The warnings have been coming steadily from American Home Mortgage, in sharp contrast to the rosy picture painted by New Century before it dropped off the cliff. They have also been increasing reserves significantly during this time. However, you have to ask the question whether there is something fundamentally flawed in the business model such that even lenders like American Home who don’t focus technically on the “sub-prime” market have been severely impacted by the US housing market slide.
One area they did potentially over concentrate on is the high loan-to-value, stated income loans that resulted in the great majority of their delinquency related charges. The also had only three lenders who bought up 50% of their portfolio, Countrywide Financial Corporation, Deutsche Bank and Wells Fargo Bank, N.A. , which accounted for 20%, 19% and 11%, respectively, of total loan sales.
Yesterday’s announcement focused on the disappearance of their credit facilities. I really like the way they worded this, “…hindering of access…”
“American Home is currently experiencing a hindering of access to its traditional credit facilities. Additionally, American Home’s lenders have initiated margin calls in response to the decline in the collateral value of certain of the Company’s loans and securities held in its portfolio. The Company has received and paid very significant margin calls in the last three weeks and has substantial unpaid margin calls pending. Further pressure on the Company’s liquidity presently exists due to its warehouse lenders effectively reducing, in this environment, their advance rate on new loans made by the Company.
Based on the foregoing, the Company at present is unable to borrow on its credit facilities and was unable to fund its lending obligations yesterday of approximately $300 million. It does not anticipate funding approximately $450 to $500 million today.”
The impact was severe, with their stock losing 90% of its value on Tuesday. They are now threatening to liquidate. Three of American Homes’ lenders are Bank of America, Credit Suisse and JPMorgan Chase. And the lawsuits are starting to roll in.
In the end, Deloitte gave them a clean bill of health, both for the internal controls and their overall financial statements at the end of 2006.