July 30, 2007

American Home Mortgage Halts Trading Pending News: Market Cap Down $221+ Million Over the Weekend. SoCal Still in Wonderland.

According to CNN, American Home Mortgage (AHM) is another company facing issues regarding the subprime fall out:

“NEW YORK (Reuters) -- American Home Mortgage Investment Corp. shares sank on Monday after the home loan provider announced "major" writedowns, delayed a dividend and said lenders were demanding it put up more cash.

Shares of American Home were down 39 percent, falling in pre-market trading to $6.39 from Friday's close of $10.47. On Friday the shares hit their lowest level since April 2003. Trading on Monday was halted for news pending.”

The beating AHM is taking is predominantly on their announcement to delay dividends on their stock. Guess when they announced this. Late Friday! Since AHM knew that if the announcement came any earlier, it would take a beat down like any of the housing related stocks last week. So they let it fester over the weekend and as of this posting, trading has halted on further “news.” But how much market cap was lost over the weekend? We always hear that massive corrections cannot occur over night but really in terms of money, how much was lost? Well let us take a look at some details regarding the company:

American Home Mortgage

Shares Outstanding: 54.28M

Price Per Share on Friday: $10.47

Current Pre-Market Share Price: $6.39

Friday Market Cap: $568,290,000

Pre-Market Cap: $346,849,000

Down in Two Days: $221,441,000

Here’s the thing. All things real estate can go down fast and dirty. Keep in mind this is only one example of many companies. The fact of the matter here is that this company has a market cap of half a billion dollars and is rather large. The disturbing part, as highlighted by the CNN article is you have a company as of the end of March, that had $4.01 billion in “warehouse” credit lines. It is becoming apparent that the subprime contagion is spreading all across the housing sectors.

In reality companies are valued on multiple fronts including their potential earnings or cash flow. For example, say you and I own a company with $40,000 in assets. We decide that we will only have two owners (shareholders) and have two shares outstanding. Therefore each of us would have a “stock” of $20,000 in the company assuming we have $0 in liabilities. Say we expect to earn $100,000 next year in revenue. Obviously the share price of $20,000 will jump up because of the projected earning potential. But what happens should we have negative cash flow? That is what is occurring with these companies but on a larger scale. Of course this is a rudimentary explanation but many of these companies are in similar situations like home owners facing massive resets yet have negative cash flow that they didn’t expect. In addition, your underlying asset gets impacted by negative growth potential. The market is calling it liquidity issues but ultimately it boils down to being unable to pay your bills.

Issues on the Home Front

And then we have stories like this one submitted by a reader of a Ventura Country couple trying to sell their home at bubblicious prices. From the Ventura County Star:

“The Conroys might have aimed high at a time when the market is soft. The most comparable home with similar square footage in the Golf Course Villas had an asking price of $759,000 and sold for $773,500 in October, said Joe Virnig, president of Ventura County Coastal Association of Realtors. He said he believes the same pricing strategy would have been successful for the Conroys.

Doughtery thinks the weekend's event will likely expedite the sale, but not without a cost.

"I think if you want to unload a property for less than the actual value, then this is the way to go," he said.

Still, Virnig warns there must be a catch to this type of marketing tactic, and calls it a "gimmick" to get people to see the house. It's the first time he's seen such a strategy in Ventura County.

"I have trouble believing they'd honor the $594,000 price if that's all they get," he said. "I see all kinds of problems with real estate agents adopting these tactics. I'm not about to adopt it — it's fraught with risk. Until the inspection period is up, it would be difficult to be sure that you didn't end up buying a problem."

You should really examine the entire article but the fact of the matter is we have people stuck on housing bubble yesteryear prices. They are asking $849,000 when a comparable home sold last October for $773,500. Even the fact that they are "entertaining" offers above $594,000, they are still in the belief that they can yield top prices from their rhetoric. In addition, I’m not sure if they are aware, we are in full out suprime and Alt-A meltdown mode therefore limiting access to whacky LaLa land credit. So the pool of buyers is limited in comparison to October of last year. In fact, standards didn’t get tighter until Q1 of this year. So they may look at the $773,500 price and laugh at it, but they’d be lucky to even get that. And the scary part of the article is that there are many folks still looking to jump into the game. Thankfully, I’m sure many of these would be buyers are having issues getting mortgages since they probably don’t have a sufficient down payment and Wall Street is done with the creative financing game. Even in today’s absurd market, all you need is 5 to 10 percent to get top notch mortgage products and rates. Yet with our negative savings rate, this is obviously too much to ask.

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Tyrone said...

How do you go from giving out a dividend, to landing the toilet in the span of a few days??? Amazing!

Implode-o-Meter hasn't added them to the list... yet. Tomorrow's another day. :)

Steve said...

Not sure where the data would come from, but it would be interesting to see a matrix of income levels mapped to mortgage products and then mapped to the income levels of an area.

Now that lending standards are becoming more real, a $894K house must have a very small percentage of families that could even qualify, let alone are in the market for a new home in a particular area.

Also I would wager that a family who can qualify for $894K under normal lending standards is pretty smart with their money and will expect more than a Real Home of Genius.

So if I was a real estate agent and someone wanted me to list a home at $894, I could just tell them "there are 6 people in the area that can afford your home.. I called them.. they aren't interested.. How about you drop to $794K and I'll call the 10 people that could swing that payment?"

Pop goes the bubble...

Chris said...

Hey Doc, great site.

I've been following what is happening in So. Cal. loosely because I have a few cousins living in the Fresno area. But, you have certainly put in a new data based light.

For years living in Dallas, TX I've been envious of the equity gains that investors are making in the Cal & the S. West compared to the meager annual appreciation we've seen here.

However, in light of what I've been reading I am really happy that my investments have had modest growth and solid positive cash flow. My biggest concern is that we are seeing many not so savvy “investors” moving into some of the suburbs and driving the markets.

Again, thanks for the site. It’s great to see something that is driven by data rather than by emotions.

Tyrone said...

And here's what happens in the span of a couple of months.

May 2, 2007
1) http://tinyurl.com/29llqn
The investors: How to get rich trading "idiot" loans
The housing boom was good to John Devaney. Really good. He owns a Rolls-Royce, a Gulfstream Jet, a 12,000-square-foot mansion in Key Biscayne and a 143-foot yacht, as well as a few Renoirs and a valuable 1823 reproduction of the Declaration of Independence.

Option ARMs? Devaney loves 'em. "The consumer has to be an idiot to take on those loans," he says. "But it has been one of our best-performing investments."

July 30, 2007
2) http://tinyurl.com/2qxf2p
Fund manager's fun sailing away
John Devaney, the CEO of United Capital Markets, a fund that specializes in buying and selling bonds that are backed by the mortgage payments, particularly adjustable rate subprime mortgages, has put his 142-foot yacht "Positive Carry" up for sale, according to a yacht broker's Web site.

Wall Street has to an idiot to think that consumers can pay back those loans (Option ARMs) and take on those mortgage-backed securities BASED on those loans.

Rob Dawg said...

Seeing as I live on the next golf course over I think you need to understand a few things. $800k is low end around here. More like a lot price. These people are stuck because everyone who can afford one of these already has two of them.

I'll answer any questions as the house is about 3 minutes away.

Dr Housing Bubble said...


Trading is still on hold. IndyMac announced profits and it isn't looking so hot. But it seems the markets are already expecting Alt-A lenders to go down. Probably the reason the market is holding up. Now if FNM and FRE, then we might see some movement.


Data is readily available for California in terms of mortgage products. In August of 2005 70+ percent of loans originated in California were adjustable. Tack this on with local income information and you may have a mortgage matrix. I haven't seen a chart fusing the two.


Appreciate the comment. The benefit of being in a place like Dallas is housing is fairly priced. Instead of worrying like most people in overpriced areas, you can expect continued modest appreciation or if the worst hits, maybe a slight decline.

Easy come easy go here in the west.

@rob dawg,

If you can keep us posted on the property that would be great. No doubt the place looks nice. From the article they seemed poised on moving out of the state and selling their home at a peak price. Like you've stated, most folks that own bought long ago. I'd be curious to see what their place eventually sells for (or if they decide to stay put).

Anonymous said...

I don't read much about how a lot of people who buy expensive houses are in the real estate field themselves. I have some friends in the business (mortgages, title insurance, Real Estate agent, builder and appraiser) The Mortgage Broker, Real Estate Agent and Builder said that they are hurting right now. The Apprasier said he is busy and I never asked the person in Title Insurance. All of them have done unbelievably well for themselves over the last few years. I wonder how much they will be affected by this. I think the RE Agent is starting to look for another job. I think everyone else is going to wait it out.

Rob Dawg said...

Based on the rent vs. own formula I ultimately expect them to go for the high $400s or about what their original sales prices were new $220-$250k adjusted for inflation.

Dr Housing Bubble said...


Trading opened and AHM is getting creamed:

Down 89% and trading at 1.15. Total market cap is now $63.5 Million. Big difference from the $500+ million just last week.

This on news that it will be unable to fund loans. Credit crunch.

Samuel Adams said...

AHM ended up in the tank.

Check out ABC on the loanofficersforum.

[I had 4 loans signed and pre funded. Today i found out that ABC is up for sale to the biggest offer. Thats just straight up bull****. They reversed all the wires that were supposed to go out today. I dont know how banks can just screw borrowers out of there loans. I have four very angry borrowers now with 30 day lates. I would never ever ever use ABC for anything ever again.]

[We have a loan with ABC that was SUPPOSED to fund yesterday and the wire never got to the title company. We called ABC last night after being on hold for almost an hour a lady from the funding department got on the phone. She said she did not know if the loan was going to fund because she didn't even know if she would have a job tommorrow!!!! She then asked if we could say a prayer for her. It really is a sad situation for the company and everyone who has loans with them that are supposed to fund.]

Full load of commentary from pissed off loan folks here: