Back in the heady days of mid-1998, Amresco Inc. agreed to buy a small mortgage company with a controversial history. As it turns out, Amresco's own performance has proved problematic.

When Amresco agreed to pay $70 million to $105 million over three years for Mortgage Investors Corp. of St. Petersburg, Fla., its stock was trading at about $30 a share, giving it a market capitalization well over $1 billion -- plenty of currency to follow through on such a deal.

A year and a half later, Amresco's market cap has plummeted to $64 million, forcing the Dallas lender to scramble to undo the deal, which required it to issue $86 million of its own stock to Mortgage Investors' original shareholders this year.

In one of the starkest illustrations yet of the trouble that has befallen specialty finance companies like Amresco since 1998, the company was faced with turning over majority ownership to Mortgage Investors' executives and shareholders. Last week Amresco shares hit a new low of $1. At midday Tuesday they were trading at about $1.3125, down 6.67% from Friday's close.

At the current market price, $86 million of Amresco stock would give Mortgage Investors' original shareholders a 57% stake in Amresco.

Mortgage Investors last week gave Amresco the option of selling 100% of Mortgage Investors stock back to the original owners for $25 million. If Amresco exercises the option before April 30, it will be relieved of its obligation to issue shares.

Amresco did not return calls seeking comment, but it appears to be ready to accept the offer. In a statement, the company said common stock issued under the original purchase obligation "would be dilutive based on Amresco's current share price."

"Given the current market price of Amresco's stock, one could understand why the company would not particularly want to issue new stock at this time," said Ryan O'Connell, an analyst at Moody's Investors Service.

In the July 1998 deal, Amresco agreed to pay $70 million to $105 million -- depending on how much Mortgage Investors earned -- over three years, most of it in stock.

Last April, Amresco, its stock down to the $6 to $7 range, amended the deal to buy itself some time. It agreed to pay Mortgage Investors the maximum amount, in exchange for a postponement until March 2000 of the payment of a portion of the stock, which had originally been scheduled for April 30, 1999.

But Amresco's stock price kept falling, and it had to find a way out.

Meanwhile Mortgage Investors' fortunes were taking a turn for the worse.

The lender specializes in streamlined refinancings of loans insured by the Department of Veterans Affairs. It drew publicity in 1995 for charging unusually high fees for refinancing veterans' loans. The department subsequently capped such fees at 2 points.

Initially, the unit was "a good generator of cash flow" for Amresco, as falling interest rates in late 1998 prompted a surge of refinancings, one analyst said. But last spring rates started climbing, eliminating the impetus for veterans, or any homeowners, to refinance.

Mortgage Investors is "totally dependent on interest rates," said a source familiar with Amresco's business lines.

It didn't help when the VA last May issued another set of rules that, among other measures, forbade automatic refinancing of loans that were more than 30 days past due. Previously, the department had allowed loans that were up to 90 days delinquent to be refinanced without its approval.

Mortgage Investors has sued to block that rule, contending that it has hurt its business by eliminating the pool of eligible refinancing candidates, said Erica Lewis, a loan specialist at the Department of Veterans Affairs.

William Edwards, Mortgage Investors' chief executive and chief former stockholder, did not return a phone call seeking comment for this article. Ms. Lewis said she does not believe the tighter rules are responsible for lower volumes, noting that the rise in interest rates has had an industrywide impact.

Whatever the reason, Mortgage Investors' performance suffered last year. According to a filing with the Securities and Exchange Commission, the unit lost $12.7 million for Amresco in the first nine months of 1999, compared with a $7.9 million profit in the same period a year earlier.

"They bought that thing at the absolute top of the market," said an official at one of Amresco's creditor banks, speaking on condition of anonymity. "Within six months [Mortgage Investors] was losing money on a monthly basis."

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