Large US mortgage lender runs out if money

Posted on 31 July 2007 by Ray Boulger

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Shares in American Home Mortgage Investment Corporation, a New York based lender, collapsed to $1.15 this afternoon in Wall St trading. This compares to a price of $40 only 2 year ago, a fall of 97%.

This was a reaction to the lender issuing a statement to say that it doesn't have cash to fund new loans and follows investment banks cutting off credit lines, as a result of which yesterday American Home did not have the funds to finance $300m of mortgages it had already offered on. Today it said $450 - $500m of loans probably won't get funded. This is a horrible scenario for the borrowers whose funds don’t come through. They might even have packed up and be on the road to their new home or even sitting outside it waiting for the keys.

American Home is not a sub prime lender – it specialises in loans to borrowers whose credit scores fall just short of a top rating and was the 20^th largest lender specialising in that sector of the market. Thus this announcement is further evidence, as if it was needed after Countrywide’s results last week, that delinquency problems in the US mortgage are spreading out far from the sub prime sector to the wider market.

American Home said it is "seeking the course of resolution, in this environment, that is least disruptive to its business and to the many thousands of homebuyers to whom it has committed to provide mortgages." Once a lender has lost the confidence of its funders it is a dead duck unless it is baled out by the Central Bank or other banks. The reality is that the customers to whom American Home has made offers are not going to get their mortgages and so they need to get an application in to another lender pronto. They may have to accept less good terms in view of difficulties in which many US lenders now find themselves.

This reminds me of a situation in the UK market many years ago when exactly the same thing happened to sub prime lender Southern Pacific. Their customers were left stranded with virtually no notice when they ran out of cash. Fortunately other sub prime lenders rallied round, not specifically to save Southern Pacific, although they did that, but to try to mitigate the problems for Southern Pacific’s clients. A small consortium of lenders used the Southern Pacific application forms to underwrite the applications and also accepted the valuations Southern Pacific had and then got new mortgages offers out, in many cases in the space of a day or two, as a result of which completions were delayed very little.

This was a really good example of the industry rallying round and treating customers who weren’t at the time even their customers very fairly, before the FSA had even thought of their "Treating Customers Fairly – TCF" policy. I hope some US banks will launch a similar lifeboat operation to minimise the inconvenience these borrowers will face. It is also good business practice as such an action will show the industry in a good light – the alternative is that the reputation of the whole industry will be tarnished.

There will undoubtedly be a lot more bad news coming out of the US on this front before things get better. The good news for UK mortgage borrowers is that these concerns are likely to mean that gilts continue to perform well, although today has been an exception, resulting in a drop in their yield and helping to reduce the cost of funding for UK mortgage lenders.

The bad news is that concerns over the quality of mortgage books being sold on by lenders means the spread between the gilt yield and swap rates has increased. Thus funding costs for lenders have not reduced by as much as they would have done if swap rates had fallen in line with gilt yields. However, they have fallen and so UK borrowers are reaping some rewards from this US crisis.

Categories: Property market, Mortgages, House and home, Interest rates

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