American Residential Investment Trust Inc., which in April announced that it would shift its business focus to become a mortgage originator, has initiated a stock buyback program.

Executives said they believe the stock is undervalued and that the buyback will let the company purchase up to $1 million of stock in the next few months at a bargain price.

“We believe that the value of the company’s net assets is significantly higher than the recent stock price trading range,” said John M. Robbins, chairman and chief executive officer of American Residential. “A stock repurchase program is especially compelling because the company’s shares are trading at a substantial discount to our book value.”

Nonetheless, American Residential has given investors little to cheer about.

In the past four quarters, it has lost $15.4 million, including a $7.4 million loss in the third quarter. And its stock has not fared much better: Once trading near $17, the shares now languish around $2, down almost 90%.

The bulk of the problems date from April, when the Del Mar, Calif., company said that changes in the mortgage industry had created significant challenges to its business as a real estate investment trust. “A bulk purchase strategy is currently not viable because of the price-to-value relationship on loans,” the company said then. As a REIT, American Residential invested in nonconforming residential mortgage assets.

With its change of focus to origination, the company warned that short-term operating income would suffer as its portfolio shrank without new bulk loan purchases to replenish it. As a mortgage originator, it plans to keep its loans in portfolio.

Despite the current pain American Residential is experiencing, Mr. Robbins said the company has made progress toward its origination goals — and now has the good fortune of entering a much improving mortgage market.

Last week mortgage rates hit 18-month lows, dipping below 7.20%. And more important, refinancing activity has risen precipitously since September. Refinancings made up 37% of total applications last week.

Both factors have helped the profits and stock prices of several mortgage-related companies, including Fannie Mae, Freddie Mac, Countrywide, Radian, and Resource Bancshares Mortgage Group, which have all seen substantial gains in share price since rates peaked in May.

And Mr. Robbins is investing heavily in the business.

“A substantial portion of the company’s cash reserves are being allocated to build and support our origination strategies, which we believe will generate new assets for portfolio investment and provide new sources of revenue,” he said. He added that he believes originating and servicing loans will eventually produce higher profit margins.


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