Bankruptcy

American Home Shuts Its Doors

The subprime lender, once the 10th largest in the U.S., is the latest company to topple under the weight of the mortgage market crisis.
Marie LeoneAugust 6, 2007

In bold red letters strewn across the top of its website are the words: “American Home Mortgage is no longer taking mortgage loan applications.” The residential mortgage company, which filed for Chapter 11 bankruptcy protection on Monday, is the latest victim in the subprime mortgage market meltdown. Subprime lenders extend loans—including mortgages—to borrowers with poor credit histories.

Citing the “sudden adverse impact” on the company’s liquidity and business from “extraordinary disruptions” occurring in the failing secondary mortgage and real estate market, American Home directors gave management the go-ahead to file for bankruptcy. Over the past several weeks, the mortgage company had been cut off from tapping new credit lines, and halted from borrowing from existing ones, as lenders made “significant” margin calls, perhaps sensing that the bankruptcy was at hand. Indeed, the company conceded that the collateral value of its own loan and securities portfolio was sinking. What’s more, there are “significant unpaid margin calls pending,” noted officials.

Last week, the bankruptcy filing seemed imminent. On July 30, the company could not meet its $300 million loan obligation and announced that it did not expect to meet the next day’s obligation of between $450 million and $500 million. Then on Friday, the company shuttered its mortgage origination business and laid off approximately 6,250 of its 7,000 employees.

Only thrift and servicing units will continue to operate during the Chapter 11 reorganization. Reportedly, the company will work to arrange a “prudent” deal for creditors—although officials admit that the company will not be able to repay creditors in full. Then the Chapter 11 team will work toward an “orderly wind down” of the operation.

AMH will receive up to $50 million in debtor-in-possession financing from WL Ross & Co., and Stephen Cooper, chairman of turnaround firm Kroll Zolfo Cooper, will guide the company through its Chapter 11 process. Before its collapse, American Home was listed as the 10th largest retail mortgage company in the U.S.

Within the past few months, as the housing market has slowed, subprime mortgage assets have dropped in value, negatively affecting other investments tied to the loans, including stock, bonds, and derivatives. The downward spiral, feeding on itself, has dragged down other mortgage companies as well. For instance, last week First NLC Financial Services, a subprime mortgage company that is being sold, laid off nearly half of its 1,350 employees. Meanwhile, Alliance Bancorp Inc. filed for Chapter 7 bankruptcy protection as a precursor to its liquidation.

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