Merrill Lynch has cut jobs at First Franklin Financial, a sub-prime mortgage business that it bought for $1.3 billion (£650 million) less than a year ago, after its bet on America’s high-risk home loan industry soured.

The undisclosed redundancies at First Franklin emerged after Merrill Lynch announced a significant writedown on its mortgage-backed securities portfolio on Friday, which it said would hit third-quarter profits.

Merrill Lynch has not disclosed Franklin’s results, although recent filings indicate that the unit in which most of the business is accounted for lost $111 million in the first half of the year. The cuts at the bank, which had about 2,800 staff in January, come on top of about 50,000 redundancies in the American mortgage industry so far this year, as a surge in defaults on sub-prime mortgages contaminated the entire housing market.

The home loan employees of Lehman Brothers have been among those hit hardest, with more than 2,000 losing their jobs this year. Bear Stearns has shed about 240 jobs over the same period.

America’s mortgage woes will continue to take centre stage this week as some of Wall Street’s biggest firms report their third-quarter results. Most are expected to report significant declines on the previous year as they suffer from writedowns in assets connected to mortgages and a sharp downturn in financing fees as the credit crunch brings the lucrative leveraged buyout industry to a standstill.

Lehman Brothers will report its third-quarter profits today. Analysts estimate that the biggest underwriter of US mortgage bonds will announce profits of $1.49 a share, a 5 per cent decline from the $1.57 recorded the year before and a 32.5 per cent decline from the $2.21 unveiled in the second quarter.

Tomorrow Morgan Stanley is expected to report an 11 per cent decline in its earnings per share, from a year earlier, and Bear Stearns is predicted to report a 40 per cent decline from the year before on Thursday.

E*Trade, the online share dealer and recent buyer of mortgage debt, gave warning to Wall Street yesterday that its earnings for the third quarter of the year could be a third lower than expected because of the crisis in the US mortgage market. The company, which is scheduled to report its third-quarter figures in mid-October, said that it would seek to exit the mortgage business altogether to concentrate on online retail share dealing.

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