near Philadelphia and Atlanta.

Closely held MLN is the 15th-biggest issuer of sub-prime mortgages, with $3.3 billion of loans in the third quarter, according to the industry publication National Mortgage News. Sub-prime mortgages are made to people with low incomes, a track record of missed payments or limited credit histories.

Brokerage firms including Morgan Stanley, Barclays Plc and Deutsche Bank AG have been buying mortgage companies, including sub-prime lenders and servicing units, so they can repackage home loans into larger securities, which spreads the risk of default. The firms can then sell the securities to clients who want interest income. On Dec. 30, Merrill Lynch & Co. completed the $1.3 billion purchase of National City Corp.'s First Franklin sub-prime lending and servicing unit, National City said today.

Customer Dilemma

Pedrick confirmed in an interview that the company won't fund any more mortgages arranged by brokers, even if they've already received final approval.

``We're talking to a group of Wall Street firms about the feasibility of an alliance,'' Pedrick said. Such discussions would have to conclude within a ``short window of time,'' he said, because employees may start looking for other jobs.

He declined to disclose the number of employees in the wholesale unit, most of whom worked out of regional centers in Horsham, Pennsylvania; Alpharetta, Georgia; Oak Brook, Illinois; and Phoenix. Construction of the new Connecticut headquarters will continue because few of the wholesale employees were slated to work there, Pedrick said.

MLN's announcement left at least one mortgage broker scrambling to line up alternatives for his customers. Michael Warshaw, owner of Stamford, Connecticut-based Warshaw Capital, said he arranges about 80 loans a month, including four or five through MLN.

One Maryland client of his received approval last week to refinance a $300,000 mortgage with two mortgages from MLN totaling $350,000, Warshaw said. The man planned to use the $50,000 in extra cash for renovations.

MLN is ``not taking phone calls, we can't get through,'' Warshaw said. ``Now we're going to have to try and resubmit a loan application somewhere else.''

To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net.

Last Updated: January 2, 2007 18:47 EST