American Home Mortgage Seeks Bankruptcy Protection

American Home Mortgage became the second-biggest home loan lender to file for bankruptcy protection this year, adding to signs that late payments have spread to homeowners with good credit records.

The company sought federal bankruptcy protection from creditors in Wilmington, Delaware, saying it had assets of more than $100 million and debts of more than $100 million owed to more than 100,000 creditors.

The filing comes after American Home Mortgage announced August 2 it would halt operations and slash staff.

Bankers began shutting off credit to American Home, leaving the lender unable to fund at least $750 million in home loans and stranding thousands of borrowers.

Before it quit lending, Melville, New York mortgage company specialized in mortgages for people who fall just short of top credit scores.

Shares of U.S. home lenders have slumped as defaults spilled over from “subprime” borrowers with the worst repayment records to those with more reliable payment histories.

More than half a dozen rivals have declared bankruptcy this year.

A Chapter 11 bankruptcy filing like the one filed by American Home Mortgage may allow a company to stay in business and protects it from claims by creditors while it tries to work out a plan to pay its bills.

American Home, founded in 1988 by Chief Executive Officer Michael Strauss, employed about 7,400 people at the end of 2006, according to Bloomberg data. The company said last week that number will be reduced to 750.

The company originated almost $60 billion in bad credit mortgages last year and issued $16.7 billion in the first quarter of 2007.

American Home said July 28 that it needs a “better understanding” of how it will be affected by weak home mortgage markets. It slashed the quarterly common stock dividend by 38 percent in April to 70 cents.

Falling bids by investment banks that buy mortgages and securities backed by home loans forced American Home to write down the value its holdings.

A drop in value prompted banks that provide credit to demand collateral as a cushion against default. The company had about $837 million of cash as of March 31 and raised more than $200 million selling stock.

American Home specializes in so-called Alt-A mortgage loans, an alternative for A-rated borrowers who can’t satisfy all of the terms for a prime rate mortgage. The company was the 20th-largest Alt-A lender in 2006, according to March data from trade publication Inside Mortgage Finance.

© Source: Bloomberg Media