This week's bankruptcy filing by United Companies Financial Corp., a veteran lender to consumers with bad credit, caps a dismal period in the subprime mortgage sector and leaves in its wake more than $1.2 billion in debt.

Conspicuously exposed are as many as 22 banks, led by First Union Corp., that made an $850 million unsecured loan to the company in April 1997, when the subprime sector was booming. The loan was being renegotiated in October but talks between the banks and United Companies fell apart, observers said, and United Companies has drawn down the full $850 million on the loan.

"Losses are going to be really, really severe," said E. Reilly Tierney, analyst with Fox-Pitt, Kelton in New York, who said he expects banks still holding debt to be forced to write off the majority of the outstanding loan amount.

Since United Companies said in early February that it may default on its debts, banks have been scrambling to sell their stakes in the loan, market sources said. Steve Nelson, a Moody's Investors Service analyst, said it appeared that an increasing portion was being snapped up by distressed-loan buyers.

By midday Tuesday, market sources said about $300 million of the United Company paper was in play on the secondary market, trading for 50 cents on the dollar.

First Union and Bank One Corp. had the largest exposure as of Feb. 3, according to Securities Data Co., with $90 million each. A First Union spokesman said the bank could not comment on the matter while it was in bankruptcy court.

Morgan Guaranty, the main operating unit of J.P. Morgan & Co., follows with $65 million. Units of Bank of New York Corp., BankAmerica Corp., and Fleet Financial Group lent $60 million apiece.

The United Companies loan is one of the most obvious examples of the untoward risk that some banks took on when they eagerly extended funding to the subprime sector two years ago, observers said. Now, many may be paying the price.

Bank credit officers will be inspecting existing loans and warehouse lines in the mortgage industry, and tightening credit standards, said Michael McMahon, an analyst with Sandler O'Neill & Partners.

Potentially contributing to the damage banks could suffer in the United Companies loan is a post-bankruptcy arrangement proposed by CIT Group and Greenwich Capital Financial Products. The two plan to make a $500 million debtor-in-possession loan secured by United Companies' assets, upon approval of the U.S. Bankruptcy Court.

Debtor-in-possession lenders move ahead of other lenders as a reorganizing company repays its debts. The role is usually assumed by one of the bankrupt company's largest lenders.

CIT and Greenwich "just totally undercut the banks" by stepping in and grabbing the loan, said Mr. Tierney of Fox, Pitt, Kelton. This is the third time CIT Group has arranged similar financing for a failing subprime company, he said.

"The company is uniquely positioned to take advantage of the fall of this industry," Mr. Tierney said.

Guiding United Companies through its Chapter 11 filing is turnaround specialist who most recently engineered the reorganization and sale of Standand Brands Paint.

Ms. Midanek, 44, was a director at Drexel Burnham Lambert, and co- founded Solon Asset Management, a $500 million fixed-income investment advisory firm.

She joined United Companies in early February as a stand-in for longtime chief executive J. Terrell Brown, who took a 90-day leave of absence in an attempt to raise outside funding for the company.

Ms. Midanek's plans for the company include converting it from a securitizer to a whole-loan sales shop, and then selling it off to one or several buyers, she said.

Paying back the bank loan and debts to bondholders is "certainly part of our attempt and our effort, though we can't make any guarantees," she said.

United Companies and similar lenders suffered because of a "classic Wall Street pendulum effect," Ms. Midanek said. "An enormous amount of money moves into a sector, then recedes, leaving the sector off-balance."

She added that "First Union and the bank group were supportive of the initiative to become a whole-loan company.

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