A franchise-mortgage finance group at Lehman Brothers, which includes an origination effort based in Orlando, Fla., and a team of bankers in New York, may be dismantled - with a simultaneous redistribution of talent - according to several reliable market sources and insiders knowledgable about the developments.

It is understood that a term securitization of Lehman franchise loans has been in the works for a while, although market players have expressed discomfort with the notion that the unit may be shut down following a deal. According to insiders, Lehman has been working on the franchise deal for nearly a year, but so far to no avail.

Officials at Lehman, however, adamantly deny the rumors and speculation.

"We are not exiting the franchise business, which actually differentiates us from many that are out there, who are not active in the business," said Paul Sveen, who heads up the franchise mortgage conduit. "I have heard this rumor, and it is false. There are lots of franchise players who are having trouble with their business or with aggressive underwriting, but that does not happen to be our problem. We periodically look at the [franchise] securitization market, and at some point in time we will print a securitization."

Sveen said within the last two weeks he has had to quell this rumor to certain retail brokers that expressed concern.

However, word on the Street is that Lehman's franchise mortgage conduit has been troubled for some time and is losing money. The franchise group has been originating loans and financing them in the conduit market. The Orlando origination arm is staffed in part by ex-CNL originators.

"We've heard rumors that they're closing the shop as soon as the deal is done," one source said. "We saw that with First Boston. No one wants to have a deal where the originator isn't there anymore, or isn't behind the deal."

"This franchise operation has been an albatross to them from the start," said another insider. "They are going to be winding it down."

CSFB ran a franchise loan finance unit in the late 1990s, and launched a joint deal with Captec Financial Group in 1998, but has been out of the picture since then.

Another insider close to the business said that Lehman had seriously considered folding the franchise business into the firm's commercial mortgage conduit three years ago, which was then headed up by Mike Mazzei. The idea, at the time, was nixed.

"They knew [the franchise business] didn't make any sense," a market source said. More recently, the franchise operation lost some talent, such as Judy Tan, who left the firm at the beginning of the year. "I think Lehman's original plan was to be a long term player, but I've been hearing more and more that that probably is not going to happen," the source added.

Still, senior management at Lehman deny that the franchise group is going to be disbanded.

"We cannot validate something that is completely unsubstantiated," said Nelson Soares, the head of the ABS group at Lehman.

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