Some mortgage originators, like American Home and NovaStar,
rely on credit lines from large banks to help them
"warehouse" loans they've offered. When they've accumulated
enough mortgages, the loans are packaged as mortgage-backed
securities and sold on to institutional investors in the
asset-backed securities market. Without such lines of
credit, these lenders find it tough to keep originating
loans. New Century, one of the largest subprime mortgage
originators, was forced into bankruptcy earlier this year
after warehouse lenders pulled back.
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Original source URL:
http://www.marketwatch.com/news/story/american-home-plunges-bankruptcy-concern/story.aspx?guid=%7BBEECDD93%2D41EB%2D4E49%2DAA5E%2DFAEA3A434B44%7D&dist=SecMostMailed
American Home plunges on bankruptcy concern
Mortgage lender hires advisers for 'orderly liquidation of assets'
By Alistair Barr, MarketWatch
Last Update: 6:33 PM ET Jul 31, 2007
SAN FRANCISCO (MarketWatch) -- American Home Mortgage Investment Corp., the
10th-largest mortgage lender in the U.S., teetered on the brink of bankruptcy on
Tuesday after saying it can't pay its creditors, potentially becoming the first
big lender outside the subprime mortgage business to go bust.
Shares of the company plunged 90% to close at $1.04.
"They will either file for bankruptcy or do some sort of material restructuring
that will leave equity investors with very little," Bose George, an analyst at
Keefe Bruyette & Woods, said in an interview. "It sounds like there's very
little capital left."
The announcement hit shares of other mortgage lenders, dented the broader stock
market and pushed U.S. Treasury bonds higher. Several big banks, including Bank
of America (BAC
bank of america corporation com
BAC
) , Bear Stearns (BSC
The Bear Stearns Companies Inc
BSC
) and Barclays (UK:BARC: news, chart, profile) , have lending agreements with
American Home. See full story.
A lot of mortgage lenders have already gone bust this year. But those companies,
such as New Century (NEWCQ
new century financial corp m com
News , chart , profile , more
NEWCQ
) , focused on subprime home loans for less creditworthy borrowers. American
Home doesn't offer subprime mortgages. Instead, it has specialized in
adjustable-rate mortgages and so-called Alt-A loans, which often require little
or no documentation of a borrower's income.
"It could be the first large bankruptcy of a mortgage lender that doesn't focus
on subprime home loans," KBW's George said. "There have been some smaller Alt-A
lenders that have struggled, but the size of this one will dwarf the other
ones."
American Home was the 10th largest mortgage originator in the U.S. during the
first half of 2007, according to industry publisher Inside Mortgage Finance. The
company offered almost $35 billion in home loans in the period.
Margin calls
American Home (AHM
american home mtg invt corp com
News , chart , profile , more
AHM
) said on Tuesday that its lenders have initiated margin calls because the loans
and securities the company was holding as collateral to back its borrowing have
dropped in value. (Margin calls are for more money or collateral to back loans).
The company said it has paid "very significant" margin calls during the past
three weeks, but has "substantial" unpaid margin calls still pending. It was
unable to fund lending obligations of roughly $300 million on Monday and said it
will likely not be able to meet another $450 million to $500 million of
obligations on Tuesday.
American Home said it has hired Milestone Advisors and Lazard Ltd. (LAZ
lazard ltd shs a
News , chart , profile , more
LAZ
) as advisers to help it consider strategic options such as "the orderly
liquidation of its assets."
"American Home Mortgage emphasized that it is seeking the course of resolution,
in this environment, that is least disruptive to its business and to the many
thousands of home buyers to whom it has committed to provide mortgages," the
company said in a statement.
Other mortgage lenders
Other mortgage lenders also fell on Tuesday after American Home warned that
investors in the secondary mortgage market have stopped buying loans from a
variety of originators.
Impac Mortgage Holdings (IMH
impac mtg hldgs inc com
News , chart , profile , more
IMH
) fell 13% and NovaStar Financial (NFI
novastar finl inc com new
News , chart , profile , more
NFI
) dropped 25%.
Impac and NovaStar "have exactly the same reliance on capital markets as
American Home," KBW's George said. He covers Impac, but not NovaStar.
Some mortgage originators, like American Home and NovaStar, rely on credit lines
from large banks to help them "warehouse" loans they've offered. When they've
accumulated enough mortgages, the loans are packaged as mortgage-backed
securities and sold on to institutional investors in the asset-backed securities
market. Without such lines of credit, these lenders find it tough to keep
originating loans.
New Century, one of the largest subprime mortgage originators, was forced into
bankruptcy earlier this year after warehouse lenders pulled back. See full
story.
American Home faces similar problems with reluctant warehouse lenders. However,
the company is battling another problem too. It holds some mortgage-related
securities on its balance sheet. Recent sharp declines in the value of those
holdings also made its creditors wary, triggering the margin calls.
"It's a little bit beyond New Century," Zack Gast, an analyst at the Center for
Financial Research and Analysis, said. "This is likely linked to the securities
they hold and the quick widened of spreads on lower-rated mortgage-backed
securities recently."
'Off guard'
Indeed, the fall of American Home came much quicker than KBW's George was
expecting.
"We've been bearish on this company for a while, but we didn't think they'd
basically fold on Tuesday morning," he said. "The thing that's caught people off
guard is the huge widening in spreads of mortgage assets, including even some
higher-rated securities."
American Home's troubles confirm that problems in the subprime mortgage business
have spread into other parts of the home loan market, Gast said. That
realization is probably what dented stock markets on Tuesday afternoon, he
noted.
"We'd long moved beyond the idea that this was just a subprime thing, but other
investors were still holding out," he said.
It's not clear from American Home's statement on Tuesday what types of loans
triggered the company's liquidity crisis, Gast added.
However, the analyst said the company was known for offering option ARM
mortgages with high loan-to-value ratios. (Option ARMs let borrowers pay less
than their minimum monthly interest charges. The bit they don't pay gets tacked
onto their principal, increasing the debt that they ultimately have to pay off.)
It could also be another sign of problems with Alt-A loans, Gast added. See full
story.
Alistair Barr is a reporter for MarketWatch in San Francisco.
--
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