updated 8/3/2007 8:02:05 AM ET 2007-08-03T12:02:05

American Home Mortgage Investment Corp., which raised fears this week that it may become insolvent, said Thursday it has stopped taking mortgage applications and is cutting most of its staff of more than 7,000 effective Friday.

“It is with great sadness that American Home has had to take this action which involves so many dedicated employees,” Chief Executive Michael Strauss said in a statement issued late Thursday. “Unfortunately, the market conditions in both the secondary mortgage market as well as the national real estate market have deteriorated to the point that we have no realistic alternative.”

The company said it will keep about 750 employees to maintain its thrift and servicing businesses, and it is determined to slash its operating costs in an effort to preserve the value of its remaining assets.

Company officials did not immediately return calls seeking additional comment. An employee who answered the phone at the company’s Melville headquarters declined to comment.

American Home Mortgage, which had about 7,400 employees as of Dec. 31, has been struggling to raise money to make new loans and said this week that 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.

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.

American Home Mortgage said Tuesday 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 said it 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.

Shares of American Home Mortgage Investment Corp. plunged 90 percent Tuesday after the company’s warnings, which renewed concern about worsening credit quality in the mortgage market and killed a Wall Street rally.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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