July 31 (Bloomberg) -- American Home Mortgage Investment Corp. shares plunged 90 percent after the lender said it doesn't have cash to fund new loans, stranding thousands of home buyers and putting the company on the brink of failure.

Investment banks cut off credit lines, leaving American Home without money yesterday for $300 million of mortgages it had already promised, the Melville, New York-based company said in a statement today. It anticipates that $450 million to $500 million of loans probably won't get funded today, and the lender may have to sell off its assets.

``They can't function without access to capital,'' said Bose George, an analyst with KBW Inc. in New York. ``The company either has to file for bankruptcy or go through some type of rescue or restructuring, and either way will leave almost nothing for the common shareholders.''

American Home caters to borrowers whose credit scores fall just short of standards for top-rated mortgages. The announcement provides fresh evidence that defaults may be spreading from subprime borrowers with the worst credit scores to homeowners with more reliable payment records. The biggest U.S. mortgage lender, Countrywide Financial Corp., said last week late payments rose among some of its most creditworthy clients.

Shares of American Home, halted by the New York Stock Exchange early yesterday, plummeted $9.43 from their close on July 27 to $1.04 as of 4:15 p.m. in NYSE composite trading. They sold for $6.39 in pre-market transactions yesterday. Two years ago, they fetched almost $40.

Margin Calls

American Home said it's ``seeking the course of resolution, in this environment, that is least disruptive to its business and to the many thousands of homebuyers to whom it has committed to provide mortgages.''

Creditors made ``very significant margin calls'' in the last three weeks and American Home still has ``substantial unpaid margin calls pending,'' it said in the statement. Options may include ``the orderly liquidation of its assets.''

American Home hired Milestone Advisors LLC and Lazard Ltd. to evaluate its choices. Milestone served as an adviser to ResMae Mortgage Corp. prior to the Brea, California-based lender's bankruptcy filing in February. Irvine, California-based New Century Financial Corp., which was the biggest U.S. subprime lender until it filed for bankruptcy in April, used Lazard.

Mary Feder, a spokeswoman at American Home, didn't return a call seeking comment. The company employed more than 7,400 people at the end of 2006.

Alt-A Lender

Most of the company's loans last year went to California, Florida, Illinois, Virginia and New York, according to regulatory filings. About 196,000 borrowers in 2006 received $58.9 billion in mortgages, the annual report said. The company issued $16.7 billion of loans in the first quarter of this year.

American Home specializes in Alt-A mortgages, an alternative for A-rated borrowers who can't satisfy all the terms for a regular ``prime'' mortgage. Founded in 1988 by Chairman and Chief Executive Officer Michael Strauss, the company became the 20th- largest Alt-A lender by 2006, according to trade publication Inside Mortgage Finance. IndyMac Bancorp Inc. ranked first.

Bids from investors for American Home's loans began falling earlier this year after defaults on U.S. subprime mortgages rose to the highest level since 2002. Investors were concerned that the lax underwriting standards and growing fraud in the subprime industry might presage rising defaults on Alt-A loans.

Among American Home's offerings were ``pay-option'' adjustable-rate mortgages that allow borrowers to defer some interest payments, a type of loan that may carry more risk for lenders.

Falling Prices

``We obviously have a major correction going on in the mortgage market; it started in subprime and now it's shifting to Alt-A,'' said David Olson, president of Wholesale Access Mortgage Research and Consulting in Columbia, Maryland, and the former director of market research at Freddie Mac, the second-biggest financier of U.S. mortgages. ``It looks like it's going to take at least two years to play out.''

Falling home values have made it harder for borrowers to refinance loans, and forced banks and other lenders to incur losses when they foreclose on mortgages and sell the properties. Home prices fell 2.8 percent in May from a year earlier, the most in at least six years, according to data today from the S&P/Case- Shiller Index of 20 U.S. metropolitan areas.

``Rising prices will bail some borrowers and lenders out whereas declining prices will sink some,'' said Bert Ely, an Alexandria, Virginia-based consultant. ``The longer this thing drags on, the more it's going to filter up into the supposedly higher-quality mortgages.''

Bankruptcies

Writedowns, collateral calls and cash shortages triggered bankruptcies of subprime lenders New Century Financial Corp. and Mortgage Lenders Network USA Inc., and led to sales of Accredited Home Lenders Holding Co. and Fieldstone Investment Corp. More than 60 mortgage companies have closed operations or sought buyers since the start of 2006, according to Bloomberg data.

``It's another one on the heap,'' said Vincent Arscott, an analyst with Fitch Ratings in New York. ``American Home played in a little more of the Alt-A space, and that's why they were able to hang on a little longer.''

To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net.

Last Updated: July 31, 2007 17:42 EDT