American Home Mortgage Corp. (NYSE: AHM) marked the first big casualty of the meltdown in subprime and so now the death watch has turned to some other names in the sector. Accredited Home Lenders (NASDAQ: LEND) is a tricky one because of its definitive agreement to be acquired by private equity firm Lone Star so we'll leave that one alone, but a more likely candidate seems to be NovaStar Financial (NYSE: NFI). After initiating a "strategic alternatives" process on April 12, the company was not able to find a buyer for itself which resulted in a July financing deal. The company ended up raising $150 million in part due to selling $48.8 million of convertible preferred stock and made a 4-for-1 reverse stock split - a move that was seen as a sign of desperation.

Needless to say, NovaStar shares are off 75% since the split. And though the company said Monday it would resume funding wholesale mortgages after it temporarily suspended issuing commitments for some loans, the bounce back in the stock has been short lived thanks to a bleak outlook. Subprime troubles are far from over and haven't been contained, just take a look at the headlines this morning; a French bank said it was freezing three securities funds that struggled to find liquidity in the U.S. subprime mortgage market (causing the central banks to scramble and inject cash into the markets) and AIG reported that mortgage delinquencies and defaults are becoming more common in the category just above subprime (10.8% of subprime mortgages and 4.6% just above subprime were overdue). With subprime market conditions that won't be getting any better in the near term, NovaStar stock could be a ticking time bomb because of potentially imminent margin calls.

Recent turmoil in the mortgage market has pummeled subprime stocks, with the most notable being American Home Mortgage (NYSE: AHM) which filed for Chapter 11 bankruptcy protection today. But shares of Accredited Home Lender (NASDAQ: LEND) have come off their lows and the rebound over the past two trading sessions has shown some legs, leading many investors to believe that this isn't just a dead cat bounce. So let's look at why that could be the case. In June, Accredited agreed to be acquired by private equity firm Lone Star for $400 million, or about $15.10 share. Yet, there are fears that because of intensified subprime worries due to rising defaults by borrowers, Lone Star could reduce its offer, or back out of the deal. But a read of the filings suggest that just might not be possible. According to the terms of the deal, without the prior consent of the company, the purchaser would not be allowed to decrease the number of common shares sought to be purchased or reduce the offer price.

Another interesting tidbit is that the company reported at the time of the deal that since March 31, 2007, there had been no event that would have a material adverse effect on its business. Obviously the liquidity crisis has changed things, but the language of the definitive agreement doesn't give Lone Star a clear out if things go sour. The only party that clearly has a way to back out is Accredited, though it will have to pay a $12 million break up fee to do so. With Lone Star extending the tender offer deadline and the stock trading at half the offer, the speculation has only continued as to what will ultimately happen. To borrow a line from CNBC, this is definitely a "balls of steel" trade so be sure to manage your risk.

Recent turmoil in the mortgage market has pummeled subprime stocks, with the most notable being American Home Mortgage (NYSE: AHM) which filed for Chapter 11 bankruptcy protection today. But shares of Accredited Home Lender (NASDAQ: LEND) have come off their lows and the rebound over the past two trading sessions has shown some legs, leading many investors to believe that this isn't just a dead cat bounce. So let's look at why that could be the case. In June, Accredited agreed to be acquired by private equity firm Lone Star for $400 million, or about $15.10 share. Yet, there are fears that because of intensified subprime worries due to rising defaults by borrowers, Lone Star could reduce its offer, or back out of the deal. But a read of the filings suggest that just might not be possible. According to the terms of the deal, without the prior consent of the company, the purchaser would not be allowed to decrease the number of common shares sought to be purchased or reduce the offer price.

Another interesting tidbit is that the company reported at the time of the deal that since March 31, 2007, there had been no event that would have a material adverse effect on its business. Obviously the liquidity crisis has changed things, but the language of the definitive agreement doesn't give Lone Star a clear out if things go sour. The only party that clearly has a way to back out is Accredited, though it will have to pay a $12 million break up fee to do so. With Lone Star extending the tender offer deadline and the stock trading at half the offer, the speculation has only continued as to what will ultimately happen. To borrow a line from CNBC, this is definitely a "balls of steel" trade so be sure to manage your risk.