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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:
, , ) 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:
, , ) , 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:
, , ) 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:
, , ) 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:
, , ) fell 13% and NovaStar Financial (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.”
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on Monday, February 25th, 2008 at 6:22 am and is filed under Bankruptcy, Bankruptcy Attorney.
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