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Shares of American Home Mortgage Investment Corp., the country's 10th-largest mortgage lender, plunged 90% Tuesday to close at $1.04 on news that it cannot pay its debts. The company's banks cut off its credit lines, leaving it unable to fund $300 million in promised loans on Monday. "They can't function without access to capital," said Keefe Bruyette & Woods analyst Bose George. "They will either file for bankruptcy or do some sort of material restructuring that will leave equity investors with very little, and either way will leave almost nothing for the common shareholders." Unlike defunct lender New Century, which specialized in loans for less creditworthy borrowers, American Home offers adjustable-rate mortgages and Alt-A loans, which generally require little documentation of income. The company offered $35 billion in home loans during H1 2007. It is facing "very significant" margin calls because the assets backing those loans have dropped precipitously in value. The company has hired advisors to assist it in evaluating strategic options that could include "the orderly liquidation of its assets." Following American Home's announcement, which stopped a DJIA rally in its tracks, lenders Impac Mortgage Holdings and NovaStar Financial fell 13% and 25%, respectively. "We obviously have a major correction going on in the mortgage market; it started in subprime and now it's shifting to Alt-A," said mortgage consultant David Olson.

Sources: MarketWatch I, II, Bloomberg, Wall Street Journal
Commentary: American Home Mortgage: The Liquidity Crunch Claims Another VictimAmerican Home Mortgage Investment Hit with Margin CallsAmerican Home Mortgage: Continued Carnage from Mortgage Security Writedowns
Stocks/ETFs to watch: AHM. Competitors: IMH, NFI. ETFs: REM

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Source: American Home Mortgage Plummets on Bankruptcy Fears