N.Y. Lender Files for Bankruptcy Protection
Tuesday, August 7, 2007
NEW YORK, Aug. 6 -- American Home Mortgage Investment filed for bankruptcy protection Monday, and two other mortgage lenders said they were not accepting new applications, signs that the housing crunch could be widening.
American Home Mortgage of Melville, N.Y., once the nation's 10th largest mortgage lender by loan volume, said it fell victim to "extraordinary disruptions" that effectively cut off the funding it needed to make new loans. Falling home prices and a spike in payment defaults scared investors away from mortgage debt, including bonds and other securities backed by home loans.
Aegis Mortgage of Houston said it would not accept any more applications and said it could not meet all of its existing funding obligations. National City Home Equity, a unit of National City of Cleveland, also stopped taking applications for new home-equity loans and lines of credit.
"We are in a market now where value is a fleeting concept," JMP Securities analyst Steven C. DeLaney said of investors' vanishing appetite for the bundles of mortgage debt that had been the funding lifeline for the industry. "The market today has just basically shut down."
American Home Mortgage filed for Chapter 11 bankruptcy protection in Wilmington, Del. Its 40 biggest creditors include almost all the major names on Wall Street. At the top of the list are Deutsche Bank and J.P. Morgan Chase. Deutsche Bank had no comment. J.P. Morgan Chase declined to comment on its holdings.
In a statement, American Home Mortgage said it has lined up $50 million in debtor-in-possession financing from W.L. Ross & Co. W.L. Ross is led by 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.
Although bankrupt lenders carry ominous implications for the housing market and for consumers hoping to take out mortgages, they do not affect the status of mortgage loans already on the books. A bankruptcy proceeding that ends in liquidation means financial institutions would probably buy the company's loans as its assets are auctioned off; it does not imperil people's homes.
Ganesh Rathnam, an analyst who tracks investment banks for Morningstar, said he does not expect Wall Street to sustain much damage from American Home Mortgage, which has less than $20 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 Chapter 11 bankruptcy court this year. It is bigger than most of the other lenders to go out of business, second only to New Century Financial.
But 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 in home loans last year were to subprime borrowers.
Yet like the subprime lenders, American Home Mortgage suffered a rapid decline. Last week, the company said many of its lenders wanted their money back and that it was unable to deliver as much as $800 million in promised loans. It then laid off almost 90 percent of its 7,000 employees.