American Home Mortgage Files Bankruptcy

American Home Mortgage Investment filed for Chapter 11 bankruptcy protection after a tumultuous week in the debt markets brought a once-thriving business to its knees.

One of the largest independent U.S. home loan providers, American Home Monday filed for protection from creditors in U.S. Bankruptcy Court in Delaware. American Home becomes the second-largest U.S. residential lender to go under this year, after New Century Financial.New Century was a subprime specialist that filed for bankruptcy on April 2.

In a court filing, Chief Executive and founder Michael Strauss said the market for mortgages and loan-backed securities had become "disrupted to the point of dysfunction."

The filing came after around-the-clock talks last week with at least four potential buyers fell through, he added. "If you don't have cash, you're out," said David Olson, president of Wholesale Access, a Columbia, Maryland, research firm that tracks the mortgage industry. "The market is pretty chaotic. Everybody is waiting for mortgages to reprice and for the market to restabilize."

American Home did not return calls seeking comment.

American Home last year grew to become the 10th-largest U.S. retail mortgage lender by originating $59 billion in loans. It sold loans through 2,450 loan officers, as well as buying loans through brokers across the United States.

American Home specialized in Alt-A mortgages, alternatives for borrowers considered low-risk but who can't satisfy all conditions for "prime" mortgages. American Home had $20.6 billion in assets and $19.3 billion in debt on March 31.

The court filing followed its decision Friday to shut down its lending business and slash thousands of jobs as American Home's banks put the squeeze on its credit lines. American Home said it has more than 100,000 creditors.

Getting Worse

The bankruptcy filing showed that problems in the mortgage business have spread from the riskiest, "subprime" borrowers to people who fall just short of qualifying for prime loans.

WL Ross, a firm run by distressed-asset specialist Wilbur Ross, will provide up to $50 million indebtor-in-possession financing to sustain American Home. Ross expects problems in U.S. mortgages will worsen.

"It's our initial foray into subprime," Ross said in an interview. "We've been looking at subprime for quite a while and this is the first affirmative commitment we've made."

Separately on Monday, troubled mortgage company NovaStar Financial said it suspended issuing commitments for new loans from wholesale channels until Tuesday.

According to court papers. Melville, New York-based American Home wants to sell its loan portfolio and loan-servicing business through an auction. Bids are due Aug. 29, and an auction may take place on Sept. 5.

Still, American Home said many creditors may not be paid in full, and common shareholders will likely receive nothing for their shares. American Home shares will likely be delisted from the New York Stock Exchange.

American Home hired turnaround specialist Stephen Cooper, of Kroll Zolfo Cooper, as chief restructuring officer to lead it through bankruptcy. Cooper performed a similar role for energy trader Enron Corp. in the second-largest U.S. bankruptcy case ever.

Sudden Reversal

American Home filed for bankruptcy protection after disruption in mortgage and housing markets fueled a cash crunch.

Lower bids from banks that buy mortgages and loan-backed securities forced American Home to write down the value of its assets, prompting banks that provided its credit lines to demand more cash collateral, the company said in court filings.

The company "experienced this sudden reversal of its fortunes due to the unanticipated and rather sudden deterioration in the secondary and national real estate markets," said Strauss, who founded American Home in 1988.

More than a half dozen mortgage lenders have declared bankruptcy in the past year, with most catering to subprime borrowers. Dozens more lenders have exited the business by shutting down or selling off troubled units.

American Home in late June cut its dividend and warned of rising losses from bad loans. By July 27, it revealed it was suffering a credit crunch and postponed paying a dividend.

By the end of July, it was unable to meet margin calls and lenders threatened to sell assets.

The company shuttered most operations on Friday, laying off about 6,500 workers. It now has about 1,000 employees, and said more jobs will be cut as its operations are wound down.