When the initial public offering of ARM Mortgage Investment was shelved two weeks ago, it caused some risk management problems for sponsor American Residential Mortgage.

American Residential, the La Jolla, Calif.-based mortgage bank, was to have managed ARM Mortgage Investments, a real estate investment trust.

And though Am Res still hopes to pull off the offering, the postponement left the company with about $400 million of mortgages on its hands.

The mortgages, all with adjustable rates, were originated over the past several months by American Residential and were to have formed the initial investment assets of the new REIT, according to Judy Berry, chief financial officer of American Residential.

Since ARM Mortgage has no capital right now, American Residential has been faced with the tricky problem of what to do with a lump sum of loans that fluctuate in value every time interest rates move.

After the offering was postponed, Ms. Berry said, "we sold some of the loans."

At issue now is whether the company will hold on to the remainder in hopes of pricing the stock in the near future, or divest the assets to limit risk.

American Residential will make a decision soon, "within a couple of days," said Ms. Berry.

There is no way to know for certain what effect this will have on American Residential's bottom line.

However, since most of the loans were originated since January and since rates have risen sharply since then, it stands to reason that the loans would be sold at a loss, said Gareth Plank, an analyst at Mabon Securities.

"Even ARMs lose value when rates spike," he said.

The loans themselves are mostly a type of adjustable-rate mortgage that floats above the London interbank offered rate. There has been some speculation that since the loans are of a somewhat exotic type, it could prove difficult to get fair market value for them in the secondary markets.

'Conditions Couldn't Have Been Worse'

American Residential took a loss of about $1.3 million on the loans when it marked them to market at the end of the first quarter, according to Ms. Berry.

The public offering was pulled because "market conditions couldn't have been worse," she said, pointing out that moves by the Federal Reserve made investors skittish about interest rate-sensitive stocks.

Despite the delay, American Residential hopes to be able to price the offering.

"We are confident that we can do this sometime before the end of the year," said Ms. Berry.

An offering of 5.5 million shares at between $14 and $16 each had been planned. Underwriters are PaineWebber Inc., Kidder, Peabody & Co., and Salomon Brothers Inc.

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