Morgan Stanley to cut about 600 mortgage jobs

NEW YORK (Reuters) - Morgan Stanley (MS.N) said on Tuesday it will slash 600 jobs in its residential mortgage business, about a quarter of the work force, in the latest sign the slowdown in mortgage markets is expected to linger.

The world's second-largest investment bank said it will cut about 500 employees in the United States and another 100 in Europe -- mostly in the UK. In addition, Morgan Stanley will combine its three mortgage businesses under a single platform to be based in Irving, Texas.

The move comes amid a steep drop in mortgage lending, hammered in recent months by rising defaults in the subprime sector that caused widespread distress among lenders, home builders and other markets.

"It's not surprising that Morgan Stanley would take a look at their prospects in the marketplace right now and bite the bullet," said Marshall Front of Chicago investment management firm Front Barnett Associates LLC.

The moves will result in a charge, but one that is not material to the bank.

In the past month, rival banks Lehman Brothers Holdings Inc LEH.N said it would slash 850 employees in the United States and UK on top of the 1,200 cut when it shut down subprime unit BNC Mortgage Corp. Credit Suisse Group (CSGN.VX) plans to cut 150 jobs, while HSBC Holdings Plc (HSBA.L) said it is closing its U.S. mortgage unit, cutting 750 jobs.

Countrywide Financial Corp, the largest U.S. home lender, will cut 12,000 jobs, or 20 percent of its work force. Analysts expect more investment banks and mortgage lenders to follow with their own cuts.

REVERSAL?

The moves mark a retreat by Morgan Stanley, which expanded its mortgage business and try to make up ground lost to Lehman and Bear Stearns Cos Inc BSC.N, the goal was to build a vertically integrated business that made loans, packaged them into mortgage-backed bonds and then traded them.

Last year, Morgan acquired Saxon Capital, a firm that originated and serviced subprime loans; Morgan Stanley Credit Corp, a retail prime mortgage lender once part of Discover Financial Services (DFS.N); and Morgan Stanley Mortgage Capital Holdings, which acquires and combines loans.

Morgan Stanley has expanded its servicing business this year, despite the turmoil, taking advantage of a market where dozens of mortgage firms have left the business or gone bankrupt. Like its rivals, the bank is also looking at opportunities among distressed mortgage businesses.

Yet the spike in defaults by riskier "subprime" borrowers early this year triggered a meltdown in mortgage markets. Lenders faced a cash crunch as demand for their loans disappeared.

More recently, some firms are scouring the market looking for business they can snap up at bargain prices. Famed investor Wilbur Ross is investing in American Home Mortgage Investment Corp (AHMIQ.PK), while Goldman Sachs Group Inc (GS.N) Chief Financial Officer forecast the mortgage markets are "getting closer to the bottom."

"There are people who will step in and pick up the pieces and a year or two from now this business could be gangbusters," Front said.

Morgan Stanley shares rose $2.09, or 3.3 percent, to close at $66.10 in Tuesday trading on the New York Stock Exchange.

(Reporting by Joe Giannone, Dane Hamilton and Ed Leefeldt)