|  | Bloomberg-Clip - (BLOOM-Clip) Apr. 09, 2007. 08:00 AM EST Cuts Dividend to $0.70 from $1.12 |
By Will Edwards and Jody Shenn
April 9 (Bloomberg) -- American Home Mortgage Investment Corp. shares fell as much as 19 percent after the company's loans attracted few bids from investors, fueling concern that losses at subprime lenders are spreading to higher-rated credits.
First-quarter profit will come in at 40 cents to 60 cents a share, the Melville, New York-based company said in a statement on April 6. It was expected to earn $1.06, the average estimate of eight analysts compiled by Bloomberg. The quarterly dividend was cut to 70 cents from $1.12. Earnings for 2007 will probably be $3.75 to $4.25 a share, the company said, instead of the $5 analysts predicted in the Bloomberg survey.
American Home reported few bids and lower-than-expected prices for its Alt-A mortgages, granted to people with strong credit ratings who don't meet all the criteria for conventional loans. A week earlier, M&T Bank Corp., partly owned by Warren Buffett's Berkshire Hathaway Inc., cut its forecast because of weak demand and higher defaults on Alt-A mortgages. M&T said investor concern about the increase in bad subprime loans is hurting prices for less-risky mortgages.
``There's no question the credit problems we've seen in subprime are blending into Alt-A,'' said Fox-Pitt Kelton Inc. analyst Matthew Howlett in an interview. ``It's reflective of the poor underwriting that has gone on in this sector.''
American Home's stock declined $4.29, or 17 percent, to $21.55 at 12:33 p.m. in New York Stock Exchange composite trading. The shares had dropped 26 percent this year before today. American Home is a real estate investment trust or REIT that originates home loans and invests in mortgage securities.
Loans Sour
The lender said it had to write down its portfolio of low- investment-grade and residual securities to reflect current market values, and boost reserves to pay for Alt-A loans that it had to repurchase from investors because borrowers didn't make their payments.
Shares of mortgage lenders have dropped this year as defaults on subprime loans rose to a four-year high. Companies that offer Alt-A mortgages, a category considered at less risk of default, have said in the past month that investors are mistaking them for subprime lenders and unfairly punishing their shares.
Among rival Alt-A lenders, IndyMac Bancorp Inc. fell 1.7 percent today and Impac Mortgage Holdings Inc. fell 4.3 percent.
Subprime loans are made to people with weak credit records or high debts and are considered among the most likely to default. Alt-A mortgages, short for Alternative A, include loans that use less proof of borrowers' income or assets.
Crossing the Barrier
More than 40 lenders have halted operations, gone bankrupt or sought buyers as defaults on subprime mortgages surged to four-year highs in the final quarter of last year, according to Bloomberg data.
``Poor lending standards have crossed this magical 660 FICO band,'' Howlett said, referring to the scoring system that lenders use to judge a person's credit record. Scores higher than 660 have been considered strong. ``We're going to see more Alt-A loans perform badly because they're not traditional Alt-A loans. They're subprime.''
In early March, Wall Street firms including Bear Stearns Cos. and Goldman Sachs Group curtailed purchases of Alt-A mortgages with down payments of less than 5 percent. The firms package mortgages into bonds, and investors that buy the securities were demanding more yield to offset the risks.
Risk Costs More
The extra yield that investors typically demand to own BBB rated bonds backed by 30-year Alt-A loans rose from 3.10 percentage points over Treasuries with similar maturities in late January to 3.50 percentage points in late March, according to New York-based Bear Stearns, the top mortgage-bond underwriter.
Bear Stearns said last month the surge of defaults in subprime home loans won't spread to other parts of the mortgage market, and IndyMac said losses from Alt-A customers industrywide are far below subprime defaults. Regulators including Federal Reserve Chairman Ben Bernanke said they don't see any ``spillover'' of defaults into safer mortgages.
Subprime home loans often come with adjustable interest rates that are discounted in the early years and then rise sharply. Some borrowers who planned on refinancing to avoid the added costs now can't qualify because the price of their home has fallen, contributing to higher defaults.
``If we have a continued house-price decline, Alt-A will be more affected'' than subprime mortgages, said Howard Hill, a managing director in Springfield, Massachusetts at Babson Capital Management LLC. Hill said Alt-A lenders were more likely to combine low documentation and low down payments, and more likely to have extended mortgages to speculators, while offering less protection for bondholders.
Layers
Such layering of risks is ``two to four times as common in Alt-A deals as in subprime deals,'' Hill said. His unit of MassMutual Financial Group manages about $30 billion of mortgage- and asset-backed bonds, and Hill also oversees investments in the stocks of mortgage-lending REITs, including American Home and Kansas City, Missouri-based NovaStar Financial Inc.
Some Alt-A loans require no down payment or proof of income, and they're often used to buy a second home or rental unit as well as speculation. Also falling into the category are interest- only loans and ``option'' adjustable-rate mortgages, whose minimum payments can fail to cover the interest owed.
Mortgages are categorized as Alt-A when they fall just short of the typical standards of Fannie Mae and Freddie Mac, the two largest U.S. sources of mortgage money. Some lenders require a credit score of more than 700 for an Alt-A loan, while others will accept a score as low as 620. The maximum score is 850.
To contact the reporters on this story: Will Edwards in Charlotte, North Carolina, at wiedwards@bloomberg.net ; Jody Shenn in New York at jshenn@bloomberg.net .
Last Updated: April 9, 2007 13:03 EDT
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