Shockwaves of still unknown impact crashed through financial markets Tuesday when the United States Melville-based American Home Mortgage Investment Corp. announced it was suffering credit problems and would consider going into liquidation among other options.
It was the largest mortgage bank to face bankruptcy in a year of bad news for the US mortgage industry and shares in the firm, the tenth largest residential mortgage lender in the US, fell more than 90% in response to the news. The effects of American Home's insolvency are far-reaching. The company's 7,627 employees face an uncertain future. Its borrowers will lose access to 800 million US dollars in approved loans. That number is mounting by hundreds of millions of dollars each day. Major investors have announced millions in losses on the company. Banks that lent the company billions of dollars could see their stakes dissolve. The Tuesday announcement contained shreds of the specific information that anxious investors and analysts had been clamoring for since the company kicked off a spate of ominous announcements April 6 with a downward adjustment of first-quarter profit projections and dividend policy. Since then, the company's reticence has unsettled investors. When it released the required first-quarter earnings figures, CEO and founder of the company Michael Strauss said he was "disappointed" but that the market appeared to be stabilizing. Two months later, a mid-quarter update reaffirming the dividend policy and stated, "stockholder's equity will actually be higher at the end of the second quarter," but it withdrew earnings guidance for the year. And then, last Friday night, the company announced it would not pay the dividend due that day. The stock price which topped 36 US dollars in December stood at 6.39 when trading was stopped "pending further information from the company". In it, the company acknowledged what many had feared: It had lost access to its credit facilities, lenders had been demanding repayment of some of American Home's debts for three weeks, and there were "substantial" additional calls for repayment outstanding. The company said it had retained outside consultants -- companies that have assisted bankrupt mortgage firms in the past -- to help it resolve the situation in the manner "least disruptive to its business and to the many thousands of home buyers to whom it has committed mortgages." One option, the company said, was "the orderly liquidation of its assets." But shareholders showed scant faith in its prospects. Twenty minutes after trading reopened the stock had fallen 90% from its Friday close of 10.47, and the NYSE stopped trading out of concern that its price could fall below its delisting line of one US dollar. Shares continued to trade electronically throughout the afternoon, ending regular trading hours at a price of 1.04. The fallout from the AHM announcement was immediate.