American Home Mortgage to Close Operations Friday

American Home Mortgage plans to close most operations on Friday and said nearly 7,000 employees will lose their jobs as the lender becomes one of the biggest casualties of the U.S.
housing downturn.

Experts said it is likely the Melville, New York-based company will have to seek bankruptcy protection, and no later than Monday.

In a statement, American Home on Thursday night confirmed earlier reports that it was ceasing most operations. The company said its employee base will be reduced to about 750 workers, down from the 7,409 it reported at the end of last year. The terminations are effective Friday.

American Home originated $59 billion in loans last year, and mostly to people with better credit than risky subprime borrowers. About half of those mortgages were adjustable-rate loans, whose defining feature is an interest rate that can be adjusted upward.

"It is with great sadness that American Home has had to take this action which involves so many dedicated employees," Chief Executive Michael Strauss said in a statement.

Earlier on Thursday, Strauss declined to comment on whether the company would seek bankruptcy protection, which has become the last stop for a number of U.S. mortgage lenders in the past year. The company said it is maintaining its thrift and loan servicing businesses.

Ron Greenspan, a senior managing director at FTI Consulting in Los Angeles, said he has been in contact with American Home's creditors as they seek the best way to extract value from the lender's assets.

American Home's collapse shows how problems in the U.S. mortgage market are broadening, as credit quality issues begin to affect lenders focused on borrowers with decent credit, as opposed to "subprime" borrowers thought to be greater risks.

While American Home focused on borrowers considered good credit risks, it made many loans to people who could not document income or assets. "Bankruptcy is the next logical step," said Steve DeLaney, analyst at JMP Securities in Atlanta.

American Home this week said that its own lenders cut it off, it faced escalating margin calls, and might liquidate assets. It also said it stopped taking loan applications.

The company offered many "Alt-A" mortgages, which fall between prime and subprime in quality, as well as adjustable-rate loans. Founded in 1987, the company said it had by 2006 become the 10th largest U.S. retail mortgage lender.

Dozens of mortgage lenders have shut their doors or tightened loan standards as housing prices slumped, borrowing costs rose, and delinquencies and defaults soared.

Other lenders that focused on higher-quality loans have also been challenged in the current downturn, including the largest, Countrywide Financial Corp

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Countrywide, which has seen an increase in problem loans among its more credit-worthy customers, issued an unusual statement on Thursday, saying its financial condition is "strong," and that is has nearly $50 billion of "highly reliable" short-term funding liquidity.

Shares of American Home Mortgage plunged 90% Tuesday after the company's warnings, which renewed concern about worsening credit quality in the mortgage market and killed a Wall Street rally.

The shares

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[AHM  Loading...      ()   ] fell 3 cents to $1.45 Thursday, then plummeted 50% to 72 cents in after-hours trading.