Credit market ills go beyond subprime

Amy Scott Jul 30, 2007

Credit market ills go beyond subprime

Amy Scott Jul 30, 2007


Kai Ryssdal: American Home Mortgage trades on the New York Stock Exchange under the ticker symbol AHM. In this day and age, though, you don’t have to wait until the opening bell in New York to dump a stock, should you be so inclined.

And investors were so inclined this morning. Shares of AHM dropped 39 percent in electronic trading before the open. The company said its own lenders are demanding more cash, and that it’s going to delay its planned fourth-quarter dividend to hang onto what little cash it does have.

So far, all of this adds up to just one more bank getting squeezed by the tightening credit market. Yet another victim of the subprime mortgage mess. But Marketplace’s Amy Scott reports American Home doesn’t even make subprime loans.

Amy Scott: American Home borrows money from banks to fund its mortgages. But now, those mortgages are declining in value. Banks are threatening to turn off the spigot unless American Home puts up more collateral.

American Home’s biggest problem is its Alt-A mortgages. They’re usually lent to people who have good credit, but who can’t or won’t document their income. Maybe they’re self-employed, for example, or immigrants.

Andrew Davidson follows the mortgage-backed securities business. He says mortgage companies recently began selling Alt-A’s to more risky borrowers.

Andrew Davidson: Within the Alt-A market, there’s a very wide range of borrower quality and borrower background. And so what we are seeing is that the Alt-A loans that are more like subprime loans are really beginning to under-perform as well.

Losses on Alt-A mortgages forced California-based IndyMac to lay-off 400 workers earlier this month. Last week, Countrywide Financial scaled back its earnings forecast for the year. The company blamed losses in a similar kind of loan.

Bose George is an analyst with investment bank Keefe, Bruyette and Woods. He says if home prices continue to fall in the next few years, the situation could get worse for lenders of all stripes.

Bose George: It makes it much harder for prime borrowers as well. Because when they, you know, go to refinance their loan or if they default, their recovery is much lower.

George says that’s not a serious worry as long as the economy keeps ticking along. Primes borrowers only tend to default on their loans when they lose their jobs or their incomes take a serious hit.

In New York, I’m Amy Scott for Marketplace.

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