American Home Mortgage says it will close

Lender to lay off all but 750 of its 7,000 employees 'in

light of liquidity issues resulting from disruptions' in the

secondary mortgage market

By Eric Dash
THE NEW YORK TIMES
Friday, August 03, 2007

American Home Mortgage Investment, the troubled mortgage lender based in Melville, N.Y., will close today, making it the latest company to fail this year as loans made to home buyers even with better credit histories go bad.

In a news release issued Thursday night, American Home Mortgage said it would lay off all but 750 of its 7,000 employees "in light of liquidity issues resulting from disruptions" in the secondary mortgage market.

"Conditions in both the secondary mortgage market as well as the national real estate market have deteriorated to the point that we have no realistic alternative," Michael Strauss, the chief executive of American Home Mortgage said in a statement.

The company said it was shutting down all but its thrift and servicing businesses "to preserve the value of its remaining assets."

On its Web site Thursday night, the company said it was no longer taking any loan applications.

Calls to American Home Mortgage offices and e-mail messages were not returned Thursday night.

The mortgage lender has been struggling to raise money to make new loans and said this week that its financial backers have essentially pulled the plug. The Wall Street banks that lend American Home Mortgage money for home loans — which include firms such as UBS AG, Bear Stearns Cos., and JPMorgan Chase & Co. — will not extend the company any more money, and some have demanded back the money they have loaned.

The reason American Home Mortgage's lenders are balking is the mortgage loans that act as collateral for the company's credit lines have sunk in value. The market where investors buy mortgage loans has suffered "unprecedented disruption" this year, the company said, and it is having trouble selling its mortgages.

American Home Mortgage said Tuesday it has over the last three weeks paid "very significant" margin calls, which occur when a lender demands compensation after a borrower's collateral loses value. The company said it still faces "substantial" unpaid margin calls.

American Home Mortgage is the latest home lender to fall this year and comes as other companies in the mortgage business are sounding alarms. On Thursday, Accredited Home Lenders Holding Co., a San Diego-based subprime mortgage company being acquired by Lone Star Funds, said its sale was in jeopardy and that bankruptcy was possible. Its shares lost more than a third of their value.

"Several of our competitors have recently stopped originating loans or sought protection under bankruptcy laws," Accredited Home Lenders said in public filings.

Meanwhile, Michael Perry, the chief executive of IndyMac Bancorp, another mortgage company, told employees it was making "very major changes" to its lending standards and would charge higher rates as its business slowed.

"Unlike past secondary mortgage market disruptions, which have lasted a few weeks or so, our industry and IndyMac have to be prudent and assume that this present disruption, which appears broader and more serious, might take longer to correct."

Until recently, American Home Mortgage was one of the fastest-growing and largest mortgage companies in the country. It specialized in adjustable-rate mortgages that in the first few years required borrowers to pay the interest or a minimum payment that was even smaller. It caters to homeowners with high credit scores and has an extensive network of retail branches, mortgage brokers and correspondent banks.

At the start of the year, American Home Mortgage seemed to defy the problems that were plaguing its industry. In the first three months, the company made $16.7 billion in home loans, up 27.2 percent from the same period in 2006.

Of all the loans American Home Mortgage has held for investment, those in five states — California, Florida, Illinois, Virginia and New York — accounted for 46 percent of its loans at the end of March. A third of the mortgages were pay-option loans that allow borrowers to make less than the interest payment on the loan by adding the deferred payments to the principal amount of the loan.

Those loans were popular with affluent borrowers and speculators, when rising home prices made them seem safe. Now, however, as home prices fall, defaults are rising.

Additional material from The Associated Press