updated 7/31/2007 5:48:15 PM ET 2007-07-31T21:48:15

Shares of American Home Mortgage Investment Corp. plunged 90 percent Tuesday after the company raised fears it may become insolvent, renewing concern about worsening credit quality in the mortgage market and killing a Wall Street rally.

The struggling mortgage lender said its financial backers have essentially pulled the plug. The Wall Street banks that lend American Home Mortgage money for home loans — which include firms like UBS AG, Bear Stearns Cos., and JPMorgan Chase & Co. — will not extend the company any more money, and some have demanded back the money they have lent.

American Home shares, which were halted all day Monday, plummeted when trading finally began at about 2 p.m. EDT and ended the day at $1.04 a share, down from $10.47 on Friday before the company first disclosed the depths of its financial woes.

The Dow Jones industrial average, which had been up as much as 140 points earlier in the day, reversed course after the resumption of trading in the company’s stock and then kept falling. It fell 1.1 percent or almost 146 points for the day.

Keefe, Bruyette & Woods analyst Bose George said American Home Mortgage will probably go bankrupt, or at least be restructured into something leaving very little value for shareholders.

“The chances are low,” he said of the company’s prospects for survival. “The situation is radically going to be altered.”

American Home Mortgage said it has over the last three weeks paid “very significant” margin calls, which occur when a lender demands compensation after a borrower’s collateral loses value. The company still faces “substantial” unpaid margin calls.

This echoes reports from a number of other mortgage lenders of late, including New Century Financial Corp., the Irvine, Calif.-based lender that filed for bankruptcy protection earlier this year.

American Home Mortgage hired Lazard Ltd. and Milestone Advisors to assist in evaluating the company’s options. One of those options, the company said, is an “orderly liquidation of its assets.”

The company failed Monday to deliver $300 million in mortgages promised to home buyers, and said it expects to be unable to finance $450 million to $500 million in additional mortgages Tuesday.

The reason American Home Mortgage’s lenders are balking is the mortgage loans that act as collateral for the company’s credit lines have sunk in value. The market where investors buy mortgage loans has suffered “unprecedented disruption” this year, the company said, and it is having trouble selling its mortgages.

Last year, the lender sold two-fifths of its loans to Countrywide Financial Corp., Deutsche Bank AG, and Wells Fargo & Co.

Dozens of mortgage lenders have gone bankrupt this year as more people miss payments on home loans, housing prices sag and skittish investors flee risky mortgage debt.

But while most of the bankrupt lenders catered to “subprime” borrowers — or borrowers with checkered credit histories — almost none of American Home Mortgage’s $58.9 billion in loans last year were classified as subprime.

American Home Mortgage specializes in adjustable-rate mortgages, which carry interest rates that reset according to certain benchmark interest rates. This type of debt has hamstrung a lot of borrowers in the past year because interest rates have jumped.

The company also lends to so-called Alt-A borrowers, or borrowers that cannot document their income. While Alt-A credit is not considered as unreliable as subprime, it is a step down from prime. Some banks, such as M&T Bank Corp., have recorded accounting charges this year assuming a worsening in Alt-A mortgage credit.

Alliance Bancorp, an Alt-A lender based in Brisbane, Calif., went bankrupt this year.

Separately, ratings agency Moody’s Investors Service said it is increasing its assumptions for losses on pools of Alt-A loans. As delinquencies in Alt-A debt mount, Moody’s said it sees signs that Alt-A loans were underwritten using similar standards to subprime loans.

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Data: Latest rates in the US

Home equity rates View rates in your area
Home equity type Today +/- Chart
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$30K home equity loan FICO 5.26%
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