Merrill Lynch's subprime unit cutting jobs

By Tim McLaughlin

NEW YORK (Reuters) - Merrill Lynch & Co Inc MER.N said on Monday that its subprime lender, First Franklin Financial, would cut an unspecified number of jobs in another setback to the brokerage's $1.3 billion acquisition.

Merrill Lynch bought San Jose-California-based First Franklin in December amid a meltdown in the market for risky subprime mortgages. Analysts have questioned the timing of the deal and the rich premium Merrill paid.

Like other subprime lenders owned by Wall Street companies, First Franklin has been burned by lax underwriting and unscrupulous independent mortgage brokers. In a May filing with the U.S. Securities and Exchange Commission, First Franklin disclosed that it had terminated more than 60,000 independent brokers since 2000.

First Franklin, one of the largest U.S. subprime originators , currently works with about 26,000 approved mortgage brokers, the company said in May.

Separately, First Franklin's former owner, National City Corp. NCC.N, warned that risk remained "elevated" on the loans it kept from the subprime lender.

Merrill shares were down 2.3 percent at $72.91 in afternoon New York Stock Exchange trade.

The company declined to say how many jobs were being cut. First Franklin employed 2,100 workers and had 35 offices, according to a May filing with U.S. regulators. It also has an online subprime operation called NationPoint, which operates in Lake Forest, California, with 370 employees.

Recently filed reports with U.S. banking regulators show that Merrill Lynch Bank & Trust Co., where a lot of the First Franklin franchise is housed, lost $111 million through the first half of 2007.

"We have adjusted our staffing levels to be in line with current business requirements," the company said in a statement.

Merrill Lynch's rationale for buying the business -- packaging risky mortgages into securities for institutional investors -- has been undermined by escalating defaults throughout the subprime industry. The market for securities backed by subprime loans has all but dried up in recent months.

During the first half of this year, First Franklin originated or acquired about $11.3 billion in loans that were securitized. That amount was $25.5 billion for all of 2006.

First Franklin relies on independent brokers to find borrowers and to submit loans applications. This model keeps overhead costs lower than a branch-based approach. But Merrill's peers, including Lehman Brothers Holdings LEH.N, have abandoned or sharply curtailed funding loans sourced by independent brokers. Lenders have complained about lax underwriting and outright fraud on broker-related loans.

In recent months, First Franklin has moved toward offering Alt-A loans, or mortgages to borrowers with better credit than subprime customers.

(Additional reporting by Jonathan Stempel in New York)