American Home Files for Bankruptcy Protection

American Home Files for Bankruptcy After Shutdown (Update2)

By Steven Church and Bradley Keoun

Aug. 6 (Bloomberg) – American Home Mortgage Investment Corp. became the second-biggest residential lender to file for bankruptcy protection this year, adding to signs that late payments have spread to homeowners with good credit records.

The company sought federal court protection from creditors in Wilmington, Delaware, today, saying it had assets of more than $100 million and debts of more than $100 million owed to more than 100,000 creditors. The filing comes after the company announced Aug. 2 it would halt operations and slash staff.

American Home specialized in mortgages for people who fall just short of top credit scores. More than half a dozen competitors have declared bankruptcy this year as defaults spilled over from ``subprime’’ borrowers with the worst repayment records to those with more reliable payment histories.

Their sources of funding have all dried up,'' said Mark T. Power, an attorney who is representing some creditors in the case.This case is going to be very similar to New Century.’’

New Century Financial Corp., based in Irvine, California, became the largest home lender to seek court protection from its creditors when it filed for bankruptcy in April. The company is now being liquidated. Melville, New York-based American Home also is probably going to be forced to liquidate, Power said in an interview Friday, after American Home told employees that it was planning to declare bankruptcy.

Investment Banks

Investment banks began shutting off credit to American Home this year as concerns about subprime mortgages spread, leaving the lender unable to fund at least $750 million in loans and stranding thousands of borrowers, according to a U.S. Securities and Exchange Commission filing. American Home reduced its staff to about 1,000 workers last week from 7,400 at the end of 2006.

The company has hired Stephen Cooper, of the turnaround firm Kroll Zolfo Cooper LLC, as its chief restructuring officer, Chief Executive Officer Michael Strauss said in the Chapter 11 petition. Strauss founded American Home in 1988.

American Home originated almost $60 billion in mortgages last year and issued $16.7 billion in the first quarter of 2007. The company said in a statement July 28 that it needs a ``better understanding’’ of how it will be affected by weak mortgage markets. It slashed the quarterly common-stock dividend by 38 percent in April to 70 cents.

Credit Crunch

Falling bids by investment banks that buy mortgages and securities backed by home loans forced American Home to write down the value its holdings, the lender said. The drop in value prompted banks that provide credit lines to demand more collateral as a cushion against default.

The company had about $837 million of cash as of March 31 and raised more than $200 million selling stock.

American Home specializes in so-called Alt-A mortgages, an alternative for A-rated borrowers who can’t satisfy all the terms for a regular ``prime’’ mortgage. The company was the 20th-largest Alt-A lender in 2006, according to March data from trade publication Inside Mortgage Finance.

Bids from investors for American Home’s loans began falling this year after defaults on U.S. subprime mortgages rose to the highest level since 2002. Investors were concerned that lax underwriting standards and growing fraud might lead to rising defaults on Alt-A loans.

The case is In re American Home Mortgages Holdings Inc., No. 07-11047, U.S. Bankruptcy Court, District of Delaware (Wilmington).

To contact the reporters on this story: Bradley Keoun in New York at ; Steven Church in Wilmington, Delaware, at .

Last Updated: August 6, 2007 08:36 EDT

The seller of the home I was inspecting Saturday is having a new home built that is almost completed. When I was there his L.O. came by to inform him American Home had filed for bankruptcy. So now he has to scramble and get a new loan in less than a month.