US lender on brink of bankruptcy

American Home says it was the tenth biggest retail mortgage lender

US lender American Home Mortgage has filed for bankruptcy, after laying off the majority of its staff last week.

The demise of one of the country's largest independent home loan providers is the latest case of a business suffering from the US housing slump.

Despite these worries, Wall Street rallied on Monday with leading share indices closing up sharply.

The benchmark Dow Jones industrial average closed up 286.87 points, or 2.1%, at 13,468.78.

Market volatility

The strong gains reflected continued volatility on the markets, the Dow Jones having fallen by a similar amount on Friday.

American Home Mortgage's woes are the latest to afflict the mortgage investment market.

Earlier this year the firm had over seven thousand employees, but by Friday only 750 staff remained.

Repeated interest rate rises have pushed up loan repayments, leading to a rise in defaults and hitting mortgage lenders hard.

While the sub-prime market - the sector that caters for the riskiest borrowers - has been the most obvious to suffer from defaults, it is not alone.

American Home Mortgage offered loans that were categorised between prime and sub-prime.

It also provided the less common mortgage with adjustable interest rates. Most US mortgages have fixed rates.

As the firm files Chapter 11 proceedings - the US process to seek bankruptcy protection - Deutsche Bank, Wilmington Trust and JP Morgan Chase are American Home Mortgage's three largest creditors.