American Home Recinds Earnings Guidance In Wake Of Loan Losses

Another big mortgage corporation has sent out early warning signals about its financial health in the wake of the virtual collapse of the subprime mortgage market.

American Home Mortgage Investment Corporation announced late last week that it will take substantial charges for credit-related expenses in the second quarter and it is likely it will experience a second quarter loss. American Home also withdrew its previously issued earnings guidance for 2007 in which it had projected earnings of $3.25 to $3.75 per share. According to BusinessWeek Online A.G. Edwards projects the company's earnings this year at $1.67 and has cut its earnings forecast to $2.89 from $4.50 for FY 2008.

American Home hopes to reinstate earnings guidance toward year-end.

So what? Subprime lenders have been falling under the bus for months; at least a dozen have shuttered offices, had warehouse lines closed by big banks, or stopped accepting loan applications and started auctioning portfolios. But American Home is not a subprime company. In fact in March the company issued a press release to clear up any "confusion" about the type of loans it offers: at that point subprime mortgage represented less than 1% of its total loan portfolio.

The company specializes in so called Alt-A loans. These are loans where the homeowner borrows a relatively high portion of the value of a property and simply states an income, rather than documenting it. They tend to be adjustable rate mortgages and have been particularly prone to rising delinquencies.

American Home's problems arose primarily because these Alt-A mortgages were sold to investors with a so-called "timely payment" warranty wherein the company agreed to repurchase loans within a three month period if borrowers did not make mortgage payments on time. These warranties are common in the industry but many more borrowers than anticipated fell behind on their payments quickly and the company has had to buy those loans back. (It seems appropriate to note that these were not necessarily brand new loans where borrowers almost immediately defaulted. They may have been held by American Home in its own portfolio or assigned to banks to secure warehouse loans for many months before being packaged and sold to investors.)

Repurchase demands reached a high in April at which time the company announced they would no longer write the high loan to value/stated income products. Repurchases have declined substantially since that time and are now believed to be about 53 percent below April levels and are expected to continue to decline. However, according to MarketWatch, Paul Miller, an analyst for Friedman Billings Ramsey downgraded American Home to underperforming on Friday and cut the stock's target price from $25 to $15. "We are unconvinced that the worst of the credit issues are behind the company," Miller said. He also explained that the company's tighter underwriting standards will cut the number of loans the company will originate, further affecting future earnings.

By its own description American Home Mortgage Investment Corp. is a mortgage real estate investment trust (REIT) focused on earning net interest income from self-originated loans and mortgage-backed securities, and, through its taxable subsidiaries, from originating and selling mortgage loans and servicing mortgage loans for institutional investors. Mortgages are originated through a network of loan production offices and mortgage brokers as well as purchased from correspondent lenders, and are serviced at the Company's Irving, Texas servicing center.

While second quarter earnings are expected to be substantially impacted, the company has confirmed it will pay the expected $0.70 quarterly dividend. The company had cut its dividend earlier this year from $1.12 per share.

Michael Strauss, American Home's Chief Executive Officer, commented, "Our company's goal is to put the impact from the discontinued products behind us. A benefit of the substantial reserves we are establishing in the second quarter is that the discontinued product's impact on our future financial results is likely to diminish. As we put the impact from the discontinued products behind us, the positive contributions from our portfolio, mortgage origination franchise and loan servicing business will again drive our results. Altogether, the second quarter will be a period of "clean-up" as the impact from the discontinued products continues to wind down."

Shares of American Home which are listed on the New York Stock Exchange as AHM fell 12 percent on Friday closing at $18.38 after falling as low at $17.40 earlier in the day. Shares were trading at $18.22 at mid-day on Tuesday, July 3.