American Home Mortgage Falls as Credit Markets Tighten

Although not quite the canary in this coal mine, yesterday’s announcement of insolvency by American Home Mortgage Corp., one of the country’s largest mortgage banks, sent a chill through the financial markers. The announcement was significant because AHM was not a sub-prime lender and because it indicates that the mortgage industry’s problems have spread into the prime lending and corporate capital markets.

With risk spreads widening and credit tightening at all levels, the LBOs that have sustained the stock market’s recent rise are in jeopardy. Between AHM’s announcement and Countrywide’s earnings report last week, the stock and bond markets were frantic. The Dow dropped 147 points yesterday. AHM’s stock fell from a Friday high of $10.47 to $1.04 per share by the end of the day.

The aftershocks in the mortgage lending landscape were immediate, with virtually all prime lenders suspending or cancelling Alt-A programs (think A– paper), many stated income programs, and nearly all 2nd home equity loans until things settle down. Many lenders have put deadlines on approved loans, after which time the approval is canceled. With its credit lines shut down, American Home Mortgage had $800 million in approved loans that will never arrive. Those borrowers are now scrambling.

As always, work with a full-time mortgage pro who can stay on top of the changes in the market and guide you to a successful close. Things are getting wild.

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