The venture capital arm of Donaldson, Lufkin & Jenrette Securities Corp. has decided to cut its losses, signing a letter of intent to sell its controlling stake in First Franklin Financial Corp.

A source familiar with the deal said DLJ Merchant Banking is selling its 80% stake in the San Jose, Calif.-based mortgage lender to Bank America Corp.'s Continental Illinois Venture Corp. for $32 million. DLJ paid $36 million for the stake in 1994, and according to the source has lost about $15 million on the company.

Investment and venture capital groups have frequently dabbled in the mortgage business. Midcoast Mortgage Corp., Fort Lauderdale, Fla., was recently liquidated and sold by its venture capital parent, TA Associates. Thomas Lee & Co. and Madison Dearborn Partners both invested in HomeSide Lending, the mortgage joint venture spun off by Bank of Boston and Barnett Banks Inc. Knutson Mortgage Corp., Bloomington, Minn., is owned by Goldner, Hawn, Johnson & Morrison, Minneapolis, and the investment group at Chase Manhattan . Investment groups bought failed savings and loans from the Resolution Trust Corp. in the 1980s and early 1990s. Ronald O. Perleman bought Troy & Nichols Inc. from the RTC, and is said to have made a large profit from selling it to Chase in March 1993.

William and Steve Dallas, brothers who co-founded First Franklin, are to retain their 20% ownership of the company after the deal closes, likely in late September.

William Dallas will remain president and chief executive of the company, and will be on the board of the new firm. He is active in the Mortgage Bankers Association of America, as a member of the executive committee and head of the Freddie Mac liaison committee. He did not return a telephone call seeking comment.

The announcement of the deal said it includes First Franklin's Innovative Mortgage Solutions, which lends to borrowers with less-than- perfect credit. Financial terms were not disclosed.

Shortly after buying First Franklin, DLJ Merchant Banking merged it with Franklin Mortgage Capital Corp., a Virginia mortgage lender it already owned.

The losses suffered by First Franklin under DLJ's ownership were incurred by loans Franklin Mortgage originated before DLJ bought that company, according to the source.

First Franklin hired Smith Barney to raise capital in 1993 in order to keep up with the large mortgage lenders. The Dallas brothers, wishing to retain control, were looking for a minority investor, according to a source close to that deal. Having failed to find one, they agreed in May 1994 to cede control to DLJ Merchant Banking.

First Franklin originated $2.2 billion of mortgages in 1995, and currently services some $2 billion of home loans.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.