Mortgage Industry Troubles Spread Beyond Subprime

[SinkingFast]

American Home Mortgage Files Chapter 11
By DAN SEYMOUR 08.06.07, 10:54 AM ET

NEW YORK -

American Home Mortgage Corp. filed for bankruptcy protection on Monday, the latest casualty of a mortgage industry that has plunged into distress.

The Melville, N.Y.-based company's request for Chapter 11 bankruptcy protection - filed in bankruptcy court in Wilmington, Del. - caps a tumultuous 10 days for what was in 2006 the nation's 10th-biggest home lender.

American Home Mortgage said it fell victim to "extraordinary disruptions" in the markets that support the mortgage industry. A cold housing market and a spike in payment defaults scared investors away from mortgage debt, including bonds and other securities backed by home loans.

With the value of American Home Mortgage's home loans rapidly losing value, its financial backers pulled the plug and the company ran out of cash.

American Home Mortgage's 40 biggest creditors include virtually all the major names of Wall Street. The company's three biggest creditors are Deutsche Bank AG, Wilmington Trust Co., and JPMorgan Chase & Co.

Deutsche Bank had no comment. Neither Wilmington Trust nor JPMorgan Chase could be reached immediately for comment.

JMP Securities analyst Steven C. Delaney said the same reason American Home Mortgage went bankrupt in the first place - the exodus of buyers from the mortgage debt market - means the company will have trouble selling its assets to raise cash right away.

"We are in a market now where value is a fleeting concept," Delaney said. "The market today has just basically shut down. ... They might not even find a buyer at any price today."

A slew of other bankrupt lenders are also auctioning off their collateral into a market where there are no buyers, Delaney said. This has forced a "downward spiral" that will likely take months to reverse, he said.

At the end of the first quarter, American Home Mortgage reported $19.33 billion in liabilities, including $4.01 billion in credit lines and $6.7 billion in debt backed by mortgage investments.

In a statement, American Home said it lined up $50 million in debtor-in-possession financing from WL Ross & Co. LLC. WL Ross is led by billionaire Wilbur L. Ross Jr., who has rescued failed companies in the steel, coal, telecommunications and textile industries.

The company also hired Stephen F. Cooper to be chief restructuring officer. Cooper was also chief restructuring officer for Enron Corp.

The stock market had already anticipated that the company was likely to go bankrupt. The company's shares, which closed 2006 at more than $35, tumbled to 69 cents on Friday. The stock fell 25 cents, or 36.7 percent, to 44 cents, before trading was suspended Monday.

American Home Mortgage joins more than 50 lenders in bankruptcy this year, but the company is unique among them in two ways. It is bigger than most of the other lenders to go out of business so far, second in size only to New Century Financial Corp.

And, unlike New Century and most of the other bankrupt lenders, American Home Mortgage was not a "subprime" lender. Subprime lenders cater to home buyers with spotty credit histories. Almost none of American Home Mortgage's $58.9 billion in home loans last year were to subprime borrowers.

After the initial flare-ups at the bottom rung of the mortgage industry's credit ladder earlier this year, a number of economists including Federal Reserve Chairman Ben Bernanke said the problems in subprime were likely to remain contained.

But American Home Mortgage's bankruptcy, plus indications of problems with prime home-equity loans at Countrywide Financial Corp., are being taken as evidence the upheaval in subprime has spread.

In a research report released Monday before American Home Mortgage's bankruptcy filing, Lehman Brothers analyst Roger Freeman wrote a "pillar of support" for the market was the belief that "the weakness in mortgages was largely contained to subprime."

That pillar "developed a crack" when Countrywide Financial said bad credit siphoned $710 million from its second-quarter profit. Countrywide Financial is the nation's biggest mortgage lender and less than 9 percent of its loans last year were subprime.

http://www.forbes.com/feeds/ap/2007/...ap3990468.html

[freshstart06]

The mortgage industry is only going to get worst at least until 2009, this is the prediction. As you know I am/was (still don't know anymore LOL) a mortgage broker. I have been in this business for 8 years and this is the worse. I started right before the subprime business really got into play. The problem is the housing boom and easy qualify this destroyed the market. Now home values are going down to the point you can't even refinance or sell. Lenders are going out of business by the dozens, first it was just subprime but now A- and A paper lenders are closing their doors. It is just a mess.

[$$only4ever]

I work in a bank and the real estate market has affected everyone in the financial world. The bank that I work at only buys existing mortgage loans (no sub-prime), they do not originate any....so I think we are okay at this point.

[treehugger1]

What I'm reading is that it is moving out beyond the sub-prime market. Even banks who buy solid mortgages from clients who finance to 750+ FICO are not protected when these good folk decide to choose food, recreation, and transportation (all skyrocketing) above making payments on a house that is dramatically (potentially) losing its market value. What's the saying, "Throwing good money after...?" I think there are several reasons that one doesn't pay their bills; can't afford to, or choose not to because it doen't make financial sense to them." I sometimes think all of us got led into the belief that good financial sense meant "good credit," no matter the cost. I say let's see how that rings out in 5 - 10 years. As an example, suppose you bring home $4k per month, but your unsecured are $2.2k per month. On top of that you have a $1200 -$2500 mortgage in a declining or "even" real estate market. If you hope to have money for your kids health, education, and welfare and you want to have a sensible lifestyle around food, transportation, health, and recreation, where is the financial "sense" in terms of the high-mortgage? It seems to me that in the past folks would go to extremes to "protect their credit," and go without necessities of life, and contributions to retirement, etc. In my opinion, this is going to change.

[SinkingFast]

I have to wonder,............ If the people who were good borrowers at the time of loan inception are defaulting because,.........

Many of them are like many of us. Loosing good paying jobs. Having wages frozen. Being asked to take voluntary pay cuts like Cindy just had happen to her.

They just haven't gotten to the point where they've realized yet that BK may be their only option or made the decision to file.

[JRScott]

The problem will expand well beyond the mortgage companies I believe. I've been as guilty as everyone else, but the problem is our nation's economy has relied to heavily on debt. Cash reserves at the government, business and personal levels are at the lowest they have ever been.

We have a situation where the baby boomers will be retiring in the next 10 to 15 years. The government does not have the money to pay for their promised benefits. They don't have that money because they have not managed the money collected through taxes wisely.

These baby boomers also on average have less savings in retirement then their parents generation had. Its a disaster waiting to happen.

I fear as they retire we are going to see an ever greater amount of bankruptcies and foreclosures. My generation will be even worse unless we can change course as a nation. We must move away from the buy today, pay tomorrow strategy and we must move to a policy of living within our means. We cannot depend on the government to fill the gaps in our income, because in the future they aren't going to have enough money, because of their own debt.

We need to start teaching the rising generation now before its too late. It might be time as some have called for to have all high school students required to pass a financial management course in high school prior to graduation. At the very least they'd know how to balance a checkbook, and the pitfalls of paying 18% interest on purchases before they got in to deep.

I believe as a nation we are headed for some very hard time in the next couple of decades, indeed we may see a new Great Depression in the years ahead, I hope not, but our leaders are to caught up in posturing to do anything meaningful to tackle the issues before the nation. We are not well prepared for the future as a nation.

[Keebler]

I may be kind of selfish, but I'm wondering how the economy will fare over the next several years -- I'm wondering if my job is secure.

If I file Chapter 7 and then I lose my job a couple of years down the road and can't make payments on my mortgage or automobile loans, I'll be left hanging without bankruptcy as an option.

Suddenly the eight year window for filing again seems like it might not be a smart thing to do right now.

Does anyone know anything about filing for Chapter 13 without having disposable income? I know it wouldn't normally be smart to file Chapter 13 when you're qualified for Chapter 7, but is it completely prohibited?

If all else were equal, it might be smart to go the 13 route and leave some options open in case things get really bad.

The other thought is how it might not be smart to assume I can make the car payments and choose not to reaffirm them under chapter 7. It might be better to go the payment-less route and drive disposable cars to avoid a payment I might not be able to make some day. Still, making a house payment could be a problem.

[lrprn]

Does anyone know anything about filing for Chapter 13 without having disposable income? I know it wouldn't normally be smart to file Chapter 13 when you're qualified for Chapter 7, but is it completely prohibited?

If you don't have at least $100/month disposable income showing on the Means Test, then you can't file Ch 13.

Sometimes folks under the median income for their family size are so desperate to keep a big asset that they will cut their expenses past the bone to get disposable income showing on the Means Test. Typically what happens in this situation is that what they are left to live on isn't nearly enough and they end up throwing in the towel long before they finish their plan.

[whatamess]

Keebler
NO your not selfish, your thinking how everyone else spending like madmen should be.
We worry about the same thing, everyone does I'm sure. There are no guaranteed jobs anymore. Even once 'safe' government jobs are not safe.
The only thing we can do is live below our means and buy smaller houses, cheaper cars SAVE save save. Pay cash. What else can you do w/o giving yourself an ulcer?
WAM

[JollyGG]

Keebler,
You are not being shelfish you are learning to plan your financial future. We looked at our budget when we filed and made sure that if one of us lost a job we would be okay. We realized that as long as we no longer pay daycare, get unemployment or a part time job, and put our student loans in deferment while unemployed we would still be okay. That is when I realized what a good decision bankruptcy was for us and knew I was doing the right thing.

[JRScott]

If you don't have at least $100/month disposable income showing on the Means Test, then you can't file Ch 13.

Sometimes folks under the median income for their family size are so desperate to keep a big asset that they will cut their expenses past the bone to get disposable income showing on the Means Test. Typically what happens in this situation is that what they are left to live on isn't nearly enough and they end up throwing in the towel long before they finish their plan.

Yep Keebler don't cut yourself to the bone just to save assets. As lrprn states above to many folks cut their expenses to much hoping to save an asset only later to fail and have to file a chapter 7 and lose it.

One thing you'll have left is the ability to perhaps renegotiate the mortgage or car payments. Also if your state allows a ride through without reaffirmation then even if at a later time you have to walk away from the house or car you still wouldn't owe anything on it. (Only if you sign a reaffirmation would you be responsible still for the debt).

I suspect in an effort to prop up their bottom lines many of these subprime and variable interest home mortgage granters are going to have to renegotiate with the customers. After all they don't want to be sitting on a bunch of homes, better to let someone pay at lower interest rates and keep the home and get the money. You'd probably need someone experienced in renegotiation to work out the deal though. I do see it coming though as a possibility.