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By Mike Caggeso
American Home Mortgage Investment Corp. (NYSE: AHM) announced Friday that it was closing its doors, heightening fears that we’ve only seen the start of the U.S. credit market shakeout.
Almost 6,250 employees lost their jobs, leaving about 700 people to collect unsettled bills for the Melville, N.Y.-based lender. American Home Mortgage Investment will likely seek for bankruptcy protection this week.
“Unfortunately, the market conditions in both the secondary mortgage market as well as the national real estate market have deteriorated to the point that we have no realistic alternative,” American Home Chief Executive Officer Michael Strauss said with the company’s announcement.
It isn’t the only mortgage and loan company that is having a hard time paying off its own debt. New Century Financial Corp. (OTC: NEWCQ) has sought bankruptcy protection. Accredited Home Lenders Holding Co. (Nasdaq: LEND) is also struggling to tread water while the sub-prime mortgage market continues to drown.
Other lenders are holding their ground by raising rates and/or lopping off higher-risk loan services. Wells Fargo & Co. (NYSE: WFC) and Wachovia Corp. (NYSE: WB) are both raising rates. AmTrust Financial Corp. announced it stopped granting loans that exceed 95% of a home’s value. First Horizon raised rates on Alt-A and jumbo loans in the past two weeks, Bloomberg News reported.
So how did the dominos start falling? Credit problems initially struck the so-called “sub-prime” lenders, the bankers who provide high-interest loans to people with poor credit. On top of that, the slow real estate dampened the number of loans taken. American Home Mortgage Investment wasn’t a sub-prime lender, but it made many loans to borrowers who could not document their income or assets.
How other sub-prime lenders in poor condition stay alive could be an interesting and potentially dangerous paradox. Many will have to take out loans until they get their finances in order. Given the risky nature of this situation, lenders will ratchet up the interest rates they charge to account for the added risk. If those loans end up in default, too – the corporate equivalent of the sub-prime deals that sank consumers – it could start a second wave of defaults, but this time in the corporate lending market.