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August 2, 2007

A Disturbance in the Mortgage Force

While it's not unexpected -- the company warned on Tuesday it was spiraling into bankruptcy -- there is something deeply disturbing about the news out of American Home Mortgage tonight. The country's former number three mortage lending company, no longe able to package and syndicate its loans, and watching delinquencies and unpaid collateral calls sky-rocket, was forced to essentially call it quits as of tomorrow:
American Home Mortgage Investment Corp. (NYSE:AHM) today reported that, in light of the liquidity issues resulting from extraordinary disruptions occurring in the secondary mortgage market, the Company has determined to significantly reduce its operating structure as it seeks the most appropriate course of resolution to preserve the value of its remaining assets.

American Home has ceased taking mortgage applications and has notified all of its production employees that they will be separated effective tomorrow, August 3, 2007. Accordingly, the Company employee base will be reduced from over 7,000 to approximately 750. [Emphasis mine]

While Countrywide, the U.S.'s number one mortage lender, is nowhere near this point yet, people shouldn't underestimate the likelihood of a restrictive loan spiral taking things much further than anyone currently expects.

And if you're in the mood for mortgage musings, Mark Zandi's comments on a new Economy.com report are worth a listen.

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Comments

1. Comment by Dave Hodson -- August 3, 2007 @ 10:46 AM

Paul

Seems like the Fed would step in and simply cut rates by a full point. That would dramatically slow down the default rate.

2. Comment by Paul Kedrosky -- August 3, 2007 @ 2:21 PM

Sure, and that's what Cramer was calling for today. I'm not convinced it's the right answer -- risk is being repriced and rates might not come down as much as some would like; and the Fed riding to the rescue comes with many of its own risks -- but we are backing into a very narrow list of options, all unpalatable.