NEW YORK – Shares of American Home Mortgage Investment Corp. plunged 90 percent Tuesday after the company raised fears it may become insolvent, renewing concern about worsening credit quality in the mortgage market and killing a Wall Street rally.
The struggling mortgage lender said its financial backers have essentially pulled the plug. The Wall Street banks that lend American Home Mortgage money for home loans – which include firms like UBS AG, Bear Stearns Cos., and JPMorgan Chase &Co. – will not extend the company any more money, and some have demanded back they money they have lent.
The Dow Jones industrial average, which had been up more than 120 points earlier in the day, closed down about 147 points after the news from American Home reminded investors of the tenuous state of the credit markets of late.
Keefe, Bruyette &Woods analyst Bose George said American Home Mortgage will probably go bankrupt, or at least be restructured into something leaving very little value for shareholders.
“The chances are low,” he said of the company’s prospects for survival. “The situation is radically going to be altered.”
American Home shares, which were halted all day Monday and most of Tuesday, shed $9.43 in only two hours of trading to close at $1.04.
American Home Mortgage said it has over the last three weeks paid “very significant” margin calls, which occur when a lender demands compensation after a borrower’s collateral loses value. The company still faces “substantial” unpaid margin calls.
This echoes reports from a number of other mortgage lenders of late, including New Century Financial Corp., the Irvine, Calif.-based lender that filed for bankruptcy protection earlier this year.
American Home Mortgage hired Lazard Ltd. and Milestone Advisors to assist in evaluating the company’s options. One of those options, the company said, is an “orderly liquidation of its assets.”
The company failed Monday to deliver $300 million in mortgages promised to home buyers, and it said it expects to be unable to finance $450 million to $500 million in additional mortgages Tuesday.
The reason American Home Mortgage’s lenders are balking is the mortgage loans that act as collateral for the company’s credit lines have sunk in value. The market where investors buy mortgage loans has suffered “unprecedented disruption” this year, the company said, and it is having trouble selling its mortgages.
Last year, the lender sold two-fifths of its loans to Countrywide Financial Corp., Deutsche Bank AG, and Wells Fargo &Co.
Dozens of mortgage lenders have gone bankrupt this year as more people miss payments on home loans, housing prices sag and skittish investors flee risky mortgage debt.
But while most of the bankrupt lenders catered to “subprime” borrowers – or borrowers with checkered credit histories – almost none of American Home Mortgage’s $58.9 billion in loans last year were classified as subprime.
American Home Mortgage specializes in adjustable-rate mortgages, which carry interest rates that reset according to certain benchmark interest rates. This type of debt has hamstrung a lot of borrowers in the past year because interest rates have jumped.
The company also lends to so-called Alt-A borrowers, or borrowers that cannot document their income.
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