Negotiations Fail on Selling Shearson Lehman Mortgage

Shearson Lehman Bros.’ plan to sell its Irvine-based mortgage banking unit to a group of Middle Eastern and U.S. investors has collapsed, an official with the investor group said Wednesday.

American Mortgage Service--the company formed to acquire Shearson Lehman Mortgage Corp.--halted the talks last week. The company included an affiliate of Trans-Arabian Investment Bank and investors from San Francisco-based Hamilton Savings Bank. Trans-Arabian is a merchant bank with headquarters in Bahrain.

Paul Siegel, president of Hamilton Savings, said Wednesday that the deal ran into trouble when falling interest rates contributed to a boom in mortgage refinancing. This caused a surge in early prepayments of mortgages, greatly shrinking Shearson’s portfolio.

While Hamilton Savings is eager to build its loan servicing business, it is not ready to sacrifice profits to expand its business in that area, Siegel said.

“Their portfolio is shrinking far faster than we anticipated, and we could not accept a pricing that was based on longer-term prepayment rates,” he said.

“We thought the price should be adjusted substantially downward” from the tentatively agreed amount of $238 million set in November, 1991, he said.

Officials at Shearson Lehman could not be reached for comment.

Shearson Lehman, the broker-dealer arm of American Express Co., is the nation’s 12th-largest servicer of home mortgages. It managed about $19 billion in mortgages and home-equity loans in 1991. Hamilton Savings, with assets of $335 million, serviced about $2.3 billion in home mortgages last year.

Shearson Lehman Bros. has been trying to sell its mortgage banking subsidiary since last spring to focus on its main businesses and boost capital. Other companies that expressed interest in the unit have reportedly included BankAmerica Corp., General Electric Capital Corp. and Sears, Roebuck & Co.

The American Banker, a trade newspaper that first reported the collapse of the sale Tuesday, also reported that Shearson Lehman is discussing the sale of about $600 million in second mortgages held by its mortgage unit. This portfolio, which was not included in its talks with American Mortgage, may soon be sold, the publication said.