Merrill Lynch & Co. said it will lay off an unspecified number of workers at its subprime lending subsidiary, First Franklin Financial, which it purchased from National City Corp. earlier this year for $1.3 billion.

First Franklin’s previous owner, National City Corp., has increased its estimates of third-quarter losses from mortgage banking to between $130 million and $160 million, in part because of rising losses on loans originated by First Franklin.

Although National City Corp. reported a $622 million gain on the sale of First Franklin, it retained $7.3 billion in loans originated by company.

In a mid-quarter update to investors today, National City reported nonperforming residential real estate loans in its portfolio grew to $236 million at the end of August, up from $213 million at the end of July and $149 million a year ago. Nonconforming loans originated by First Franklin and National City’s former Altegra/Loan Zone business units accounted for more than a third of the total, or $86 million.

Real estate owned (REO) residential property totaled $280 million at the end of August, up from $187 million a year ago. At $172 million, property securing loans originated by First Franklin accounted for more than half of the residential REO total.

Nonperforming assets of all types, including commercial loans and real estate-owned property, totaled $1.02 billion, up from $878 million at the end of July and $661 million a year ago. 

National City said risk remains elevated in the $1.7 billion First Franklin second lien portfolio and in certain home construction and investment real estate projects.

On Sept. 6, National City announced it was laying off 1,300 workers at National City Mortgage and would write down the value of loans it’s been unable to sell to investors by up to $30 million.

National City said today it employed the equivalent of 7,457 full time workers in mortgage banking at the end of August, down from 7,666 at the end of April.

At First Franklin, which employed 2,800 at the end of December, Merrill Lynch is cutting an unspecified number of jobs “to be in line with current business requirements,” a Merrill Lynch spokesman told Bloomberg News, with employees informed of the decision last week.

Reuters reported that Merrill Lynch Bank & Trust Co., the unit where much of First Franklin’s results are now reported, lost $111 million through the first half of 2007.

A Merrill Lynch competitor, Lehman Brothers Holdings Inc., announced earlier this month it would lay off 850 workers worldwide as part of a restructuring plan for its residential mortgage origination business. Lehman Brothers announced the closure of its BNC Mortgage LLC subsidiary in August.

Other lenders to have announced job cuts in recent weeks include Washington Mutual (1,000 positions), Option One (575 employees), Countrywide Financial (10,000 to 12,000 jobs), and IndyMac Bancorp Inc. (1,000 workers).

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