Monday, July 30, 2007

American Home Mortgage: another troubled lender?

American Home Mortgage Investment Corp. had to write down the value of its loan and security portfolios due to “unprecedented” disruption in the credit markets, leading to margin calls from its investors. As a result, it is delaying payment of dividends on its common stock, and its preferred shares as well. Keeping cash on hand will allow American Home Mortgage to act quickly when it fully understands “the impact of market conditions on its balance sheet and liquidity”. At this point, it seems, understanding the effect of market disruptions is not as hard as deciding what to do right now and what to do if things get worse. The problem is that economists are having a hard time predicting what will happen next and what happens after that. It is hard to tell whether we’re experiencing a financial “correction” or standing on the verge of a global credit crunch unprecedented in history. So, the “wait and see” strategy no longer works, because credit problems are already affecting investments, retirement accounts and other financial instruments that affect a number of consumers that spans well beyond the circle of Wall Street professionals.

American Home Mortgage, which has little exposure to subprime lending, but worked mostly with prime and Alt-A borrowers, is yet another example of the “subprime contagion” – something corporate executives seemed to deem impossible until recently. If the lender is unable to meet the margin calls, it may have to file for bankruptcy, because it depends on short-term loans from banks to fund the mortgages it issues. It is expected to post a second-quarter loss and possibly “contained” losses for 2007. Stocks closed at $10, 47 on Friday, the lowest since April 2003.

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