American Home: Which Way is Up?

American Home Mortgage Investment Corp. released its first-quarter earnings report today, which was pretty much what any seasoned market observer would have expected: an operating loss, downward revision of yearly earnings outcomes, and a message that things are getting better in April than they were in March. This little tidbit, however, caught my eye:

Michael Strauss, American Home’s Chief Executive Officer commented, “As has been well publicized, the first quarter was a difficult period for mortgage lenders….also, during the first quarter our company set aside a record level of reserves for delinquency related charges including $60.5 million of reserving associated with our loans held for sale. This high level of reserving caused our gain on sale margin net of loans held for sale delinquency reserves to be 0.74% in the first quarter compared to 1.42% in the fourth quarter of 2006….

It looks like reserves for delinquency-related charges drove a lion’s-share of the first quarter loss at American Home, from what I can gather above. So what is it about the loans it originated in the first quarter led the company to believe that it needed to establish a “record level” of loss reserves? We don’t know for sure, since the company didn’t say much about it in its press release. And I’m not alone in being befuddled by all of this — Tanta over at Calculated Risk has her eyebrows furrowed as well:

For reasons I do not fully understand–I am just a mortgage punk, you know–AHM has lowered guidance for the second time in about a month, while it reports that the problems are stabilizing.

The AP highlighted the wrong area of the press release, IMHO, in it’s coverage — although it astutely noted that the company’s bounce in share price this afternoon was because the problems affecting the lender were already largely expected by investors. But the AP also noted this little tidbit:

The lender also issued commentary suggesting a bounceback in the market for mortgage debt. The market appears to be stabilizing, the company said in a statement, and in April more buyers bid for pools of loans.

Perhaps, but what about those loans it expects to go bad for one reason or another? There may be more bids now, for sure, but that wouldn’t entirely explain a massive increase in loan loss reserves — unless the company is expecting a flood of EPDs regardless of trends in the secondary market, or that it is expecting a much larger loss on those foreclosures already in the pipeline due to continuing poor conditions in key housing markets. If the company expects to soon be able to sell those loans that weren’t getting bids in March (i.e. maintains them with a held-for-sale classification) — which by all accounts seems to be the case here — I’m just not sold that the company would need to move its loss reserves up to record levels unless the loans themselves seemed more likely to end up in AHM’s lap.

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