Lehman licks wounds on UK home loans

Lehman Brothers' plan to sell €2.8 billion of British mortgages as part of a survival strategy follows an aggressive bet on riskier UK mortgages in the last three years that has misfired.

Lehman plans to sell the UK mortgages to investment firm BlackRock as part of a far-reaching restructuring to raise much-needed capital to survive the credit crisis, it said.

In 2006 and early 2007, Lehman led a pack of investment banks who expanded from securitising mortgages to offering their own UK mortgages during the housing boom.

By originating their own mortgages they could provide a steady stream of loans that could then be packaged into bonds, issued and traded.

They typically targeted non-conforming mortgages that mainstream lenders were more wary of, selling them through brokers and entering partnerships to take on loans from Alliance & Leicester and Northern Rock.

But such plans backfired as the UK housing market has followed the US market into reverse and wholesale funding has become more costly as the credit crunch deepened.

Lehman stopped offering mortgages in April. The €2.8 billion of loans being sold to BlackRock doesn't represent all its UK book, but is over half of its €5.4 billion European residential mortgage book, a spokeswoman said. The deal will help cut its total residential mortgage exposure to €9.4 billion.

The fourth largest US investment bank and BlackRock declined to comment on financial details of the sale, which is expected to complete in the next few weeks.

Lehman moved into the UK market before many rivals, and remained more aggressive than most through brands including Preferred and SPML.

By the end of last year it was the 20th biggest home lender, with €11.7 billion of outstanding mortgages and a 0.8 per cent market share.

Ray Boulger, analyst at independent mortgage expert John Charcol, said competition to provide sub-prime loans drove margins below a level that reflected the risk of the business.

"The fact property prices fell so sharply and so quickly clearly means the losses were greater than expected and has compounded the problem," he said.