Lehman may be preparing to make home loans again

Lehman Brothers Holdings, the investment bank brought down by the U.S. mortgage crash after 158 years, is set to return to funding home loans through its Aurora Loan Services unit, people familiar with the matter said.

Aurora, which helped make Lehman the top underwriter of mortgage bonds during the housing boom, has started hiring staff for the effort, they said.

The expansion comes even as New York-based Lehman is shrinking through asset sales, 13 months after filing for the biggest bankruptcy in history and selling its North American investment-banking unit to Barclays.

While Aurora will be forced to focus on the government-backed mortgages now accounting for 90 percent of new home loans, rather than the riskier debt it specialized in as recently as two years ago, reduced competition has made that market more profitable.

"For the ones that are left, there's opportunity," said Steve Jacobson, chief executive of Fairway Independent Mortgage in Madison, Wis.

His originations soared 67 percent from a year earlier to $2.6 billion in the first nine months of 2009.

Less competition has boosted per-loan profits, to $1,088 in the first quarter from $657 in 2004, according to Mortgage Bankers Association studies.

Aurora, once a specialist in so-called Alt-A mortgages, may start lending again through other companies and brokers, as well as directly to consumers, according to the people familiar with the plans. The Littleton, Colo., firm has remained a servicer of outstanding mortgages and is owned by Aurora Bank, formerly Lehman Brothers Bank. The bank unit didn't enter bankruptcy protection with its parent.

Subprime mortgages were offered to borrowers with the worst credit records.

Alt-A loans, a step above, were given to borrowers seeking atypical terms, such as a lack of income verification.

Aurora, Lehman and the U.S. Office of Thrift Supervision, the bank's regulator, declined to comment.

Lehman was the largest underwriter of so-called non-agency home-loan securities in 2007, when the market collapsed, selling $67.6 billion of the debt, or 9.6 percent of the total, according to newsletter Inside MBS & ABS. .