Lehman Brothers Holdings Inc., the biggest underwriter of American bonds backed by mortgages, became the first firm on Wall Street to close its subprime-lending unit and said 1,200 employees will lose their jobs.

Shuttering BNC Mortgage LLC will cut third-quarter earnings by $52 million, Lehman said in a statement yesterday. Lehman, led by chief executive officer Richard Fuld, bought Irvine, Calif.-based BNC in 2004 and used it to expand in lending to homeowners with poor credit or heavy debt loads. The job cuts are equivalent to about 4.2% of Lehman’s workforce of more than 28,000.

“Market conditions have necessitated a substantial reduction in resources and capacity in the subprime space,” the New York-based firm said.

Subprime mortgages, shunned for years because of the default risk, helped fuel the American housing boom this decade as securities firms led by Lehman and Bear Stearns Cos. packaged them into AAA-rated bonds. A surge in late payments on the loans has since eroded confidence in credit products and roiled global debt and stock markets as investors fled to safer assets.

Accredited Home Lenders Holding Co., a subprime specialist, announced 1,600 job cuts earlier yesterday in an effort to outlast the credit crunch that has forced dozens of rivals out of business. HSBC Holdings Plc is eliminating 600 positions in its American operations and closing a mortgage office in Indiana, and Capital One Financial Corp. is closing Green-Point Mortgage because it can’t make money anymore lending to homeowners and then selling those mortgages to investors.

Lehman said as recently as June that subprime mortgages and related securities provide less than 3% of its revenue, which was $17.6 billion last year. The firm said it will continue making home loans to borrowers with better credit through its Aurora Loan Services LLC unit.

A 22-year Lehman veteran and overseer of mortgage lending at the firm, Theodore Janulis, took over the mortgage division last year after leading its investment management business for four years. Mr. Janulis, 48, became a member of Lehman’s executives committee in January 2004.

Shares of Lehman have fallen almost 27% this year, the third-worst performance in the 12-member Amex Securities Broker/ Dealer Index, on concern that contagion from the subprime crisis will hurt earnings. The stock rose 16 cents to $57.70 at 3:04 p.m. in New York Stock Exchange composite trading yesterday.

BNC made about $2 billion of loans in the first quarter, down 40% from a year earlier, according to industry newsletter National Mortgage News. The unit’s 23 offices in eight states will be closed. Lehman said in June that it would merge BNC and Aurora in within three months, eliminating 400 jobs.