Aug. 6 (Bloomberg) -- American Home Mortgage Investment Corp. filed for bankruptcy, becoming the second-biggest residential lender in the U.S. to close down this year.

The filing adds to signs that late payments have spread to homeowners with good credit. American Home sought federal court protection today in Wilmington, Delaware, with assets of more than $20.6 billion and debt of more than $19.3 billion. The company said Aug. 2 it would halt operations, and has reduced staff to 1,000 from about 7,400 people at the end of 2006.

American Home specialized in mortgages for people who fall just short of top credit scores. More than half a dozen competitors have filed for bankruptcy this year as defaults spilled over from ``subprime'' borrowers with bad credit to those with reliable histories. The lender plans to liquidate its services unit and loans not reclaimed by banks that it claims forced it into bankruptcy through margin calls.

``Their sources of funding have all dried up,'' said Mark Power, a lawyer advising some of the more than 100,000 creditors. ``This case is going to be very similar to New Century.''

New Century Financial Corp., based in Irvine, California, became the largest home lender to seek court protection from its creditors when it filed for bankruptcy in April. That company is now being liquidated.

Trading of American Home shares on the New York Stock Exchange was halted at 9:35 a.m. The shares, which closed Aug. 3 at 70 cents, fell to 44 cents before trading was stopped.

Investment Banks

American Home listed in its court petition some of the biggest investment banks as its top creditors. The top five unsecured creditors noted include units of Deutsche Bank AG, Wilmington Trust Corp., JPMorgan Chase & Co., Countrywide Financial Corp. and Bank of America Corp., the second-largest U.S. bank by market value after Citigroup Inc.

Wilmington Trust said in a statement today that it provides trustee services for some of American Home's creditors, ``but these services do not include making loans.''

American Home didn't provide estimates for how much each of its top 40 unsecured creditors was owed. The company said it was pushed into bankruptcy in part because of margin calls from banks that provided it with the cash necessary to write mortgages.

The Melville, New York-based lender is probably going to be forced to liquidate, Power said.

Regulators

``Since the news of the bankruptcy broke, our county department of labor has been working to offer its services to the impacted workers,'' Suffolk County Executive Steve Levy, whose jurisdiction includes Melville, said in an e-mailed statement.

Regulators in New York, California and four other states have suspended the company's lending licenses or barred it from accepting additional mortgage applications.

American Home plans to sell a package of loans and its loan servicing department, which provided collection and escrow services for about 197,000 loans worth $46.3 billion, according to court records.

The bankrupt company will be financed by up to $50 million in loans from WL Ross & Co. LLC, according to a statement today. American Home said it doesn't believe it has enough money to pay all its creditors and expected to be delisted from the NYSE.

Investment bankers began shutting off credit to American Home this year as concerns about subprime mortgages spread, leaving the lender unable to fund at least $750 million in loans and stranding thousands of borrowers, according to a U.S. Securities and Exchange Commission filing by the company.

Employees

The number of American Home employees is expected to fall again in the coming weeks, according to court filings.

The company has hired Stephen Cooper, of the turnaround firm Kroll Zolfo Cooper LLC, as its chief restructuring officer, Chief Executive Officer Michael Strauss said in the Chapter 11 petition. Strauss founded American Home in 1988.

American Home originated almost $60 billion in mortgages last year and issued $16.7 billion in the first quarter of 2007. The company said in a statement July 28 that it needs a ``better understanding'' of how it will be affected by weak mortgage markets.

Falling bids by investment banks that buy mortgages and securities backed by home loans forced American Home to write down the value of its holdings, the lender said. The drop in value prompted banks that provide credit lines to demand more collateral as a cushion against default.

The company had about $837 million of cash as of March 31 and raised more than $200 million selling stock.

Alt-A

American Home specializes in so-called Alt-A mortgages, an alternative for A-rated borrowers who can't satisfy all the terms for a regular ``prime'' mortgage. The company was the 20th- largest Alt-A lender in 2006, according to March data from trade publication Inside Mortgage Finance.

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

The case is In re American Home Mortgages Holdings Inc., 07- 11047, U.S. Bankruptcy Court, District of Delaware (Wilmington).

To contact the reporters on this story: Steven Church in Wilmington, Delaware, at schurch@bloomberg.net and; Bradley Keoun in New York at bkeoun@bloomberg.net;

Last Updated: August 6, 2007 16:34 EDT