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Appreciating Mortgage Risk: AHM Doesn’t Name A Stadium After Itself

But there are a lot of unhappy spectators…and margin calls that couldn’t be made. [1]

One of the long standing jokes about corporate sponsors of sport stadiums is that it can mean their time is up [2]. Enron and Ameriquest are recent examples. AHM didn’t need a stadium to implode. They only needed investors to have a change of heart [3] about risk, and the stock sank like a stone.

American Home Mortgage [4], one of the top ten mortgage originators in the US, has experienced a major meltdown. Here’s the 8K disclosure statement [5] (via Floyd Norris’ Blog [6]) that documents the meltdown of AHM.

A friend of mine was in charge of mortgage quality assurance for a local lender for many years. He was one of the few good guys in the rapidly thinning field of experts who review appraisals submitted for mortgages. That bank was purchased a few years ago and he was downsized. He went AHM in order to do the same thing there. Apparently he was brought in too late.

For the past week, AHM has dominated the financial market news [7] with this implosion. Subprime was perhaps the initiator of the problem but not the straw that broke the proverbial camel’s back.

In the case of the secondary mortgage market investors who would buy mortgage from AHM, there was a disconnect between the level of quality of the collateral and the price investors were willing to pay. It was below what AHM could afford.

As a result, $800 million in mortgages were left unfunded [8] at the closing table and trading was frozen [1].

We saw the whole lending culture change over the past decade to the point where I have long maintained that appraisals were commoditized to the point where a form was all that was needed for the loan file. I’d guess we will be reading about many, many other instances of this in the near future. I wonder how many CFO’s of mortgage companies are sweating it out right now, like the CFO of AHM did.

Let the lawsuits begin [9]