All I can say is OUCH!!
Business News
Debts Overwhelm American Home
Ruthie Ackerman, Forbes.com
Posted: 02 August 2007 1440 hrs
Photos 1 of 1
US Home sales
The subprime crisis claimed a victim beyond the market for
low-quality home loans when American Home Mortgage Investment said
it could not pay its debts.
The company announced that it had failed to pay US$300 million in
lending obligations on Monday and it expected to miss additional
payments of up to $500 million on Tuesday. It did not specify the
nature of the obligations.
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American Home Mortgage is a real estate investment trust that makes
mortgages and bundles them into securities. Although it does not
deal directly in subprime mortgages, the value of its
better-quality assets suffered in the recent market rerating of
risks that began with defaults on home loans to uncreditworthy
borrowers made during the housing boom at abruptly ended early this
year.
The reduced value of American Home's assets led to margin calls
this week from its lenders, which it could not meet. The company
said it was unable to tap credit lines to make the payments,
although it did not explain why this was so. The credit lines were
generally with major banks.
After its announcement, American Home's stock lost 87.1% of its
value, falling to $1.35 just after 2 p.m. down from $10.47 when it
last traded on Friday. The New York Stock Exchange suspended the
stock prior to trading on Monday pending an announcement. The
market took a nosedive at about the same time with the Dow Jones
industrial average losing about 52 points and falling to 13,339.61
a few minutes later, though its loss for the day was just 18.70
points.
Other mortgage lenders also suffered on Tuesday. Impac Mortgage
shares plummeted 14.2%, or 42 cents, to $2.53, in Tuesday afternoon
trading, Novastar Financial tumbled 15.1%, or $1.95, to
$10.98.
One firm that is holding its own is IndyMac Bancorp, the
second-largest mortgage lender in the United States. Despite a 60%
drop in its second-quarter earnings, shares of the company shot up
4.8%, or $1.04, to $22.73, in Tuesday afternoon trading, after the
company announced it still planned to pay its 50 cent-per-share
quarterly dividend.
By contrast, American Home announced late Friday that it would not
pay the 70-cent-per-share common-stock dividend scheduled for that
day. The company said it expected delays to preferred owners until
it obtains a better understanding of the impact that current market
conditions in the mortgage industry and the broader credit market
will have on the companys balance sheet and overall
liquidity.
If the company has a better understanding of the current market
conditions its not telling. But in its announcement on Tuesday
American Home said it was evaluating strategic options and advising
about the sourcing of additional liquidity including the liquidity
of its assets.
Keefe, Bruyette & Woods analyst Bose George said, It looks
pretty much like they are done. Theyve said they have pending
margin calls, they have to pay significant margin calls, they
havent paid loans funded in a couple of days, and they are
considering strategic options including the liquidation of assets.
It sounds like bankruptcy or a major restructuring of some sort or
another. Either way it leaves the equity holders with little or
nothing.
