Financial backers that pumped money into the mortgage industry are getting pretty tight with their money. In the following example the banks we refer to are not like your local bank. These banks lend money to a mortgage lender, the mortgage lender funnels that money into mortgage loans, and the mortgage loans act as collateral securing the credit line. Lenders are not normally entitled to demand upfront repayment. A margin call takes place when collateral securing a loan loses its value. When that happens, there is nothing protecting the lender from default by the borrower – in this case the borrower is a mortgage lender – so the lender pulls the plug with a margin call.
We are not talking about one family’s mortgage. In our example we are talking about a large investment bank like Bear Sterns loaning large amounts of capital to a company like AHM (American Home Mortgage). When AHM’s mortgages to individuals start to go bad, AHM’s lender issues a margin call, and cuts off funding entirely if AHM does cannot re-pay their lender. Obviously that puts AHM in a bad spot, and it put some lenders out of business.
American Home Mortgage Investment (nyse: AHM) Corp., a lender based in Melville, N.Y., on Friday and Tuesday disclosed its lenders are forcing margin calls, though it declined to specify the amount.