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American Home Mortgage Faces Margin Calls, Delays Dividends

American Home Mortgage Investmentsaid its banks are demanding it put up more cash after the mortgage lender wrote down the value of its loan and security portfolios significantly.

The company said in a statement released late Friday that as a result of the margin calls from lenders, it has delayed paying dividends on its common stock, and plans to delay payments on its preferred shares.

The margin calls could create big difficulty for American Home Mortgage, which relies on short-term bank financing to temporarily fund home loans it makes.

Rising mortgage rates and defaults have hurt mortgage lenders this year. More than 50 lenders have filed for bankruptcy or sold themselves. The hardest hit lenders focused on borrowers with weaker credit ratings than American Home Mortgage's average borrower.

If American Home Mortgage does not have cash on hand to meet its banks' demands, it may have to sell assets, find new financing, or restructure its debt. If it were unable to satisfy its lenders, in the worst-case scenario it would have to file for bankruptcy.

On July 19, rumors that a bank had withdrawn one of American Home Mortgage's credit facilities pushed the company's shares 20 percent lower. American Home Mortgage told analysts that rumor was false.

American Home Mortgage had $4.01 billion of borrowings outstanding under its warehouse lines of credit as of March 31, and total liabilities of $19.3 billion, according to its regular first-quarter filing with regulators. The company's assets had a total book value of $20.553 billion.

American Home Mortgage focused on prime and "near prime" borrowers, which had higher credit ratings than the subprime borrowers whose default levels have jumped.

But many of American Home Mortgage's customers provided little documentation, creating more risk for the company.

Quarterly Losses Expected

The company said in late June that it would likely post a second-quarter loss after suffering credit losses from a type of loan it stopped making. It withdrew its earnings outlook for 2007, but said it expected losses to be contained.

The company also said it sold $125 million of convertible securities to Marathon Asset Management.

American Home Mortgage relies on short-term financing from banks to fund mortgage loans, and then bundles those loans into bonds it sells to investors. Proceeds from the bond sales payback the banks, allowing the company to make new mortgage loans.

American Home Mortgage's shares closed on Friday at $10.47, their lowest level since April 2003.

Melville, New York-based American Home Mortgage said delaying paying dividends will allow the company to keep cash on hand until it better understands the impact of market conditions on its balance sheet and liquidity.

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