No loans from American Home Mortgage. Credit lines cut off. $300M of approved loans not funded

[RB TexLa]

American Home Can't Fund Loans, May Liquidate Assets (Update2)

By Bradley Keoun

July 31 (Bloomberg) -- American Home Mortgage Investment Corp. shares plunged 89 percent after the lender said it doesn't have cash to fund new loans and may have to sell off assets.

Investment banks cut off credit lines, leaving American Home without money yesterday for $300 million of mortgages it had already agreed to provide, the Melville, New York-based company said in a statement today. It anticipates $450 million to $500 million of loans probably won't get funded today.

``They can't function without access to capital,'' said Bose George, an analyst with KBW Inc. in New York. ``The company either has to file for bankruptcy or go through some type of rescue or restructuring, and either way will leave almost nothing for the common shareholders.''

American Home caters to borrowers whose credit scores fall just short of standards for top-rated mortgages. The announcement provides fresh evidence that defaults may be spreading from subprime borrowers with the worst credit records to homeowners with more reliable repayment histories. The biggest U.S. mortgage lender, Countrywide Financial Corp., said last week overdue payments rose among some of its most creditworthy clients.

Shares of American Home, halted by the New York Stock Exchange before yesterday's regular session, plummeted $9.32 from their July 27 close to $1.15 in 2:50 p.m. New York Stock Exchange composite trading. They changed hands at $6.39 in pre-market transactions yesterday. Two years ago, they fetched almost $40.

Advisory Firms Hired

American Home said it's ``seeking the course of resolution, in this environment, that is least disruptive to its business and to the many thousands of homebuyers to whom it has committed to provide mortgages.'' The company said it hired Milestone Advisors and Lazard Ltd. to evaluate ``strategic options.''

Bids from investors for American Home's loans began falling earlier this year after defaults on U.S. subprime mortgages rose to the highest level since 2002. Investors were concerned that the lax underwriting standards and growing fraud might presage rising defaults on Alt-A loans.

http://www.bloomberg.com/apps/news?pid=20670001&refer=home&sid=a2yB9pe.3k3A

[Mr. Ected]

1. I Handled An AHM Refinance Last Week

Came out of rescission today.

No funds. No closing.

[Lex]

9. An attorney I know just found out a sale he handled isn't funding.

Closing happened yesterday but lender never funded.

I guess the buyer has to get a new lender and pay rent to the seller until it is dealt with.

[Liberal_in_LA]

33. Risky to move in before the sale is funded.

[sandnsea]

2. Down payment nonprofits stopped today

Only one program is left to help low income people meet the 3% down payment requirement for an FHA loan. Apparently that was just a backdoor method of having the seller commit to participating in a program and 'donating' back to it, while jacking up the mortgage to cover the down payment. This country is built on one fraudulent scheme after another.

And people are in prison for stealing cigarettes. :eyes:

[Mr. Ected]

3. You Got a Link?

I don't disagree about the scam world we live in. But I deal with this stuff everyday. You have any more info on this?

[happyslug]

7. Here is the IRS ruling on this type of "Assistance" IRS ruling 2006-27

http://www.irs.gov/newsroom/article/0,,id=156675,00.html

Some comments about it written LAST YEAR (2006):
http://www.bankrate.com/brm/news/mortgages/20060525a1.asp
http://www.post-gazette.com/pg/06168/698534-30.stm

I can NOT find anything from this year (2007) but Is suspect the agencies making these "Down-payments" all quit giving such down payment assistance.

Remember how this work the SELLER would jack up the price of his house by the 3% down payment. He would then give this money as a donation to the Non-profit organization (often set up by Realtors). The non-profit would then give the money to the Buyer to satisfy the FHA 3% down payment rule. Everyone (but the IRA and FHA) benefited from this scam:

1. The Seller, her received the value of his house, the price went up 3% but he gave that to the Non-profit organization. Thus the Seller received his original asking price.

2. The Buyer received the 3% donation from the Non-Profit organization to use as his down payment so he or she qualified for an FHA loan.

3. The Non-profit received a Fee for moving the Money from the Seller to the Buyer (But in most cases this was minor, just breaking even).

4. The Realtor WHO SET UP THE NON_PROFIT, received their Commission. As long as the Non-profit that did the above broke even the Realtors who FORMED THE NON-PROFIT were happy, another sale.

5. The FHA THOUGHT it had guaranteed loan with a 3% down payment by the Buyer, but the FHA in reality had a zero down payment loan. This was the Scam.

[sandnsea]

10. Yes that

I can't find the article that indicated this was new today, but this is what I'm talking about. Except I don't think all of these were just the realtor setting up non-profits. You can make a nice income heading up a nonprofit, and investing half your 'salary' every year. Kind of like Abramoff did.

[earthlover]

13. Oh please....

The Realtors do not "set up" the "non-profit".

I assume you are talking about the AmeriDream program. From your description it sounds right, except you made several inaccuracies.

You make it sound as if the whole thing is illegal or immoral.

However, this program does enable borrowers who have income/debt/credit requirements of FHA loan but lack the cash down payment or the generous "gift letter" from a relative....to get into a house.

This is not what is causing the subprime market to plunge. You can't qualify for FHA with sub-prime credit ratings....

I would think that liberals out there would WANT to enable people with decent jobs, people who have paid their bills on time, have decent credit, but don't have a lot of cash..... to be able to invest in the American Dream of home ownership.

[happyslug]

19. And the lack of a Cash down payment is why the IRS ruled it illegal.

Read IR 2006-27, it is clear that what I described in a very simplified description is what the IRS is calling Illegal.

As to the Non-profit being not set up by Realtors, some may not be, while other may be. I suspect these "non-profits" are like the Non-profit credit consoling agencies. The Credit Counseling agencies were set up by Credit Card issuers to get people to go to them rather than go to an attorney. The longer a debtor stays with the Credit Consoling agency, some sort of payment on the Credit Cars is being made. If the debtor go to a lawyer, he will look over that person;s debts and tell him file bankruptcy and NOT pay anything from that point onward. This is what the Credit Card issuers do not want. They can NOT forbid a debtor from going to see a lawyer, but by offering "Credit Consoling" they can delay such a visit.

Jut because something in "non-profit" does not mean it was set up by someone with a profit motive. In the Case of Credit Consoling agencies, they were set up by for profit credit Cars issuers. In the case of many of the non-profits set up to assist FHA eligible borrowers, I suspect the same. People who want ot sale will often look into ways to make a sale. Setting up a non-profit to get the sale finished through the use of what the IRA is calling illegal loans is one way to make sure a loan goes through. Remember I am NOT saying these Non-Profits were set up for EACH transaction, but once they appeared, sellers of Property learn of their existence and used to to complete a sale.

All you need to set up a non-profit is a little seen money, which I suspect local realty agencies gladly donated so that these agencies were created. Once set up, the agency can charge fees for their service to stay in business. Thus the non-profits would be "Independent" of the people who formed them, but once form the realtors KNEW they existed and used them.

As to the AmericDream program, I have NO personal knowledge of its existence let alone practice, but even if it was 100% NOT tied in with for profit firms, does NOT mean it was not USED by those firms. Furthermore I suspect this applies to MANY non-profits not just the ones named. My point is the IRS looked these firms over (not just one non-profit, the whole group of Non-profits) and determined them NOT to be non-profits as that is defined under the IRS regulations. My comment was to the non-profits as a whole NOT any one non-profit.

[1932]

25. People shoudl get enough money from working for a living that they don't need scams

like this to get a downpayment for a home.

If you don't have money for a downpayment, you might have a hard time paying your mortgage, and getting foreclosed upon (and driving up housing prices for everyone in the process) is only good for lenders who make more money if people borrow more. it's not good for poor or middle income people, and it's not good for society.

[sendero]

29. As we are seeing...

... "getting someone into a house" is really nice, but if they don't have the financial skills and means to pay for the house it hurts everybody.

The 5% down rule that was in place for decades worked great. If you can't save a 5% down payment, you probably should keep renting until you can.

These lax loan standards are a large part of why we are facing a very serious situation regarding mortgages and credit in general. These lax standards were put in place to prop up the economy, not to help the poor would-be homeowner.

[Snarkoleptic]

11. A couple of means that are commonly used to inflate..

a purchase price (and reduce a buyers downpayment) are seller concessions and seller 'carrybacks'.
A seller concession is where a seller offers to pay up to 6% of a buyer's non-recurring closing costs.
A seller 'carryback' is where a seller finances a 2nd mortgage on the home for the buyer.
So basically, a home with 6% concessions and a 10% 'carryback' is overpriced by 16%.
The lenders aren't naive, they know that values are padded but greed and stupidity keeps them from calling 'bullshit'.

[earthlover]

15. Not a progressive thought....

Seller carrybacks are extremely rare. The market for years has been a sellers market. Even now, few sellers are willing to carry back a second mortgage for a buyer. A second mortgage is more risky, and is only paid during a foreclosure AFTER the first mortgage is satisfied (that is why it is called a SECOND mortgage!). Anyhow, trust me, it doesn't happen very often. Sellers are more likely to carry back a FIRST mortgage and bypass the bank. They at least have more control in this scenario.

As to seller concessions...they only "inflate" sale prices when you have a sellers market. If it is a buyers market, they are pretty much assumed! Right now, most of your first time home buyers are short of cash. They want as little down payment as possible, and a good percentage want their closing costs absorbed as part of the deal. If you take a hard line and say no to that, you basically eliminate most of your buyers in the price ranges dominated by first time home buyers.

So as much as you may want to huff and puff about buyers getting into houses with little down....fact of the matter is, if you eliminate this you would provoke a housing depression!!!! And the buyers you would hurt the MOST would be those with the least money. Not exactly a progressive thought....

[Kingshakabobo]

16. As a mortgage banker, I agree with you......

I've never been a big fan of those American Dream loans though. IIRC, the non-profit skims 1%.....at least that's what I remember from Nehemiah........but ....if you need to go FHA it's not a bad way to go. We don't do much FHA in the city.

I do a lot with the Fannie mae "My Community" loans. It drives me up a frickin wall when I see people on this forum bad mouthing ALL zero down loans.

The City of Chicago has a nice deal going right now for a true 4% gift, reduced PMI and below market rate. We are doing a ton of them.

[mountainvue]

21. Not to mention you can put a community second

behind My Community and it is fully forgivable after 10 years and there are no payments.
I too get sick of all of us in the industry getting painted with the big broad brush of fraud.
Brokering mortgages is not as easy as it is made to appear on tv.
My heart goes out to everybody left out in the cold by American Home Mortgage. People are going to have to start the loan processes all over again with a different lender and the loan officers and realtors are not going to get their paychecks until they get these deals funded. 300 million is a lot of mortgages.

[Snarkoleptic]

18. Having been in the industry for over 21 yrs, I must disagree with your generalizations...

Seller carrybacks are quite common (especially in the troubled subprime sector).
To expand upon my original point, the seller carryback note is more often than not forgiven immediately following the closing.
This tactic is, as I stated earlier, nothing more than an attempt to inflate the purchase price and reduce downpayment funds.
It's somewhat naive to think that a buyer is paying a seller for a second mortgage (see my original post).
As for your statement that sellers are more likely to carry back a first mortgage, this is generally most often seen when rubes who are selling a home opt to finance the seller on a contract-for-deed. With today's flat-to-declining RE values, it's extremely unwise to sell a home under a contract for deed.

Progressive or not, these are a couple of the financing vehicles that have resulted in the present subprime meltdown.
I should know, I'm on layoff from one of the major players (which tried to do the right thing).

BTW...we're already in a housing depression, in case you've not noticed.

[mountainvue]

22. Underwriter? n/t

[Snarkoleptic]

34. Regional Production Manager until the shitstorm came in June.

I had as many as 58 honest and hard working people working for me and playing by the rules.
Greed on Wall Street caused otherwise rational companies to fight to gain market share by playing a game of follow-the-leader down the slippery slope of FICO-driven underwriting.
Back in the old days, one would consider a borrowers Character, Capacity (to pay), Collateral, Credit, and Conditions (economic)when considering a loan. This was known as the 5-C's of credit.
Wall Street continually sought more subprime volume and paid premiums to get it.
They'd often buy a deal at 106 which mean they'd buy a $100K loan for $106K.

[JacquesMolay]

4. Scary ....

... wait 'till it happens to Fannie Mae.

[karlrschneider]

5. The irony about Countrywide is their own slogan: "Nobody can do what Countrywide does."

Looks like it turned out to be true. ;-)

[happyslug]

6. I was wondering why all these problems are occurring in July?

Then it dawned on me, School starts in most states the end of August. Thus most people WHO HAVE TO MOVE for any reason, move between May and August. They Sell and Buy their homes between May and July (often moving In August). In the South they is a tendency to start school the beginning of August, so sales they MUST occur before June (So people can move in July).

I attended a similar many years ago, where the topic turned to year around school. People were for it, but it was brought up that people MOVE in June, July and August, so their children do NOT move in the Middle of a School year. For that Reason the movement to extend the School year dies out. No one could determine a way for people to sell their homes, buy a new one and move they children in less than 2 months (and many questioned 2 months). Thus Summer selling of Homes has been the norm and will continue to be the norm as long as people own their own homes (Which I have read is over 60% of the population, but that is from memory and may be wrong).

Thus August has ALWAYS BEEN THE MONTH TO CUT PRICES, and this cut in prices STARTED EARLY IN THE SOUTH DO TO THEIR EARLIER SCHOOL YEAR START. I will hate to see the August number, but I believe they will be bad. This is because people generally want to sell their old home BEFORE they commit to a new one. Many can NOT make the double payments. It look like this is just the start, September is always the desperation month.

[InkAddict]

24. The federal student head count is in October.

We once moved in late December and enrolled the kids into school after the holiday break. As there was a difference in curriculum, my kids needed to make up a certain learning curve into a faster paced school district and could not get extra worksheets, etc...because it was explained that they had not been "counted" and therefore the district had not funded their two little heads so "no extra worksheets." Needless to say, when we bought our home it was NOT in that district in spite of its reputation for "excellence." For an elementary fundraiser, this PTA wanted things like "free dental service" donations instead of home-baked goodies or crafts, so it wasn't as if the district was poor--yeah, wrong place!

[happyslug]

27. And that is what people want to avoid by moving in the Summer

If people have a choice (and to a degree they do) they move in the Summer so their children start the new School year in a new school district at the same time as everyone else in that school district. I moved twice while growing up. The first time I was lost, two months to go and a new school district. I was in First grade so I had to redo it. The second Time I had to move in was the end of May so I jut skipped the rest of the school year (Which ended the first week in June). The next year, since by this time I was in High School, I tried to maintain my German Classes, but I was hopelessly lost, so after 2-3 weeks I transfered to Latin I.

To avoid the above problems most people do NOT like moving their children especially when the kids are in High School, which is the point I am trying to make. Given that school is so important to most parents (And many working adults are parents), people move around their Children's school schedule. With the South's adoption as August as a School Month (leaving their children out in May instead of June) AND the extension of other School districts to the end of June. The month to Move in July. To move one has to have a place ot move to. To have a place to move to one most have some sort of "Deposit" or "Down payment". To have such thing one must sell your old home before buying your new home. Thus People start looking to sell and buy about the same time, April (Sometime March, but almost never October through February). Home do sell year round, but the big time is May through September. The peak is JUNE so that people have time to move in July. August is desperation, September is last chance. If you are to see a substantial Drop in price it will be in the next two months for that reason alone.

[Jacobin]

8. the dominoes begin to tumble

I feel for those people who aren't going to get their loans funded...and the people selling houses to those people, which now won't close unless they find other financing...etc

[eppur_se_muova]

12. Holy crap ... glad we sold their stock a couple of years ago. nt

[lonestarnot]

14. Rugh ro.

[Tierra_y_Libertad]

17. Gives new meaning to "house of cards".

[Liberal_in_LA]

20. anyone know how this affects Countrywide?

[mountainvue]

23. As far as I know, it doesn't. AHM and Countrywide

are not related. If anything, the loss of yet another player from the market means more business for them.

[Liberal_in_LA]

32. Ok. Thanks.

[judaspriestess]

26. Countrywide is getting super super tight on their

financing. Its almost impossible to get a loan with them. We were using them as a lender but can't get anything done with them so ba-bye.

As far as down payment assistance programs. They helped alot of people. And FHA was still getting their 3% down payment. No matter what the price of the home and as long as it appraised, it just didn't matter who it came from, buyer or seller. A six percent increase if necessary to cover down payment and closing cost would affect a buyers payment about $50.00.

[JHB]

28. AHM's HQ is across the street from my workplace

It's only about three-four stories tall, but I'll keep an eye out for jumpers anyway.

:evilgrin:

[sendero]

30. It is almost impossible..

.... to overestimate the gravity of this situation. We've been assured and assured that the problems were confined to the subprime market, and now there is incontrovertible proof that they are not.

It's going to be a bumpy ride.

[1932]

31. It never made sense that ONLY subprime loans would be a problem.

Is there a magic line between subprime and prime?

No.

Subprime may be the canary in the cole mine, but the miners who couldn't get out were obviously going to be next.

In fact, that the media hopped on the categorization "subprime" was a pretty good indication of the fear that this wasn't going to be confined to just those borrowers. The week this story broker, the media wouldn't even use the term "mortgage" -- it was just "subprime". My couldn't they say the mortgage industry was at risk? Because the truth is dangerous for the economy and they need to obfuscate by trying to carve out a group of people they could talk about in a way that made it sound like they were differnt from you and me and that this problem would never creep up toward us.