Business Insight Zone

April may have been the cruelest month for T. S. Eliot, but August is shaping up to be the cruelest month for the US mortgage industry. The most stunning example has come in the abrupt collapse of American Home Mortgage. Earlier this year, as problems mounted across for subprime mortgage companies, as New Century Financial went belly-up, as credit markets tightened — through all these challenges, American Home Mortgage said that it was sound. Although it wrote loans to customers whose credit ratings put them in the category above subprime but below prime, it had never gone whole-hog into subprime loans. And the company was hardly a pipsqueak: last year it made about $2.2 billion in sales, with $59 billion of loans originated.

And then . . . poof. On Friday, August 3, the company dismissed 90% of its workforce. After what must have been a fraught weekend for its leadership, American Home Mortgage filed for Chapter 11 bankruptcy protection the following Monday. Public filings and statements from the company indicated that it would seek to wind down its operations altogether, and that its creditors likely would not be repaid.

How did American Home Mortgage fall so far, so fast? Time may reveal more about the inner workings of its finances, but even now it is clear from the outside that the company was battered by the twin storms of a US housing market that has spent quite a while in the tank and a worldwide credit market that has dried up new sources of funds in a hurry. All of this is connected to the general collapse of the subprime mortgage industry, but American Home Mortgage’s failure reveals that the damage hardly ends there. These storms will likely continue; the peers of American Home Mortgage had better keep their powder dry.

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* This article originally ran on our Company of the Day page on 14 August 2007.

Category: Company of the Day, Finance & Real Estate