July 13 (Bloomberg) -- General Electric Co. plans to sell WMC Mortgage, the company's three-year-old U.S. subprime mortgage unit, following a surge in defaults by borrowers.

``The mortgage industry has greatly changed since the purchase of WMC,'' Laurent Bossard, chief executive officer of the division, said in an e-mail to employees yesterday. ``The current subprime market environment has made a significant negative impact on the business.''

GE's decision to divest WMC comes as more than 60 mortgage companies have halted operations, gone bankrupt or sought buyers since the start of 2006, according to Bloomberg data. The contraction in the subprime industry caused the near-collapse last month of two hedge funds run by Bear Stearns Cos. and the downgrading of almost $12 billion of mortgage securities by ratings companies.

Burbank, California-based WMC this year slashed its workforce by about 70 percent and sold $3.7 billion of its loans, leaving $1.1 billion in mortgages on the books as it prepares to be acquired. In the second quarter, the company had a $182 million loss on top of $370 million in the first, said Keith Sherin, GE's chief financial officer, in an interview today.

Shares of Fairfield, Connecticut-based GE, which trails only Exxon Mobil Corp. in market value, rose 50 cents, or 1.3 percent, to $39.50 at 4:01 p.m. in New York Stock Exchange composite trading, a five-year high.

Sold Mortgages

Morgan Stanley will advise GE on a WMC sale over the ``next couple of months,'' the e-mail said.

The decision to divest came as part of regular company reviews where GE looks at all its operations ``to divest select businesses not within its long-term growth plans,'' the memo said.

GE bought WMC from private-equity firm Apollo Management LP in 2004 for an undisclosed amount. General Electric had exited the U.S. mortgage business in 2000 by selling its home-loan unit to San Francisco-based Wells Fargo & Co.

Rather than become a consolidator in the mortgage market, the company decided to exit, Chief Executive Officer Jeffrey Immelt said today on a conference call with investors.

There were ``too many other better choices'' than investing in the home-loan industry, Immelt said. ``And I just simply wanted to get this off the table vis-a-vis the things that investors have to think about with GE.''

Ratings Downgrades

The rising defaults are roiling financial markets. WMC and a unit of Washington Mutual Inc. were among four subprime lenders whose loans were behind many of the Moody's Investors Service ratings downgrades on mortgage securities this week, the firm said yesterday.

Washington Mutual's Long Beach Mortgage, WMC, New Century Financial Corp. and Fremont General Corp. made loans that backed about 60 percent of the $5 billion of bonds that were downgraded, Nicolas Weill, Moody's chief credit officer for asset finance, said on a conference call.

Standard & Poor's also downgraded $6.39 billion of mortgage bonds backed by subprime loans.

WMC also provides so-called Alt A mortgages. Alt A loans are granted to borrowers with at least fair credit scores who opt for unusual loan terms or underwriting, such as reduced proof of their pay or minimum payments below the interest they'd owe, without enough offsetting positive attributes, like large down payments.

`In and Out'

``GE's been in and out of the mortgage business before,'' said Angelo Mozilo, chief executive officer of Countrywide Financial Corp. His Calabasas, California-based company, the country's largest home lender, has said it expects to benefit as weaker rivals or competitors less dedicated to mortgages disappear during a difficult period for the cyclical business.

The biggest independent U.S. subprime lender, New Century Financial of Irvine, California, sought bankruptcy protection in April and is being liquidated.

All of the companies gave loans to people with poor credit histories or heavy debt loads who then failed to make payments. As the housing market cooled in 2006, lenders became more lax, attracting additional borrowers with weaker credit.

WMC provided about $100 million of the parent company's $20.8 billion in total profit last year.

The planned sale fits with Immelt's strategy of selling low- return units and re-investing proceeds in faster-growing areas including other segments of consumer finance such as credit cards. Immelt has made more than $78 billion in acquisitions and $35 billion in divestitures since he became CEO in 2001.

GE is required to record the loans on its balance sheet at market prices, said Mark Begor, who runs the GE Money unit in the Americas, on a conference call with analysts in April. Begor said in April GE had adequate reserves of about $700 million at WMC to cover the mortgages.

To contact the reporter on this story: Rachel Layne in Boston at rlayne@bloomberg.net.

Last Updated: July 13, 2007 17:06 EDT