Mortgage Company Halts Alt-A Loans, Warns of Subprime Mortgage Problems
The mortgage company American Home Mortgage Investment Corp. cut its first-quarter and full-year profit forecast by more than 25% Friday after being hit by problems in the secondary market for home loans and mortgage-backed securities.
The company also said that it’s stopped offering some types of so-called Alt-A mortgages because of the high cost of delinquencies on those loans. The warning suggests that problems in the subprime-mortgage business have begun spreading to other parts of the home-loan industry.
American Home said that first-quarter earnings will be roughly 40 cents to 60 cents a share, down from its previous view of $1.11 to $1.17 a share. For 2007, it forecast earnings of $3.75 to $4.25 a share, compared with the $5.40 to $5.70 a share it previously predicted.
“During March, conditions in the secondary-mortgage and mortgage-securities markets changed sharply,” said Michael Strauss, American Home’s chief executive, in a statement. “While the market may recover … our working assumption must be that current market conditions will persist.”
American Home also indicated that it continues to be affected by the high cost of delinquencies, especially on Alt-A mortgages, and that it’s been forced to repurchase some of these loans.
The company announced that it’s stopped offering certain types of Alt-A home loans that have been particularly prone to rising delinquencies and repurchases. Those are loans where the homeowner borrows a relatively high portion of the value of a property and simply states an income, rather than documenting it.
American Home also said that it plans to raise the interest rates charged on home mortgages.
Subprime-mortgage originators such as New Century Financial, NovaStar Financial Inc. and Accredited Home Lenders Holding Co. have been hit hard this year by rising delinquencies and foreclosures. Subprime loans are offered to poorer borrowers with blemished credit records, so many experts expected trouble in this corner of the mortgage market once house prices stopped rising quickly.
But American Home isn’t a subprime lender.
In early March, the company issued a statement to clear up any “confusion” about the type of loans it offers. Most are adjustable-rate mortgages and so-called Alt-A loans, which often require less documentation. American Home even offers conventional fixed-rate home loans. Subprime mortgage are less than 1% of its total loan portfolio.
Still, American Home said Friday that earnings will be lower because investors in the secondary-mortgage market and the market for mortgage-backed securities (or MBS) offered to buy its loans at “materially lower” prices.
Lower prices for AA-, A-, BBB-rated MBS and riskier bits known as residual-mortgage securities also triggered losses in American Home’s investment portfolio, the lender added.
Alistair Barr is a reporter for MarketWatch in San Francisco.