Merrill Lynch cuts Option One financing

According to Matthew Padilla at the O.C. Register, Merrill Lynch has withdrawn its $1.5 billion warehouse lending line previously held with Option One Mortgage. Large subprime mortgage lenders like Option One and New Century use these huge warehouse lines to fund residential mortgages. When investment banks begin to cut warehouse funding these companies lose lending capacity as they have to wait to "clear" existing credit lines by pooling and/or securitizing mortgage loans to sell to investors before making new loans.

From the article:

The company said in a filing today that its mortgage unit lost a $1.5 billion credit line from Merrill Lynch & Co. Other investment banks reduced or rearranged their financial backing. For example, UBS cut its credit line from 1.5 billion to $750 million.

The changes in financing amount to a red flag because Option One needs to have $8 billion worth of credit lines as part of its agreement with potential buyer Cerberus. Bloomberg calculates that after the changes, Option One still has $12.25 billion of credit lines.

In March Option One had its Bank of America warehouse line cut in half from $4 billion to $2 billion. With Merrill Lynch out of the picture Option One is left with approximately 8 creditors.