Capital intact at Knight's reverse mortgage lending unit

BOSTON (Reuters) - The reverse mortgage lender owned by Knight Capital Group Inc did not suffer a hit to its capital base when a large trading loss left Knight reeling, Knight told Reuters on Thursday.

Urban Financial Group, acquired by Knight in 2010 for $28 million, is a leading originator of reverse mortgages, which allow elderly homeowners to cash out the equity in their homes while living there.

"Knight's loss related to an equity trading technology issue August 1 did not impact Urban Financial's capital base," Knight spokeswoman Kara Fitzsimmons said.

Knight on Thursday was fighting for its survival after a trading glitch that had roiled markets wiped out $440 million of the firm's capital, forcing it to seek new funding as its shares plunged more than 70 percent in two days.

Urban Financial averaged about $140 million in originations per month in the second quarter, Knight executives said during a July conference call. It also ranked fourth in combined wholesale and retail originations during the first half of 2012.

During the second quarter, Urban Financial issued $427 million in bonds backed by reverse mortgages, or 20 percent of industry issuance, the company said on the call.

Of the $5 billion in financial instruments Knight owned at the end of the second quarter, about $2.7 billion represents reverse mortgages that have been packaged into Ginnie Mae securities. Urban originates mortgages insured by the Federal Housing Administration.

Urban's competitors include large banks, though some have exited the market. They are required to maintain minimum net worth and capital levels. Knight said Urban is in full compliance with standards.

(Reporting by Tim McLaughlin; Editing by Leslie Adler and James Dalgleish)