Another big mortgage corporation has sent out early warning signals about its
financial health in the wake of the virtual collapse of the
subprime mortgage market.
American Home Mortgage Investment Corporation announced late last week that it
will take substantial charges for credit-related expenses in the second quarter
and it is likely it will experience a second quarter loss. American Home also
withdrew its previously issued earnings guidance for 2007 in which it had projected
earnings of $3.25 to $3.75 per share. According to BusinessWeek Online A.G. Edwards
projects the company's earnings this year at $1.67 and has cut its earnings
forecast to $2.89 from $4.50 for FY 2008.
American Home hopes to reinstate earnings guidance toward year-end.
So what? Subprime lenders have been falling under the bus
for months; at least a dozen have shuttered offices, had warehouse lines closed
by big banks, or stopped accepting loan applications and started auctioning
portfolios. But American Home is not a subprime company. In fact in March the
company issued a press release to clear up any "confusion" about the
type of loans it offers: at that point subprime mortgage represented less than
1% of its total loan portfolio.
The company specializes in so called Alt-A loans. These are
loans where the homeowner borrows a relatively high portion of the value of
a property and simply states an income, rather than documenting it. They tend
to be adjustable rate mortgages and have been particularly prone to rising delinquencies.
American Home's problems arose primarily because these Alt-A mortgages were
sold to investors with a so-called "timely payment" warranty
wherein the company agreed to repurchase loans within a three month period if
borrowers did not make mortgage payments on time. These warranties are common
in the industry but many more borrowers than anticipated fell behind on their
payments quickly and the company has had to buy those loans back. (It seems
appropriate to note that these were not necessarily brand new loans where borrowers
almost immediately defaulted. They may have been held by American Home in its
own portfolio or assigned to banks to secure warehouse loans for many months
before being packaged and sold to investors.)
Repurchase demands reached a high in April at which time the
company announced they would no longer write the high loan to value/stated income
products. Repurchases have declined substantially since that time and are now
believed to be about 53 percent below April levels and are expected to continue
to decline. However, according to MarketWatch, Paul Miller, an analyst for Friedman
Billings Ramsey downgraded American Home to underperforming on Friday and cut
the stock's target price from $25 to $15. "We are unconvinced that the worst
of the credit issues are behind the company," Miller said. He also explained
that the company's tighter underwriting standards will cut the number of loans
the company will originate, further affecting future earnings.
By its own description American Home Mortgage Investment Corp. is a mortgage
real estate investment trust (REIT) focused on earning net interest income from
self-originated loans and mortgage-backed securities, and, through its taxable
subsidiaries, from originating and selling mortgage loans and servicing mortgage
loans for institutional investors. Mortgages are originated through a network
of loan production offices and mortgage brokers as well as purchased from correspondent
lenders, and are serviced at the Company's Irving, Texas servicing center.
While second quarter earnings are expected to be substantially impacted, the
company has confirmed it will pay the expected $0.70 quarterly dividend. The
company had cut its dividend earlier this year from $1.12 per share.
Michael Strauss, American Home's Chief Executive Officer, commented, "Our
company's goal is to put the impact from the discontinued products
behind us. A benefit of the substantial reserves we are establishing in the
second quarter is that the discontinued product's impact on our future financial
results is likely to diminish. As we put the impact from the discontinued products
behind us, the positive contributions from our portfolio, mortgage origination
franchise and loan servicing business will again drive our results. Altogether,
the second quarter will be a period of "clean-up" as the impact from the discontinued
products continues to wind down."
Shares of American Home which are listed on the New York Stock Exchange as
AHM fell 12 percent on Friday closing at $18.38 after falling as low at $17.40
earlier in the day. Shares were trading at $18.22 at mid-day on Tuesday, July