American Home Mortgage: Continued Carnage from Mortgage Security Writedowns

Shares in American Home Mortgage (AHM) were halted at market open Monday, after the company said it had “bad news”, which would adversely affect the value of its shares. Prior to the opening bell, the shares had tumbled nearly 50% in pre-open trading.

The AHM story is a familiar one: margin calls and demands for more collateral due to the declining value of its mortgage related securities, thus creating a liquidity crunch for the company in question. At the moment the company is “evaluating how the weak mortgage market will affect it”, which probably means recalculating the value of its mortgages and related securities, and deciding whether to have a fire sale or exercise the Bankruptcy option.

As the story unfolds, people may try to paint this as part of the subprime mortgage mess. But don’t be fooled - AHM only dealt in prime and near prime mortgages.

Others may try to say: “the loans couldn’t have been that prime”, again, don’t be fooled – there are TONS of problems in the prime space, as people bought more home then they could afford based on the idea of: “you can’t go wrong with real estate”, which led people to think that “house rich and cash poor” was a good situation to be in. In other words, a lot of prime loans were originated to people who were taking on more debt than they could comfortably service, in that instance, all it takes is one personal economic shock to make the house of cards come tumbling down.

We have a mortgage problem in the US, not a subprime problem. It's a mortgage problem which is only going to get worse.

The AHM situation reveals the risks in being a veritable pure play mortgage lender, without having retail banking and other financial services business that can provide a cheap source of cash/liquidity. I would advise investors to take a close look at any other pure play lenders in their portfolios, in order to assess if those companies face the same liquidity risks that AHM is dealing with now.

Personally, I would avoid investing in these firms all together for the time being, as their ability to hide (at least temporarily) their losses from investments in mortgage related securities, makes it quite difficult to determine their level of liquidity risk.

Disclosure: The Author doesn’t own a position in American Home Mortgage

Comments

[tlc8386:]

"Others may try to say: “the loans couldn’t have been that prime”, again, don’t be fooled – there are TONS of problems in the prime space, as people bought more home then they could afford based on the idea of: “you can’t go wrong with real estate”, which led people to think that “house rich and cash poor” was a good situation to be in. In other words, a lot of prime loans were originated to people who were taking on more debt than they could comfortably service, in that instance, all it takes is one personal economic shock to make the house of cards come tumbling down."

Real estate agents, mortgage brokers, and the governement all make money off the percentage of your home cost. Many bid up these costs and made out big time. They all rode the wave of inflation and took their percentage. Home owners were lured into these loans with the hope of their home also going up in price.

Problem is nothing goes up forever and the wages did not keep up with the rising costs with these loans. What the banks are going to have to do is help these homeowners with these terrible loans. They made a lot of money off these people and now they are going to have to give some of it back.

As far as blaming homeowners on personal shock--well labor numbers are still very low---so it's the loans that are putting these people out---it's that ballon payment that is due. It's the huge jump in rate change. And guess what banks can help these people out---

OR do they want all these foreclosure homes? Do they want this mess that they have created??

Or has another market been created and the cycle starts all over again. After all someone has to write out the new loans, sell the homes all over again.
tina c.

2007 Aug 08 01:40 PM