American Home files for bankruptcy as talks fail

By Joseph A. Giannone

NEW YORK (Reuters) - American Home Mortgage Investment Corp. filed for Chapter 11 bankruptcy protection after rising customer defaults and unfriendly credit markets brought the once-thriving lender to its knees.

One of the largest independent U.S. home loan providers, American Home on Monday filed for protection from creditors in U.S. Bankruptcy Court in Delaware. American Home becomes the second-largest U.S. residential lender to go under this year, after New Century Financial Corp..

In a court filing, Chief Executive and founder Michael Strauss said the market for mortgages and loan-backed securities had become "disrupted to the point of dysfunction." The filing came after around-the-clock talks last week with at least four potential buyers fell through, he added.

"If you don't have cash, you're out," said David Olson, president of Wholesale Access, a Columbia, Maryland, research firm that tracks the mortgage industry. "The market is pretty chaotic. Everybody is waiting for mortgages to reprice and for the market to restabilize."

American Home did not return calls seeking comment.

American Home last year grew to become the 10th-largest U.S. retail mortgage lender by originating $59 billion in loans. It sold loans through 2,450 loan officers, as well as buying loans through brokers across the United States.

American Home specialized in Alt-A mortgages, alternatives for borrowers considered low-risk but who can't satisfy all conditions for "prime" mortgages. American Home had $20.6 billion in assets and $19.3 billion in debt on March 31.

The court filing followed its decision Friday to shut down its lending business and slash thousands of jobs as American Home's banks put the squeeze on its credit lines. American Home said it has more than 100,000 creditors.

GETTING WORSE

The bankruptcy filing showed that problems in the mortgage business have spread from the riskiest, "subprime" borrowers to people who fall just short of qualifying for prime loans.

WL Ross & Co., a firm run by distressed-asset specialist Wilbur Ross, will provide up to $50 million in debtor-in-possession financing to sustain American Home. Ross expects problems in U.S. mortgages will worsen.

"It's our initial foray into subprime," Ross said in an interview. "We've been looking at subprime for quite a while and this is the first affirmative commitment we've made."

Separately on Monday, troubled mortgage company NovaStar Financial Inc. said it suspended issuing commitments for new loans from wholesale channels until Tuesday.

According to court papers. Melville, New York-based American Home wants to sell its loan portfolio and loan-servicing business through an auction. Bids are due August 29, and an auction may take place on September 5.

Still, American Home said many creditors may not be paid in full, and common shareholders will likely receive nothing for their shares. American Home shares will likely be delisted from the New York Stock Exchange.