A CLUTCH of vulture funds and private-equity bidders are circling a £900m portfolio of British sub-prime mortgages being auctioned by the administrators of Lehman Brothers.

Second-round bids for the portfolio, which includes the collapsed bank’s Capstone servicing business that employs 450 people, have to be lodged by the end of January.

American private-equity giants Apollo and Blackstone are believed to have been among those to have run a ruler over the business – one of the largest assets of Lehman’s UK operations that remains unsold.

Analysts believe the portfolio of mortgages will sell for less than 50p in the £1, reflecting mounting expectations of a collapse in British house prices. Lehman announced a plan to sell the business to the American investment firm Blackrock shortly before it collapsed in September, but the deal was never completed.

It would be one of the largest sales of a British mortgage portfolio since the recession took hold in earnest. Bankers around the world are watching the auction process closely for fear the price struck will force them into further write-downs on their own mortgage portfolios and securitised mortgage assets.

The British mortgages have been bundled together with some Irish and Portuguese loans by Lehman’s administrators at Price Waterhouse Coopers. A second tranche of mortgages originated in Latin America and eastern Europe and worth €2.5 billion (£2.3 billion) will be put up for auction in the new year.

Lehman built up a huge sub-prime mortgage business in the UK, funded entirely from the wholesale financial markets.

The business was used as a way to bring deals to the bank’s securitisation team.

Rather than persuade banks to package the loans and sell them to the markets, Lehman sourced its own customers through financial advisers using brands such as Southern Pacific.

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