RENEE MONTAGNE, host:
Another big mortgage lender may go bankrupt. American Home Mortgage thrived by offering risky interest-only loans to home buyers, the sort of loan that didn't require a down payment. But the company has been badly hurt by the downturn in the mortgage market, and now it's the lender that can't borrow. American Home Mortgage said yesterday that its credit lines have been cut off. News of its troubles sent stock prices falling.
NPR's Jim Zarroli reports.
JIM ZARROLI: Investors have been worried that the problems in the subprime mortgage market will spread to other kinds of lending. And what's happened to American Home Mortgage suggests those fears are being realized. Unlike some of the most troubled mortgage lenders right now, American Home Mortgage didn't issue subprime loans.
Guy Cecala, publisher of Inside Mortgage Finance, says the company got big by offering lots of interest-only loans.
Mr. GUY CECALA (Inside Mortgage Finance): They were supposedly designed for people to use when they got in a pinch. What ended up happening was that it turned out that most of the people, whoever took these loans, started out making the minimum payment from day one.
ZARROLI: Cecala says a lot of the loans issued by American Home Mortgage required no down payment and no income verification. The company could issue such risky loans by selling the debt to other investors as mortgage-backed securities. But this year, as delinquencies and defaults have risen, investors have abandoned mortgage companies, so lenders like American Home Mortgage have seen their credit cut off.
Mr. CECALA: That's their bloodline. You cut them off and they can't make any more loans. And it's just a matter of time before they go out of business unless somebody else will lend it to them.
ZARROLI: Yesterday American Home Mortgage said it was meeting with its advisers and would explore different options. But analyst Matthew Howlett of Fox-Pitt, Kelton says the company is in a bad position.
Mr. MATTHEW HOWLETT (Analyst, Fox-Pitt, Kelton Inc.): They don't have a lot of options right here. This is occurring at a time when the markets have simply locked up. Most likely they're going to need to sell assets. They're going to try to do it in the most orderly fashion they can without destroying the value of the company. And I just think, really, bankruptcy seems like the only option.
ZARROLI: American Home Mortgage is only the latest big lender to collapse this year. By one count, 12 of the top 50 mortgage companies have gone out of business.
On Wall Street, the fear is that investors have lost so much money they'll cut back on other kinds of lending as well, something that can only hurt the economy as a whole.
Jim Zarroli, NPR News, New York.
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