American Home Mortgage files for bankruptcy

updated 7:30 p.m. ET Aug. 6, 2007

NEW YORK - American Home Mortgage Investment Corp. filed for bankruptcy protection on Monday and two other mortgage lenders said they were not accepting new applications, signs that the worst housing crunch in decades could be widening.

American Home Mortgage, based in Melville, N.Y., and once the nation’s 10th largest mortgage lender, said it fell victim to “extraordinary disruptions” that effectively cut off the funding it needed to make new loans. Falling home prices and a spike in payment defaults scared investors away from mortgage debt, including bonds and other securities backed by home loans.

Houston-based Aegis Mortgage Corp. said it would not accept any more applications and said it could not meet all of its existing funding obligations. Cleveland-based National City Corp. also stopped taking applications for new loans and lines of credit in its wholesale home equity unit.

“We are in a market now where value is a fleeting concept,” JMP Securities analyst Steven C. DeLaney said of the vanishing appetite among investors for the bundles of mortgage debt that had been the funding lifeline for the industry. “The market today has just basically shut down.”

As the market for mortgage debt suddenly shrinks, people trying to borrow for home purchases or refinance their existing homes are facing tougher terms and stricter standards — and are much more likely to be turned down than just a few months ago, when the industry was pushing loans even at buyers with bad credit histories.

American Home Mortgage filed for Chapter 11 bankruptcy protection in Wilmington, Del. Its 40 biggest creditors include virtually all the major names of Wall Street. At the top of the list are Deutsche Bank AG and JPMorgan Chase & Co.

Deutsche Bank had no comment. JPMorgan Chase declined to comment on its exposure.

In a statement, American Home said it lined up $50 million in debtor-in-possession financing from WL Ross & Co. LLC. WL Ross is led by billionaire Wilbur L. Ross Jr., who has rescued failed companies in the steel, coal and textile industries.

The company hired Stephen F. Cooper to be chief restructuring officer. Cooper was also chief restructuring officer for Enron Corp.

While bankrupt lenders carry ominous implications for the housing market and for consumers hoping to take out mortgages, they do not affect the status of mortgage loans already on the books.

A bankrupt lender simply means financial institutions will likely buy the company’s loans as its assets are auctioned off; it does not imperil people’s homes.

Likewise, Ganesh Rathnam, an analyst who tracks investment banks for Morningstar, said he does not expect Wall Street to sustain much damage from American Home, which has less than $20 billion in liabilities.

“The Wall Street banks will go and look for their next source of income, whatever that is,” he said. “It is not going to bankrupt them.”

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