National City Corp said on Monday it expects a third-quarter mortgage banking loss of around $160 million, the high end of its forecast, hurt by slumping housing demand and tighter capital markets.

In a regulatory filing, the ninth-largest U.S. bank said it had projected a $130 million to $160 million after-tax loss from mortgage banking, excluding hedging activities. It also said bad loans rose in August at the fastest monthly pace this year. Hedging generated a $29 million gain in July and August.

National City said it expects to write down some Alt-A and home equity loans because investors have stopped buying many of those loans. Alt-A loans go to people who fall short of qualifying for prime mortgages.

Cleveland-based National City also said that in August, nonperforming assets rose 16.2 percent from July to $1.02 billion, while loans at least 90 days past due rose 8 percent from July to $1.26 billion.

Dozens of mortgage lenders have curtailed lending this year as investors stopped buying many loans, home prices stagnated and defaults soared.

On September 6, National City announced 1,300 layoffs, or 4 percent of its total work force, and said it would scale back its mortgage business, resulting in a $200 million pre-tax charge.

The company last month merged its home equity unit into its main mortgage unit. It is also making fewer loans it cannot sell to Fannie Mae and Freddie Mac, and has suspended issuance of home equity loans through brokers.

National City had already slashed its mortgage exposure in December when it sold its First Franklin Financial Corp subprime unit to Merrill Lynch & Co for $1.3 billion. Risk remains elevated in First Franklin loans it kept, National City said.

Merrill Lynch separately said it cut an unspecified number of jobs from San Jose, California-based First Franklin to be in line with current business requirements.

A Merrill Lynch unit that includes much of First Franklin lost $111 million from January to June. Subprime lenders make home loans to people with weak credit.

National City also said net interest margin fell to 3.53 percent in July and August from the second quarter's 3.59 percent. It said lending income should be relatively flat in the third quarter, helped by higher average earning assets.

National City operates mainly in the Midwest and in Florida, and has about 1,360 branches.

Shares of National City rose 9 cents to $25.84 in morning trading. Through Friday, they had fallen 29.6 percent this year.

(Additional reporting by Tim McLaughlin)

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