American Home Mortgage Investment Corp. Collapses
July 31st, 2007Via: Bloomberg:
American Home Mortgage Investment Corp. shares plunged 90 percent after the lender said it doesn’t have cash to fund new loans, stranding thousands of home buyers and putting the company on the brink of failure.
Investment banks cut off credit lines, leaving American Home without money yesterday for $300 million of mortgages it had already promised, the Melville, New York-based company said in a statement today. It anticipates that $450 million to $500 million of loans probably won’t get funded today, and the lender may have to sell off its assets.
“They can’t function without access to capital,” said Bose George, an analyst with KBW Inc. in New York. “The company either has to file for bankruptcy or go through some type of rescue or restructuring, and either way will leave almost nothing for the common shareholders.”
American Home caters to borrowers whose credit scores fall just short of standards for top-rated mortgages. The announcement provides fresh evidence that defaults may be spreading from subprime borrowers with the worst credit scores to homeowners with more reliable payment records. The biggest U.S. mortgage lender, Countrywide Financial Corp., said last week late payments rose among some of its most creditworthy clients.
Shares of American Home, halted by the New York Stock Exchange early yesterday, plummeted $9.43 from their close on July 27 to $1.04 as of 4:15 p.m. in NYSE composite trading. They sold for $6.39 in pre-market transactions yesterday. Two years ago, they fetched almost $40.
Margin Calls
American Home said it’s “seeking the course of resolution, in this environment, that is least disruptive to its business and to the many thousands of homebuyers to whom it has committed to provide mortgages.”
Creditors made “very significant margin calls” in the last three weeks and American Home still has “substantial unpaid margin calls pending,” it said in the statement. Options may include “the orderly liquidation of its assets.”
Do you have any info., yet, on what the Executives of the company were paid during this time period? How much will they have to pay toward saving the company?
Never mind, we all know the answers to those questions, a lot and nothing at all.
I could see this coming a mile away. When you’re forced to do loans to people who obviously can’t afford the loan and are not creditworthy. A foreclosure waiting to happen just be cause it’s a “loan” Loan after loan being done. It’s no longer a business where you analyze people’s creditworthiness. A machine does it. And it’s obviously not doing a good job. Who’s fault is it. The developer not the employees. But who loses the employees that are just doing the job there told to do. But they never said life was fair did they.
My husband and I were to close on our first home on Friday after jumping every hoop they put in front of us! We’ve been cheated and the worst part is that our lender didn’t have the nerve to tell us herself, our realtor did!! Then she still insisted that they could fund our loan. After reading eveything, I don’t see how, so why lie about it?!
Amy, this is probably a blessing in disguise.
The real estate market is far from bottoming out. Wait even year–maybe two–and they’ll probably be giving houses away.
Or do what I did: Find someone who’s willing to owner finance. Just be careful that the seller doesn’t feel this justifies an inflated price. Research prices. Also, it’s standard around here for a contract for deed to state that, if you are ever 60 days behind in payments, you become a renter.
A couple more caveats: Do a title search!!! I can’t emphasize this enough. Record your contract for deed at the county courthouse!!! And be sure you feel confident that you’re dealing with sellers who are straight-up honest.
I was very fortunate all the way around, but I’ve known people who weren’t.
You see many more owner-finance deals, as it gets harder to get a regular loan.
American Home Mortgage was among the best run businesses on the planet, and their recent failure was not due to mismanagement, undue risk in their underwriting portfolio, or a lack of credit-worthy borrowers. The company and its stranded borrowers are simply victims of the current uncertainty in the equity markets.
What a lot of people don’t understand is that there is an enormous difference between so-called sub-prime loans and AHM’s primary market of Alt-A. Whereas the typical sub-prime borrower has neglected to pay their bills on numerous occasions, and frequently have had a vehicle repossessed or other financial traumas, this is NOT the case with Alt-A borrowers.
Who is your Alt-A borrower? Anybody buying a home on more than 5 acres. Anybody buying a non-traditional structure like a log home, or a concrete home, or a Tenants in Common residence. But more than that, it is typically a small business owner. Or a self-employed professional.
Typical “A-Paper” loans are only capable of underwriting *employees*–people who get paid a salary and receive a W2 at the end of the year, they are not capable of underwriting employers. Your local CPA doesn’t get a W2. Neither does your private practice Dentist, or attorney, or car dealership owner, or real estate developer, etc, etc. So how do these folks who typically have very high net worth/income ratios (particularly when compared with credit-drunk employees) obtain financing when their income is difficult to document using traditional methods? Alt-A.
I’d suggest that your typical Alt-A portfolio (filled with borrowers with proven business and financial acumen) is a much better credit risk than a file full of the very best “A-Paper” files. Why? What do you get when a person has zero concept of basic financial principles, zero liquidity, is maxed out on consumer credit, and has no capital assets–yet 10-15% are going to encounter a major financial setback (firing, medical emergency, uninsured/underinsured losses)? You get tomorrow’s sub-prime borrower. And that is exactly what you have in “A-Paper.”
I’m as cynical as any, but for the voice of dissent to remain credible, you have to maintain some semblance of clarity and accuracy in your statements. Some of the comments above may be lacking in that regard.