UPDATE 2-Lehman to close subprime unit, cut 1,200 jobs

(Adds details on charges, background)

By Dan Wilchins and Joseph A. Giannone

NEW YORK, Aug 22 (Reuters) - Lehman Brothers Holdings Inc LEH.N said on Wednesday it would fire 1,200 workers and take $52 million of charges as it shutters its subprime lender BNC Mortgage Corp, the latest blow for a Wall Street bank involved in home loans to people with weak credit.

The company's shares rose after the announcement, but have fallen more than 25 percent since mid-June, more than the 15 percent drop in the broader brokerage sector index.

"People perceive this as mitigating some of Lehman's risk from mortgages. The stock was taken out and shot in recent weeks," said Chuck Carnevale, chief investment officer at Great Companies, which is thinking about buying Lehman shares.

Lehman Brothers, among the biggest underwriters and traders of mortgage debt on Wall Street, was one of the first U.S. investment banks to make loans to subprime borrowers with the express intention of packaging the mortgages into bonds.

With bond yields low earlier this decade, investors piled into securities like subprime mortgage bonds, which offered a higher yield than bonds backed by safer assets.

But U.S. home price appreciation has slowed and borrowing rates have risen, increasing borrower defaults. U.S. home foreclosures surged 93 percent in July from last year, according to RealtyTrac, an online marketplace for foreclosed properties.

Rising defaults have slashed returns for mortgage bonds and made investors leery of buying them.

Lehman attributed its closing BNC to "market conditions" that required "a substantial reduction in its resources and capacity in the subprime space."

Those straits have hit investment banks that until recently were scrambling to buy mortgage lenders. Merrill Lynch bought First Franklin Financial Corp in December for $1.3 billion, but that unit appears to be dragging on earnings.

Lehman will continue to make home loans in the United States through its Aurora Loan Services LLC platform, which tends to focus on borrowers who cannot document income or assets.

CHARGES

The investment bank said it would record a $25 million charge covering the costs of severance, real estate and technology connected with the shutdown. Lehman also would write down all of the goodwill related to Irvine, California-based BNC, which amounts to $27 million.

Lehman helped finance the buyout of BNC by its management in 2000 for about $47 million, ending a disappointing run for the lender as a publicly traded company. Lehman took a stake in the company in 2000 and by 2004 bought out the rest of the management's stake.

Last year BNC was the 40th-largest U.S. mortgage lender with $13.7 billion in volume, according to U.S. Banker. It began the year as one of the largest wholesale subprime lenders in the United States, with about 1,700 employees and a network of about 50 retail branches and 36,000 brokers.