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American Home Mortgage's new chapter opens in bankruptcy court

By Daniel Wagner | daniel.wagner@newsday.com

9:58 AM EDT, August 7, 2007

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American Home Mortgage's new chapter starts Tuesday in bankruptcy court in Wilmington, Del.

Starting a process that lawyers and other experts consider complicated and likely to be lengthy, an opening bankruptcy hearing is scheduled for 3 p.m. Tuesday. The court is expected to review and accept the motion for Chapter 11 bankruptcy protection.

The judge will consider "first-day" motions intended to help the company continue operations during bankruptcy proceedings. In American Home's case, these include requests for permission to continue paying utilities, liability insurance, the wages of about 1,000 remaining employees and the terms of its financing with WL Ross & Co. Llc.

After its spectacular collapse, American Home Mortgage Investment Corp. is officially bankrupt, a victim of tightening credit markets and the decreasing value of its loan portfolio.

The company filed papers for Chapter 11 protection Monday morning in U.S. Bankruptcy Court.

"It is unfortunate that American Home Mortgage, a company we built into a highly successful business, experienced this sudden reversal of its fortunes due to the unanticipated and rather sudden deteriorations in the secondary and national real estate markets," founder and chief executive officer Michael Strauss said in a news release.

The release said the company will use bankruptcy to maximize the value of its assets and operation and ensure "an orderly wind down of the company" -- a clear indication, analysts said, of American Home's intention to cease all operations.

Specifically, the company hopes to sell off all of its assets -- including its portfolio of loans and mortgage-related securities -- at auction. Weeks ago, analysts predicted this situation, suggesting that lenders and other investors might pick up the loans for pennies on the dollar.

Following the bankruptcy news, the New York Stock Exchange commenced the process of delisting of all of American Home's common and preferred shares. The stock ended its trading at 44 cents. As recently as December, the stock traded at $36.

The company, which went from unexpectedly delaying a dividend on July 27 to shuttering most operations a week later, intends to take $50 million in financing from financier Wilbur Ross Jr's company WL Ross & Co. Llc. Ross has made a fortune in devalued industries like steel, coal and textiles.

Ross' financing, once approved, will place him first in line to collect whatever proceeds American Home manages to squeeze from its assets, which court papers said were heavily marked down in recent weeks.

Another player in the company's future will be Stephen Cooper, who served as Enron's interim chief executive officer during that company's restructuring. Cooper is slated to be American Home's management and restructuring consultant, and will manage its day-to-day business. But all important decisions will have to be approved by the court.

The U.S. Trustee - the Department of Justice's bankruptcy arm - will approve a committee to represent the interests of the creditors throughout the liquidation of American Home's hundreds of branches and billions of dollars in mortgage-related securities.

In accordance with a court- and committee-approved plan, the company's leadership and consultants will distribute the proceeds of its liquidation to creditors.

American Home said it has over 100,000 creditors, and Monday's release said the company expects "there will be no shareholder equity remaining." The company's market capitalization was $1.4 billion at the end of 2006.

The bankruptcy filing listed assets of $20.6 billion and debts of $19.3 billion -- but those figures came from the quarter ending March 31, before write-downs on the company's portfolio led lenders to demand repayment, ultimately bankrupting the company.

Court papers revealed that the company had been engaged in "active, around-the-clock negotiations" for a week starting July 27 with at least four potential purchasers of its loan origination divisions, but said none of those transactions had panned out.

The company's top creditors read like a who's who of Wall Street: Deutsche Bank, JPMorgan Chase, Bank of America and Citigroup are in the top 11.

Because American Home was an intricately-structured company -- a real estate investment trust with both taxable and non-taxable subsidiaries -- its bankruptcy proceedings could be complex and drawn-out, said Gerard Luckman, a partner with Silverman Perlstein & Acampora Llp in Jericho.

"Even if the process goes quickly, you still have a lot of administration and a lot of investigation that could take years to go through, to see what actually happened at the company," he said.

American Home is the first major lender serving high-credit and near-prime borrowers to see such problems, and many market-watchers see it as a harbringer of coming difficulties in the wider mortgage industry.