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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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