American Home Mortgage files for bankruptcy protection

"American Home Mortgage files for bankruptcy protection"

The Associated Press
Monday, August 6, 2007
NEW YORK: American Home Mortgage Investment Corp. filed for bankruptcy protection on Monday, the latest casualty of a mortgage industry that has plunged into distress.

The Melville, New York-based company's request for Chapter 11 bankruptcy protection — filed in bankruptcy court in Wilmington, Delaware — caps a tumultuous 10 days for what had been the nation's 10th-biggest home lender.

American Home Mortgage said it fell victim to "extraordinary disruptions" in the markets that support the mortgage industry. A cold housing market and a spike in payment defaults scared investors away from mortgage debt, including bonds and other securities backed by home loans.

American Home Mortgage's 40 biggest creditors include virtually all the major names of Wall Street. At the top of the list are Deutsche Bank AG and JPMorgan Chase & Co.

Deutsche Bank had no comment. JPMorgan Chase declined to comment on its exposure.

JMP Securities analyst Steven C. Delaney said the reason American Home Mortgage went bankrupt in the first place — the exodus of buyers from the mortgage debt market — also means the company will have trouble selling its assets to raise cash.

"We are in a market now where value is a fleeting concept," Delaney said. "The market today has just basically shut down. ... They might not even find a buyer at any price today."

In a statement, American Home said it lined up $50 million (€36 million) in debtor-in-possession financing from WL Ross & Co. LLC. WL Ross is led by billionaire Wilbur L. Ross Jr., who has rescued failed companies in the steel, coal and textile industries.

The company hired Stephen F. Cooper to be chief restructuring officer. Cooper was also chief restructuring officer for Enron Corp.

The stock market had anticipated the company's demise. Its shares, which closed 2006 at more than $35, fell to 44 cents before trading was suspended Monday.

While bankrupt lenders carry ominous implications for the housing market and for consumers hoping to take out a new mortgage, they do not affect mortgages already issued.

A bankrupt lender simply means financial institutions will likely buy the company's loans as its assets are auctioned off; it does not imperil people's homes.

Likewise, Ganesh Rathnam, an analyst who tracks investment banks for Morningstar, said he does not expect Wall Street to sustain much damage from American Home, which has less than $20 billion (€14.47 billion) in liabilities.

"The Wall Street banks will go and look for their next source of income, whatever that is," he said. "It is not going to bankrupt them."

American Home Mortgage joins more than 50 lenders in bankruptcy this year. It is bigger than most of the other lenders to go out of business so far, second only to New Century Financial Corp.

And, unlike New Century and most other bankrupt lenders, American Home Mortgage was not a "subprime" lender. Subprime lenders cater to home buyers with spotty credit. Almost none of American Home Mortgage's $58.9 billion (€42.63 billion) in home loans last year were to subprime borrowers.

Yet like other subprime lenders, American Home's decline was quick.

Last week, the company said many of its lenders wanted their money back, and said it was unable to deliver as much as $800 million (€579 million) in promised loans. It then laid off almost 90 percent of its 7,000 employees.

The lenders left standing have scrambled to convince the market they have enough cash. Dexia SA, a bank based in Belgium, said Monday it is well-protected against subprime risk.

Last week, Bear Stearns Cos. and Countrywide Financial Corp. each tried to assure the market of their liquidity and access to cash, only to see their stocks fall sharply afterward.

Separately, NovaStar Financial Inc. on Monday confirmed it temporarily halted home loans through brokers but said it was honoring existing commitments.

Friedman Billings Ramsey analyst Scott Valentin cut his price target on the company's stock to zero, saying suspending loans lays the groundwork for shutting down."