Subprime Woes Take Center Stage

The subprime mortgage mess has become has the top financial story this summer as many executives head for the beach.

Elizabeth Duke, a nominee to the Federal Reserve Board, told the Senate Banking Committee yesterday that the subprime problems may be just beginning. “Unfortunately, I do have some experience with troubled debt, and that specific issue will probably get worse before it gets better,” said Duke, according to the Reuters news service. Duke is chief operating officer of Suffolk, Va.-based TowneBank.

Duke said that the subprime problems have remained largely contained to that segment of the banking business. 

“I don’t think that subprime issues have impacted the overall economy, the day-to-day functioning of the economy,” said Duke.

Federal Reserve Governor Randall Kroszner gave the banking panel similar testimony. “The real economy doesn’t seem to be affected by this,” said Kroszner.

President Bush nominated Kroszner, Duke, and Larry Klane, president of global financial services at Capital One, to fill three governor slots at the Fed. Kroszner would serve a full 14-year term after completing his current term next year.

The 7,400 employees of American Home Mortgage Investment Corp. in Melville, N.Y., may differ with the conclusions of Kroszner and Duke. The company announced late Thursday it had stopped taking mortgage applications and would cut most of its staff. The company reportedly had only a small exposure to subprime loans.

The big banks that lent American Home Mortgage money started pulling the plug last week, drying up its ability to make loans to home buyers.

Robert Bach, senior vice president at real estate firm Grubb & Ellis, told the Associated Press earlier this week, “The credit disruption has spread to the point where people are reluctant to make loans. What started in subprime mortgage has sort of transferred into other kinds of debt right now.”

After American Home warned investors this week it was having difficulties its stock plummeted from $10.47 on Tuesday to 0.75 cents today.

American Home said it would retain 750 staff to provide banking services to its customers.

Accredited Home Lenders Holding Co., a subprime mortgage firm, said yesterday it may have to declare bankruptcy, putting its planned acquisition by Lone Star Funds on hold, according to Bloomberg.com.

Lone Star had agreed in June to buy Accredited for $400 million in cash but some believe that price may be negotiated lower.