Morgan Stanley Builds Mortgages

The housing market may be slowing down, but that's not stopping Morgan Stanley(MS Quote) from expanding its mortgage lending business.

The big Wall Street said Wednesday it is buying mortgage banker Saxon Capital(SAX Quote) for $706 million, or $14.10 a share. The cash deal will add to Morgan Stanley's growing home loan business and enhance its ability to generate more mortgage-backed securities.

The transaction represents a 28% premium to Saxon's Tuesday close of $10.97 a share. In premarket trading, shares of Saxon, which also reported Wednesday that second quarter profits rose 23%, were up $2.93 to $13.90.

Saxon, which operates as a real estate investment trust, or REIT, is a major originator and service of so-called sub-prime mortgages--loans sold to home buyers with less than sterling credit histories. The Virginia-based REIT provides mortgage servicing to a $26.4 billion home loan portfolio.

Mortgage servicing is a business in which a firm earns a fee for collecting and processing the payments on a mortgage.

In recent years, Wall Street firms have been moving into the mortgage lending, in a bid to steal some business away from traditional banks, and also support their securitization operations. For instance, Merrill Lynch(MER Quote)and Bear Stearns(BSC Quote) are other significant players in the mortgage market.

Wall Street firms earn rich fees from packaging home loans into mortgage-backed securities and then selling them to institutional investors and hedge funds.

Shares of Morgan Stanley, largely unchanged in premarket trading, closed Tuesday at $66.28.