I just read a post by Kurt Jackson called, "AHM The story behind the story".  In it he explains what might be happening at American Home Mortgage. 

Well, I can't say that I know specifically what happened at AHM, but it sounds like, from what Mr. Jackson had said, that they didn't buy a sizable enough "Forward commitment".  In essence, a forward commitment is the wholesaler's way of "locking-in" the interest rates that they are going to deliver to the market.

I've never done secondary marketing, but did spend a day in the secondary marketing department at a large wholesale lender.  These are the guys who commit to funding a certain amount of mortgages at a certain price.  They have to second guess how much production their company is going to have and where the bond markets are going.  They then "lock-in" that amount of money or if they think that rates are going to be going down, they don't buy that much coverage.

From what I saw that day, secondary marketing has got to be one of the hardest jobs in mortgage banking!  For one, they have to second guess how many loans are actually going to fund that are locked in by their loan officers and brokers.  ---This is one of the reasons that the practice that some loan officers/mortgage companies have of locking a loan at a particular investor and then not delivering it if rates go down (because they ended up selling the loan to a different investor when they saw that they could make more money ) sucks and makes wholesalers angry.---

Secondly, they have to second guess where interest rates are going to be.  If they guess that rates are going to go up and buy a lot of coverage and interest rates go down (see above about brokers not delivering loans), they still have to pay for that coverage.

If they guess that rates are going to be going down and instead they go up, well they committed to delivering these mortgages.  If they don't, they have to make up the difference.  This is basically what Kurt Jackson was describing.

As I mentioned, this is an aspect of the market that I'm not terribly well educated in, but this is how I understand it to be.  I do know that the investors have various hedging tools available to them to protect themselves in the event that they guess wrong and I don't know why AHM didn't hedge their bets or if they did, what went wrong.  

My guess is that there is more to the story that meets the eye right now and I'm sure that there are a lot more stories out there.  The longer this downturn in the industry goes on, the more we're going to hear about them.

If there is somebody out there who is more familiar with the AHM story or in secondary marketing in general, I'd love to hear from you.

Bob Mitchell

ValueList Real Estate Services, Inc.