Weak Reserves Lead to Cease-and-Desist at AmTrust
(Update 1 reflects a media statement from AmTrust.) The Office of Thrift Supervision has issued a cease-and-desist order against Cleveland-based AmTrust Financial Corp. (AFNL) and AmTrust Bank, one of the nation's largest mortgage originators. The order prohibits the bank from making any new loans or issuing new lines of credit for speculative residential construction, land acquisition or development. The bank has also been restricted from granting any new reduced- or no-documentation loans, but it may continue extending, refinancing or modifying existing loans so long as these actions don't require granting new funds. AmTrust ranked as the nation's 20th-largest residential mortgage originator during 2007, according to industry publication Inside Mortgage Finance. The action is based on an August examination of the bank through which the OTS discovered "unsafe and unsound banking practices, including operating with an unsafe level of adversely classified assets relative to existing core capital," according the order dated Nov. 19. So-called unsafe levels of capital led to the requirement that the bank maintain a core capital ratio of at least 7 percent and a total risk-based capital ratio of at least 12 percent beginning Dec. 31. According to bank officials, bad loans prompted the OTS action. “It’s all about capital,” spokeswoman Donna Winfield told Crain's Cleveland Business. “Our liquidity has never been stronger.” The bank will, however, cooperate with the order and its stipulations. “We are working to implement a sound going-forward business plan to strengthen the bank’s capital ratios and increase our earnings potential," Winfield told HousingWire. "This plan includes efforts to raise additional capital from external sources as well as conserve capital by carefully managing our business, which unfortunately will include some reductions-in-force." AmTrust by Sunday must have a revised business plan to include defined capital preservation strategies, limits on high-risk lending practices, detailed strategies to improve and sustain earnings and to adjust earnings forecasts based on operating results, economic conditions and credit quality inherent in the loan portfolio. The new plan must also include detailed quarterly balance sheets and income statements for a rolling three-year period beginning Jan. 1, 2009. AmTrust has been ordered to implement the new business plan within 10 days of approval from an OTS regional director. The bank will also face scrutiny of its projected operating results compared with actual quarterly results. The order requires the bank's board of directors to "determine any material deviations" and report them to the regional director within 30 days of the quarter's close. View a PDF of the order. Write to Diana Golobay at firstname.lastname@example.org. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.