Through The Fly's Eyes: American Home Mortgage
from Joseph Lazzaro of Theflyonthewall.com
AHM Provides A Data Point, And Wall Street Waits For More
There are times when Wall Street, to borrow a phrase, takes "two steps forward and one step back."
Then there are times when the Street simply stands, and waits for the events on the ground to clarify the financial landscape.
And that was the case Tuesday, as Monday's rally faded into Tuesday's 140-point Dow sell-off. And one reason was the subprime issue, in general, which seems to offer a data point daily regarding the sector's health, and its impact on the housing sector, and the economy.
Tuesday's data point, in specific, was American Home Mortgage (AHM), which dropped more than 80% to about $1.00 per share from its recent $10.50 per share after the company indicated it is unable to borrow money under its banks lines and is looking at ways to raise money, including "the orderly liquidation of assets."
AHM needs the money to meet margin calls initiated by lenders, due to the declining collateral value of certain loans and securities in the company's portfolio. That margin call was in part prompted by AHM's Monday announcement: on Monday AHM announced a major write-down of loans, i.e. declared that it is unlikely to receive timely, full payment for certain loans, and also delayed its quarterly dividend. That sent a shudder through AHM's lenders, who, of course, fear AHM will default on loans to the company.
AHM characterized the circumstance as a "liquidity issue," and at first glance the event would appear to be limited / restricted to subprime mortgage segment. However, American Home Mortgage's portfolio contains not only subprime loans, but also near-prime loans, which allow borrowers to obtain mortgages with little documentation of income or assets. Hence, AHM's problems have reignited Wall Street's concerns that the home mortgage default issue may also include home loans to borrowers with average or even above-average credit ratings. If the last point is true, that would suggest a mortgage default problem involving a wider pool of citizens [translation: consumers].
Even so, with the above as background, it's important to maintain a dispassionate, balanced perspective regarding the subprime issue: the current, prevailing conventional wisdom argues that, regarding fundamentals, there are more positives than negatives pertaining to the market, and by extension, in the U.S. economy.
But right now the unknown is guiding the market - the unknown regarding the size of the subprime problem, the unknown regarding how deep - if at all - the problem is in the higher-quality loan category - which is why analysts, traders and typical citizens alike are waiting for more information, waiting for events on the ground to clarify themselves.