American Home Mortgage announced today that the company will cease to exist after tomorrow, Friday, August 3, 2007. The company plans to seek bankruptcy under the Chapter 11 statutes.
How did this happen to the 10th largest mortgage lender in the US, a company that was growing exponentially? Essentially, market forces dragged the company down because as a Real Estate Investment Trust (REIT), the company’s source of capital was Wall Street. Unlike a bank, who has deposits and the Federal Home Loan Bank for borrowed funds, a REIT depends on the securities markets for capitalization.
The stock price had gone from a 52 week high of about $39 to around $11 a month ago, but the thinking was that the price had been depressed because of overall concern about mortgage delinquencies and defaults nationwide. AHM had almost $1 billion in the bank and was operating normally. Plus, our portfolio of loans was not considered in the sub-prime category. We funded a lot of stated income and interest only loans, but not much in the way of loans that would be considered seriously high risk.
Then last week a margin call came from one of our institutional investors as additional collateral against our pool of mortgage backed securities. Other Wall Street investors grew concerned and issued margin calls, too. That action burned through the cash the company had on hand. Then it was announced that a promised stock dividend for 7/31 was not going to be paid and the analysts turned very sour on the company. The stock was frozen and not traded on Monday. Once it resumed trading on Tuesday, the value sunk to about $1 per share.
With no cash on hand and credit lines frozen, the company ceased funding loans on Monday, 7/30. That’s a huge no-no and it’s been a big headache for us at the branch level……
Luckily, my friend has 26 years invested in the mortgage industry, he knows the business and can be successful at it, but there about 7000 other employees of the firm that may not be so lucky.