Oct. 2 (Bloomberg) -- Morgan Stanley, the second-biggest U.S. securities firm, plans to cut 600 jobs after a decline in mortgage-related revenue contributed to lower third-quarter earnings than analysts estimated.

About 500 jobs will be eliminated in the U.S. and about 100 in Europe, including 90 from a U.K. mortgage subsidiary, the New York-based firm said today in a statement. The cuts represent about 25 percent of Morgan Stanley's residential mortgage origination and servicing jobs, said spokesman Mark Lake. They are just over 1 percent of the firm's entire workforce.

Morgan Stanley follows UBS AG, Merrill Lynch & Co. and others in eliminating jobs after record U.S. home foreclosures sapped demand for bonds backed by mortgages. Wall Street firms, which make money by packaging loans into bonds and selling them to investors, bought mortgage companies in recent years to obtain more loans, a trend that is now reversing.

``Everyone who has any mortgage business is cutting back,'' said Benjamin Wallace, who helps manage $750 million, including shares of Morgan Stanley, at Grimes & Co. in Westborough, Massachusetts. ``There are fewer mortgages coming through the pipeline for everyone.''

Morgan Stanley rose $2.09, or 3.3 percent, to $66.10 at 4:09 p.m. in New York Stock Exchange composite trading. The stock has lost 2.2 percent this year.

Bigger Role

The firm took a bigger role in mortgages when it bought Saxon Capital Inc. for $705 million in December, just as defaults on subprime loans, which are made to the least credit- worthy borrowers, began to rise. Saxon makes mortgages and services people with patchy credit by collecting payments, maintaining records and foreclosing on delinquent borrowers.

The number of Americans signing contracts to buy previously owned homes dropped to the lowest level on record in August, the National Association of Realtors' said today. The decline was steeper than economists expected.

Morgan Stanley said it plans to merge its three U.S. residential mortgage businesses -- Saxon Capital, Morgan Stanley Credit Corp. and Morgan Stanley Mortgage Capital Holdings -- and base the combined business in Irving, Texas. The company will keep regional centers in Fort Worth, Texas; Foothill Ranch, California; Riverwoods, Illinois; and Tampa, Florida. Some offices will be closed, Morgan Stanley said.

``The industry has experienced a fundamental paradigm shift that will require banks to rethink product offerings and capital structures and to provide greater transparency to investors in securities backed by pools of mortgages,'' Bruce Witherell, global co-head of the residential mortgage business, said in the company's statement.

Lehman Cuts

Lehman Brothers Holdings Inc., the biggest underwriter of U.S. mortgage bonds, said in August that it was shutting its subprime mortgage unit, cutting 1,200 jobs. Last month Lehman also closed a Korean home-loan business. Bear Stearns Cos., the second-largest mortgage bond underwriter, cut about 240 jobs at two home lending units in August because of a decline in demand.

Merrill Lynch, the third-biggest U.S. securities firm, said last month that it was cutting jobs at subprime mortgage lender First Franklin Financial Corp., which it acquired for $1.3 billion nine months ago.

UBS, Europe's biggest bank by assets, said yesterday that it was eliminating 1,500 positions, including about 70 U.S. employees who work with mortgage-backed, asset-backed and collateralized debt obligations, after reporting that write- downs on mortgage assets would cause a third-quarter loss.

Jobs in Jeopardy

Options Group, a financial-services recruitment firm, estimated in August that about one in three Wall Street employees involved in creating and selling securities backed by mortgages or pools of loans will lose their jobs this year unless market conditions improve.

Morgan Stanley last month reported third-quarter profit from continuing operations fell 7 percent to $1.47 billion, or $1.38 a share, missing analysts' estimates for the first time in at least six quarters.

The firm said that credit-trading revenue, which includes mortgage-related securities, dropped by more than $1 billion from the second quarter. The firm also wrote down the value of loans and loan commitments by $877 million.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net.

Last Updated: October 2, 2007 16:14 EDT