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American Home Mortgage (AHM)
American Home Mortgage May Be Selling the Farm
Chalk up another victim of the subprime mortgage meltdown: American Home Mortgage. On Tuesday the company said it would no longer be able to fund its loans and that it may be forced to liquidate assets (read: declare bankruptcy). Investors reacted to the sad state of affairs by sending the stock from $10.47 to a low of $1.10, a 90% drop. This is obviously bad news for shareholders of the nation's 10th largest lender, but is probably nothing new to anyone following the industry. How did AHM get into this predicament, and is there any chance that the tables will turn positive?
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Real estate has had a tough time over the past few years, but despite all the gnashing of teeth over new and existing home sales the mortgage industry was chugging along fine. In order to tap into new markets, the now ubiquitous "subprime" mortgages were offered to potential home owners who could not qualify for market rate mortgages due to credit problems. These loans were significantly more risky to both the creditor and the debtor because the rate of the loan tended to be much higher (higher payments), increasing the likelihood that the person taking out the loan would be able to pay it back. This did not faze investors, who felt that the high rate of return was worth the risk. Even well-established firms like H&R Block (HRB: Charts, News, Offers), Bear Stearns (BSC: Charts, News, Offers) jumped in on the action.
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While the picture seemed rosy, turning on the television or reading the paper nowadays shows a different story. By early February the honeymoon was over. Companies like AHM, New Century Financial (now bankrupt), Countrywide Financial and Ameriquest Mortgage saw the value of their mortgage portfolios tumble. Companies that had not counted on having to buy back the loans they originated were suddenly faced with doing just that, forcing several companies to indicate that this would not be possible. Subprime loans make up 11% of the US mortgage market, and with investors less willing to buy mortgage-backed securities in these riskier loans the value of new mortgage originations is likely to fall from $2.5 trillion (not a misspelling) in 2006 to $2.2 trillion in 2007. Within subprime mortgages, 11% of the loans were either late, in foreclosure or had resulted in the property being seized.
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American Home Mortgage is somewhat different than the likes of the now defunct New Century Financial. Instead of offering subprime mortgages, it offered what is known as Alt-A loans. These differ in that they require borrowers to provide little or no proof of income before snapping up an adjustable-rate mortgage. With no proof it would be incredibly difficult for the company to know what sort of financial situation the borrower was in, including whether or not the borrower would be able to pay the loan back. Considering that the company offered almost $35bn in loans so far in 2007, Tuesday's decision to look into liquidation means that AHM is the largest mortgage lender of its type to run into trouble.
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So what will become of American Home Mortgage? It is already behind in its margin calls to the tune of $750-800m from Monday and Tuesday of this week, and it is unlikely that it will be able to pay the calls any time soon. This has prompted shares of its competitors - namely NovaStar Financial (NFI: Charts, News, Offers) and Impac Mortgage (IMH: Charts, News, Offers) - to tumble by 52% and 35%, respectively. While the stock certificates are still worth more than kindling, it will be an uphill battle for prices to ever regain their luster. The company is retaining the services of Lazard (LAZ: Charts, News, Offers) and Milestone Advisors to evaluate the options available. Bankruptcy or restructuring are really the two main options that the company has, though either option will likely leave shareholders holding the bag.
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Profile |
Click here to read a detailed profile of American Home Mortgage.
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