Prime time
Prime time Mortgage Mess: Now It's Prime Time
Shares of American Home Mortgage fell Monday after it said it had to write down
higher-quality residential loans
April 9, 2007 found at businessweek.com
When American Home Mortgage Investment (AHM)
warned of lower earnings after taking hits on higher quality debt, the real
estate investment trust's announcement fanned fears about the mortgage industry
on Monday Apr. 9. So far investors have worried for weeks mainly about mortgage
companies that have exposure to the riskiest borrowers, but the pain could be
spreading.
The Melville (N.Y.)-based American Home originates and resells mainly U.S.
residential mortgages that are securitized, or backed with guarantees like
collateral. Explaining that debt values weakened by an "unusually
large" amount during the first quarter, American Home said on Apr. 6 that
it had to write down, or take a loss, on around $484 million of securities rated
AA, A, or BBB. Those rating categories typically indicate that borrowers have a
good chance of repaying their debts.
As a result American Home now thinks it may earn between 40 cents and 60
cents per share during the first quarter and $3.75 to $4.25 per share during
2007. Analysts surveyed by Thomson Financial had expected $1.06 per share during
the quarter ended March 2007 and $5.00 per share during the full year 2007.
"While the market may recover ... our working assumption must be that
current market conditions will persist and that our gain on sale margins will
not recover through the balance of the year," CEO Michael Strauss said in a
press release Apr. 6.
Strauss' company is fighting such losses by raising the interest rates it
charges consumers, however.
Investors responded by selling American Home stock by 15.4% to $21.85 per
share in early afternoon trading on the New York Stock Exchange on Apr. 9. Other
lenders shed value too. For example, Novastar Financial (NFI)
gave up 3.4% to $5.13 per share on the NYSE, Accredited Home Lenders (LEND)
4.4% to $9.22 per share on the Nasdaq and M&T Bank (MTB)
0.9% to $105.08 per share on the NYSE.
"We see this news as evidence that troubles in the residential mortgage
market are spreading beyond subprime," Standard & Poor's equity analyst
Jason Willey said in a research note. Willey cut his estimate on American Home's
2007 earnings per share to $2.89 from $4.69 and his 12-month target price on the
stock by $5 to $22. (S&P, like BusinessWeek.com, is owned by The McGraw-Hill
Companies.)
In another recent sign that such pain has spread to others, M&T Bank said
in a Mar. 30 regulatory filing that it had found less investor interest for
so-called Alt-A loans. That product typically falls between prime and subprime
mortgages, requiring less documented information from the borrower.
American Home is the latest lender to take a hit as more people fail to repay
their mortgages amid shaky housing prices during recent months -- but most of
the recent worry has focused on lenders who have exposure to the highest risk
debt. The poster child for the subprime mess, New Century Financial (NEW),
on Apr.2 filed for Chapter 11 protection in Delaware and laid off 3,200
workers-more than half its staff (see BusinessWeek.com, 4/3/07, "The
Subprime Story's Latest Chapter: 11"). Kansas City (Mo.) based lender
Novastar Financial said after the close of trading Mar. 16 that it intends to
reduce its workforce by about 350 people, or about 17%, to align itself with
what it calls, with considerable understatement, "changing conditions in
the mortgage market."
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“There’s so much inventory out there that the buyer can pick and choose,” said Susan Sirles Fidler, a Realtor at Re/Max 10, Oak Lawn. But she cautioned, “The stuff that’s almost free is almost free because it’s going to cost you an arm and a leg to put it back together. It’s not buyer beware as much as buyer be smart.”
