After two days in which trading was suspended on the basis of information about
margin calls, shares in American Home Mortgage (AHM) were again
put into active trading on Tuesday and immediately lost over 90 percent of their
Stock in the company had been trading around $36 as recently as February but
had fallen to the high teens in recent weeks because of subprime
problems. Rumors were rife on Friday that the AHM had lost some of its warehouse
lines and was scrambling to find additional collateral or funding to complete
its obligations. AHM denied the rumors at that point and its
stock recovered slightly during the day, closing at $10.47. However, by the
time the market opened on Monday the company had confirmed its problems and
trading in the stock was suspended by exchange officials. When trading in the
stock was finally reinstated Tuesday afternoon the stock plummeted. At the end
of the day Tuesday shares were trading at $1.04.
The company admitted that it had met a number of margin calls over the last
few weeks as the value of its loan portfolio declined and lenders and investors
demanded more collateral for its loans.
Further spooking a jittery market is the fact that AHM is not a subprime lender
but rather a big player in the Alt-A
market, catering to borrowers with decent credit. It also writes huge numbers
of adjustable rate mortgages. There has been a lot of speculation that, as these
marginal customers will be unable to make payments or refinance to more affordable
products and defaults and thus foreclosures will skyrocket.
The company has been told by its lenders, those banks and other financial entities
that actually provide money for the mortgages the company writes, that they
will no longer fund AHM loans. It is estimated that the company
had to default on closing $300 million in mortgages on Monday and was expected
to cancel closings on another $450 to $500 million loans Tuesday because the
money was simply not available. Among the companies that lend to AMH are Bank
of America Corp, Credit Agricole SA, Calyon affiliate, UBS AG, and Bear Stearns.
Bear Stearns has had substantial problems of its own because two of its hedge
funds are heavily invested in residential mortgage backed securities. The company
has lent the funds huge amounts of money in recent weeks and one of the funds
Analysts speculated that AHM will have little choice but to file bankruptcy
in its present situation and the company said it has hired Lazard Ltd. and Milestone
Advisors to help it sort through its options. None of these options appear to
be favorable to stockholders.
Not surprisingly, other lenders also saw their stocks lose value. According
to Reuters, NovaStar Financial a subprime lender lost one quarter of its value
The stock market itself had been having a pretty good day with the Dow Jones
up as much as 140 points, then trading opened in AHM and the bulls fled. The
market closed down 1.1 percent or 146 points.
The ripples are beginning to affect more and more sectors of the economy. Reuters
also states that two of the major issuers of private mortgage insurance,
MGIC Investment Corporation and Radian Group lost 15 to 16 percent of their
stock value after they announced that they might be forced to write off a combined
$1.03 billion from a joint venture they formed related to subprime mortgages.
But the saddest ripples of all engulfed homebuyers and sellers on Monday and
Tuesday. Imagine showing up at the title company all atwitter at the prospect
of finally owning your own home or walking out with a big check only to be told
that the money will not be there to complete your sale. Based on an average
home price and a 10 percent down payment we figure that some 3750 home closing
were directly impacted on Monday and Tuesday and surely there are more that
were scheduled over the next few weeks. And the ripples don't stop there.
Many of the sellers will now be unable to complete the purchase of their next
home, in all likelihood many will lose substantial deposits for being unable
to perform and, as a practical matter, how many people had already packed up
and vacated old homes and apartments and now have no place to go.
What was being called a mess a few months ago is now turning into a genuine
nightmare and it is hard to figure how or when it will end.