Home Equity: 2 More Subprime Lenders Caught in Liquidity Crunch As

The liquidity crisis continues to claim casualties in specialty mortgage lending.

Late Monday, Aames Financial of Los Angeles indicated that it is suffering severe liquidity problems, and Amresco Inc. of Dallas said it would shut down its home equity loan securitization unit, putting most of the unit's 129 employees out of work.

Aames said its earnings in the last quarter were 97% lower than in the same period a year earlier. "If the company cannot obtain additional credit lines or additional equity capital in 30 days, it may have to engage in extraordinary transactions to provide the liquidity necessary to operate, albeit on a much smaller scale," the release said.

Amresco will continue to originate and service subprime mortgages. A spokeswoman said the company's intent is to sell its loans as whole loans from now on.

Aames said it is in talks with a private equity fund about a possible $100 million equity investment, but did not expect to consummate the deal in time to fix its short-term liquidity requirements.

Aames also said it had a commitment to sell $500 million of whole loans. It did not disclose the buyer, but market sources said it is EquiCredit Corp. of Jacksonville, Fla. Aames officials were not available for comment, and an EquiCredit spokeswoman would only say Aames is among the firms with which it has relationships.

Aames and other lenders funded their loans by repackaging them as bonds and selling them to institutional investors. But in late August, turmoil in Russia made investors wary of any bonds other than U.S. Treasury securities.

Liquidity pressures have prompted Aames and other companies to try to sell their production in the whole loan market, creating an oversupply there, allowing purchasers of whole loans to pay lower prices and tighten underwriting criteria. Aames has found itself forced to tighten its standards and raise the pricing on its loans, which the company said will decrease production.

Selling whole loans is a less profitable funding strategy than securitization, Aames said, and the prices being paid on whole loans are lower than its cost to produce loans, so the company expects to take a loss on its whole loan sales this quarter.

That, combined with weak profits in the last quarter, could violate a minimum-profitability covenant in its main warehouse line. If that line were to be pulled, Aames said, it would have to cease lending, which would "jeopordize the company's ability to continue to operate as a going concern."

In January of this year Aames said it would abandon securitization. It did not. Market sources said the company continued to securitize its loans in order to make itself more attractive to potential buyers.

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