Fallout Hits RAIT Financial

RAIT Financial Trust (RAS Quote) plunged more than 20% Tuesday on fears about the company's exposure to collateralized debt obligations tied to American Home Mortgage (AHM Quote), a lender teetering toward liquidation.

RAIT Financial invests in residential and commercial mortgage securities. The company's exposure to American Home Mortgage stems from its 2006 acquisition of Taberna Realty Finance Trust, according to a research note from Piper Jaffray analyst Robert Napoli on Tuesday morning.

Taberna specialized in providing real estate companies with a form of financing known as trust preferred securities, which are essentially a hybrid of debt and preferred stock.

In his note, Napoli said he believes that Taberna owns about $120 million of such securities that were issued by American Home Mortgage.

These securities, in turn, were placed into collateralized debt obligations by Taberna. The liquidity crisis at American Home Mortgage could affect payments related to these CDOs, Napoli said.

"We have pointed out in a few notes recently that we are concerned about [RAIT Financial's] exposure to mortgage REITs and homebuilders, primarily through its recent acquisition of Taberna," Napoli wrote.

In a press release Tuesday afternoon, RAIT said it has net equity exposure of about $95 million, or $1.56 a share of book value, to American Home Mortgage. The company said that all issuers of its trust preferred securities other than American Home have made their payments that were due July 30.

Exposure to mortgage REITs and homebuilders represented about 16% of RAIT Financial's total assets at the end of March.

"The past few days, we have seen incredible shakeout in the sector, driven more by spread widening for the moment, than by deteriorating credit," Napoli said.

Napoli reduced his rating on RAIT Financial from outperform to market perform, and lowered his price target from $34 to $18.

In afternoon trading, RAIT Financial shares were tumbling 21%, or $3.39, to $12.69.