Shearson Agrees to Sell Mortgage Subsidiary

Shearson Lehman Brothers Inc. has reached a tentative agreement to sell its large mortgage banking company to an investor group with Middle Eastern ties for about $238 million.

The proposed sale, outlined in a letter of intent obtained by the American Banker, dramatically underscores an increasing interest by overseas investors in the lucrative U.S. mortgage market.

A Sign of Progress

It also would allow Shearson, the broker-dealer affiliate of American Express Co., to proclaim progress in its plan to shed ancillary businesses and raise capital.

According to the letter of intent signed by Shearson and the investors, Shearson Lehman Mortgage would be bought by an affiliate of Trans-Arabian Investment Bank and a group of U.S. investors who own Hamilton Savings Bank in San Francisco. Trans-Arabian is a merchant banking group based in Bahrain.

A spokesman for Shearson declined to comment. Vasudevan Srinivasan, president of the company formed to buy the unit, also declined to comment.

The letter calls for a definitive agreement to be signed by year's end. But it also points at some hurdles that could scotch the deal. The buyers have not yet completed an examination of the mortgage company, and they have not obtained all the neccessary financing.

The Shearson unit, based in Irvine, Calif., is the nation's 12th largest servicer of home mortgages. It has been on the auction block for several months.

Hopes Had Narrowed

As recently as two months ago, sources close to the firm considered chances of finding a buyer slim, partly because of the company's large size. The firm's primary business involves servicing mortgages, which can have heavy capital costs for banks and thrifts. Even nonbank players have balked at the idea.

Sources said companies that have looked at the unit without proceeding include BankAmerica Corp., GE Capital Corp., and Sears, Roebuck and Co.

Shearson Lehman Mortgage processes monthly payments on nearly $19 billion of mortgages and home equity loans. It also originated $832 million of mortgages last year, according to SMR Research.

Shareholders Named

The proposed buyers, according to the letter of intent, are calling themselves American Mortgage Servicing Inc. Its majority shareholders are Creditcorp Investments NV, an affiliate of Trans-Arabian Investment Bank, and the Burr Group, whose principals bought Hamilton Savings in 1984.

The U.S. investors include William Kirschenbaum, Hamilton's chairman, and Paul Siegel, its president.

Trans-Arabian is the latest of several overseas enterprises to show interest in the U.S. mortgage banking business.

Earlier this year, Houston entrepreneur James Tang tapped institutional investors in Hong Kong to acquire Commonwealth Mortgage of American, Houston. In 1988, Long-Term Credit Bank of Japan entered the field by acquiring Greenwich Capital Markets Inc.

Trans-Arabian has a seasoned guide to the mortgage market in Hamilton Savings, which has assets of $335 million and services about $2.3 billion of loans.

In addition, Hamilton, Carter, Smith & Co. - an affiliate of the thrift that is performing due diligence on the Shearson unit - is a leader in brokering mortgage servicing rights for other lenders.

The buyers said in the letter they intend to continue most of Shearson Mortgage's current operations and retain as many employees "as is practicable." The mortgage unit is believed to have about 400 employees.

The letter of intent said Creditcorp and the Burr Group would provide $60 million in equity for the deal and seek to raise another $60 million in subordidinated debt or equity.

The letter indicated that Citibank will attempt to raise the remaining $120 million. Any shortfall in senior bank debt would be covered by additional equity, the letter said.

The proposed sale price of $238 million works out to about 1.3% of the loans serviced, which experts described as roughly in line with the pricing of other mortgage banking deals. But analysts said it is unclear whether Shearson would recognize a gain from the sale.

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