updated 9/5/2006 2:51:59 PM ET 2006-09-05T18:51:59

The brokerage Merrill Lynch announced Tuesday that it plans to acquire the mortgage business of Cleveland-based National City Corp. for $1.3 billion.

Merrill Lynch & Co. said the deal would give it control of National City's First Franklin Financial Corp. mortgage origination franchise, which is based in San Jose, Calif. New York-based Merrill Lynch also will get National City's affiliated business units, National City Home Loan Services Inc., and NationPoint.

National City's sale of the subprime mortgage operation comes as the bank is in the process of expanding beyond it's Midwest operating area, which extends from Illinois to Michigan and Pennsylvania.

Merrill Lynch shares rose 35 cents to $74.14 in midday trading on the New York Stock Exchange, while National City shares rose 51 cents to $35.08, also on the NYSE.

Michael Mayo, a banking analyst at the Prudential Equity Group, said the deal would expand Merrill Lynch's mortgage servicing business and make it more competitive with Lehman Brothers Holdings Inc., which has a big mortgage business.

Mayo also said the deal — which will include the sale of $5.6 billion of National City's $15 billion mortgage portfolio to Merrill Lynch — would allow National City "to focus on its core banking activities." But, he said, he expected the sale to reduce the bank's 2007 earnings to $3.25 from $3.35. Mayo has an "over" rating on Merrill Lynch and "neutral" rating on the bank.

Last month, National City said it was buying Fidelity Bankshares Inc., which is based in West Palm Beach, Fla., for an estimated $1 billion. Only weeks earlier, National City said it would buy Harbor Florida Bancshares Inc., based in Fort Pierce, Fla., through a $1.1 billion stock deal.

Merrill Lynch said that First Franklin is one of the nation's leading originators of nonprime residential mortgage loans, which are those made to home buyers will less-than-perfect credit, through a wholesale network.

NationPoint, based in Lake Forest, Calif., specializes in online direct-to-consumer mortgage lending, the announcement said.

First Franklin and NationPoint together originated more than $29 billion in loans in 2005, it said.

Home Loan Services, based in Pittsburgh, together with Merrill Lynch-owned Wilshire Credit Corp., based in Beaverton, Ore., will have a total servicing portfolio of approximately $70 billion.

"These leading mortgage origination and servicing franchises will add scale to our platform and create meaningful synergies with our securitization and trading operations," Dow Kim, president of Merrill Lynch's Global Markets and Investment Banking Group, said in a statement. "This transaction accelerates our vertical integration in mortgages, complementing the three other acquisitions we have made in this area and enhancing our ability to drive growth and returns."

Andrew Pollock, president and chief executive of First Franklin, said he was looking forward "to working with Merrill Lynch to build a premier mortgage banking franchise."

Merrill Lynch said it planned to operate the acquired businesses under their current names, as distinct units.

The transaction, subject to regulatory approval, is expected to close in the fourth quarter of 2006.

Copyright 2006 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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