Trading of American Home Mortgage Investment Corp.’s stock has been suspended as the company faces liquidity concerns, reports Reuters.
The real estate investment trust, which lends to prime and near-prime borrowers, dropped a bomb Friday with its announcement that it would delay payment of a 70-cent dividend it had already declared. The dividend was supposed to have been paid on Friday and the Melville, N.Y.-based lender gave no indication of when it will pay the dividend.
Friday it said it halted the dividend to “preserve liquidity until it obtains a better understanding of the impact that current market conditions in the mortgage industry and the broader credit market will have on the company’s balance sheet and overall liquidity.”
And it added this:
“The disruption in the credit markets in the past few weeks has been unprecedented in the Company’s experience and has caused major write-downs of its loan and security portfolios and consequently has caused significant margin calls with respect to its credit facilities.”
Here’s more from Reuters:
American Home, based in Melville, New York, specializes in prime and near-prime loans. It has, however, made many loans that allow borrowers to produce little documentation. Such loans are often considered riskier. The company recently commanded a roughly 2.5 percent share of the U.S. mortgage market.
“Bankruptcy is not out of the question,” said Matt Howlett, an analyst at Fox-Pitt Kelton Inc. in New York. “It needs to find a partner with alternative funding and hope the market turns around. It’s going to be tough.”
He added, “It’s clear now we’re in a liquidity crisis. Any loans that aren’t pure prime are falling in value.”
Bose George, an analyst with Keefe, Bruyette & Woods, put out a note this morning on the company. Here’s a couple clips:
“At the end of 1Q the company had $596 million of below AAA-rated securities. Of this total $366 million was below investment grade. This includes the company’s $183 million residual. Our model now assumes a 50% loss rate on the below investment grade securities, a 30% loss rate on the BBB-rated securities, a 20% loss rate on the A-rated securities and a 10% loss rate on the AA-rated securities. This results in a total loss of $193 million which runs through the income statement. We note that there is no tax offset to this because these securities are held at the REIT.”
By the way, “residual” generally refers to the interest a lender holds in a pool of loans that have been turned into securities and sold to investors.
Here’s another clip:
“Suspending the dividend will allow the company to retain $42 million a quarter. The company’s liquidity situation appears precarious. The company has $6.6 billion of AAA MBS. This can be sold which could unlock roughly $300 million in capital. Further the company issued just over $100 million of common stock and $125 million
of convertible preferred stock in 2Q07. The fact that this capital is inadequate to meet its liquidity needs suggests that there could be large potential impairments to book capital.”
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Matt, As I have been saying, the “prime” lenders are not out of the woods. They also have made HUGE amounts of money in the subprime market over the years and as you know there is not as much money to be made in prime lending. So now they are losing money in subprime and now that prices continue to fall in the value of homes, the prime borrowers can not borrow on their equity so they are now defaulting which makes the mailnly prime lenders like Countrywide and others left with no other choice but to go out of business or come up with new products which I assure you is happening as we speak. Does anyone remember during the last real estate downturn the new and hot product was the 125’s? It made a lot of people rich until the market turned and that is about the time the subprime market came into play on the levels it was. I know some lenders have already come out with 150% loans. Look out, it has just begun to get interesting!
Lou Pacific
Real Estate and Mortgage Consultant
Serving OC for 30 Years