Mortgage Mess: Now It's Prime Time

Business Week reports:

When American Home Mortgage Investment (AHM) warned of lower earnings after taking hits on higher quality debt, the real estate investment trust's announcement fanned fears about the mortgage industry on Monday Apr. 9. So far investors have worried for weeks mainly about mortgage companies that have exposure to the riskiest borrowers, but the pain could be spreading.

The Melville (N.Y.)-based American Home originates and resells mainly U.S. residential mortgages that are securitized, or backed with guarantees like collateral. Explaining that debt values weakened by an "unusually large" amount during the first quarter, American Home said on Apr. 6 that it had to write down, or take a loss, on around $484 million of securities rated AA, A, or BBB. Those rating categories typically indicate that borrowers have a good chance of repaying their debts.

As a result American Home now thinks it may earn between 40 cents and 60 cents per share during the first quarter and $3.75 to $4.25 per share during 2007. Analysts surveyed by Thomson Financial had expected $1.06 per share during the quarter ended March 2007 and $5.00 per share during the full year 2007.

"While the market may recover ... our working assumption must be that current market conditions will persist and that our gain on sale margins will not recover through the balance of the year," CEO Michael Strauss said in a press release Apr. 6.

Strauss' company is fighting such losses by raising the interest rates it charges consumers, however.

It appears there problems outside the sub-prime market.