Aug. 22 (Bloomberg) -- Lehman Brothers Holdings Inc., the biggest underwriter of U.S. bonds backed by mortgages, became the first firm on Wall Street to close its subprime-lending unit and said 1,200 employees will lose their jobs.

Shuttering BNC Mortgage LLC will cut third-quarter earnings by $52 million, Lehman said in a statement today. Lehman, led by Chief Executive Officer Richard Fuld, bought Irvine, California- based BNC in 2004 and used it to expand in lending to homeowners with poor credit or heavy debt loads. The job cuts are equivalent to about 4.2 percent of Lehman's workforce of more than 28,000.

``They're reducing costs at a time when there's no demand for the mortgages such lenders are producing,'' said Peter Sorrentino, who helps manage about $6.5 billion, including $20 million of Lehman shares, at Huntington Asset Management in Cincinnati. ``It's a relief for investors the announcement isn't about some poisonous debt that went sour on their balance sheet.''

Subprime mortgages, shunned for years because of the default risk, helped fuel the U.S. housing boom this decade as securities firms led by Lehman and Bear Stearns Cos. profited by packaging them into AAA-rated bonds. A surge in late payments on the loans has since eroded confidence in credit products and roiled global debt and stock markets as investors fled to safer assets.

Fissures appeared in the subprime market during the fourth quarter of 2006, when delinquent payments from borrowers rose the most in four years. Prices of securities backed by their mortgages sank, ultimately forcing Bear Stearns last month to tell investors in two of its hedge funds, which bet heavily on home loans, that their investments had been wiped out.

11 Percent Drop

The collapse of the two funds inflamed investors' concern about risky bonds and loans, causing credit markets to seize up. The crunch has punished Wall Street firms' shares, as investors figure that slack demand for mortgage securities and debt used for leveraged buyouts will cut earnings.

The Amex Securities Broker/Dealer Index, which includes Lehman and Bear Stearns as well as Goldman Sachs Group Inc. and Morgan Stanley, the No. 1 and No. 2 securities firms, has fallen 11 percent since June. That compares with a 2.6 percent decline in the Standard & Poor's 500 Index.

Lehman has lost 25 percent this year, the third-worst performance in the 12-member Amex index. The stock rose $1, or 1.7 percent, to $58.54 in 4:03 p.m. New York Stock Exchange composite trading today.

Accredited Home Lenders Holding Co., a subprime specialist, announced 1,600 job cuts earlier today in an effort to outlast the credit crunch that has forced dozens of rivals out of business.

Janulis's Division

HSBC Holdings Plc is eliminating 600 positions in its U.S. operations and closing a mortgage office in Indiana, and Capital One Financial Corp. is closing GreenPoint Mortgage because it can't make money anymore lending to homeowners and then selling those mortgages to investors.

Lehman said as recently as June that subprime mortgages and related securities provide less than 3 percent of its revenue, which was $17.6 billion last year. The firm said it will continue making home loans to borrowers with better credit through its Aurora Loan Services LLC unit.

``Market conditions have necessitated a substantial reduction in resources and capacity in the subprime space,'' the New York-based firm said today.

Theodore Janulis, a 22-year Lehman veteran, oversees mortgage lending at the firm. He took over the mortgage division last year after leading its investment management business for four years. Janulis, 48, became a member of Lehman's executive committee in January 2004.

`Unrealized' Losses

BNC made about $2 billion of loans in the first quarter, down 40 percent from a year earlier, according to industry newsletter National Mortgage News. The unit's 23 offices in eight states will be closed.

Lehman said in June that it would merge BNC and Aurora within three months, eliminating 400 jobs. Aurora originated $7 billion of Alt-A loans to better-rated borrowers in the first quarter, down from $10 billion, National Mortgage News reported.

In a regulatory filing last month, Lehman said it had ``unrealized'' losses of $459 million in the quarter ended May 31 from mortgages and mortgage-backed assets. Gains in corporate bond and equity holdings, as well as derivative contracts, offset those losses, according to the filing.

Other brokerages and banks that bought U.S. mortgage lenders in the past year also face potential losses. Merrill Lynch & Co. paid $1.3 billion for First Franklin Financial Corp., and Morgan Stanley spent $706 million for Saxon Capital Inc. Deutsche Bank AG acquired MortgageIT Holdings Inc. for $429 million and Barclays Plc paid $76 million for Equifirst Corp.

Spokesmen for Merrill, Barclays and Deutsche Bank declined to comment on their firms' plans for the mortgage-lending units. A Morgan Stanley spokesman didn't return a phone call seeking comment.

To contact the reporter on this story: Yalman Onaran in New York at yonaran@bloomberg.net.

Last Updated: August 22, 2007 17:59 EDT