Deutsche Bank and JPMorgan are totting up their exposure to the latest American sub-prime mortgage casualty after they were named yesterday among the biggest creditors of American Home Mortgage, which has filed for bankruptcy protection.

As of the end of March, American Home Mortgage, America’s tenth-biggest mortgage lender, had total borrowings of $4 billion (£1.9 billion). Last week it had been trying to secure a buyer for two of its businesses, but it failed to close a deal. It also sought to cut costs by dismissing 90 per cent of its staff.

Deutsche Bank and JPMorgan declined to comment on the extent of their exposure.

The fall of the mortgage bank will concern the US Federal Reserve’s Open Market Committee, which meets today and considers the impact of recent turbulence in US markets. Previously, Ben Bernanke, the Chairman of the Fed, had predicted that the sub-prime mortgage crisis would be self-contained. However, American Home Mortgage sold much less risky prime and near-prime mortgages, indicating that the sub-prime contagion is spreading to other areas of the banking sector.

Chris Whalen, of the Institutional Risk Analytics consultancy, predicted that Wall Street would see far more Chapter 11 filings connected with the sub-prime mortgage fall-out over the next few months. He added: “We’re only in the first innings. At the moment, we are hearing silence. There are plenty of banks out there who had the same asset allocation as Bear Stearns. So where are all the others? People are only just beginning to ’fess up to their exposure.”

Bear Stearns admitted in June that two of its hedge funds had lost $1.5 billion between them because of the fall in the value of bonds that they had bought which were backed by sub-prime mortgages. On Sunday, the investment bank, once the most venerated mortgage investor on Wall Street, ousted Warren Spector, its co-chief operating officer, who was responsible for fixed-income and asset management. The hedge funds were housed within his division.

Before the bank’s hedge fund debacle, Mr Spector was perceived as the favourite candidate to succeed James Cayne, the bank’s chief executive, who is 73. In a statement issued on Sunday, Bear Stearns, whose shares have fallen by 42 per cent this year, said that Mr Spector had resigned from all his positions and detailed his immediate replacements. The bank, whose shares fell by as much as 8 per cent yesterday, is now perceived as a takeover target.

More than half a dozen sub-prime lenders have applied for Chapter 11 bankruptcy protection this year, including New Century Financial, one of America’s biggest sub-prime lenders.

Sub-prime mortgages are home loans that were made to borrowers with poor credit histories. A sub-prime borrower would typically pay at least 3 per cent more in fixed-interest payments – about a 10 per cent rate – than a prime borrower. They would also have to pay a substantial deposit on the property of up to 30 per cent.

However, in recent years, some lenders have become less stringent with their lending criteria, frequently failing to demand proof of earnings documentation and waiving down-payment requirements. Those sub-prime mortgages were then sliced up, packaged and sold on to other financial groups as mortgage-backed bonds. In many cases, derivative products were sold on the back of the debt packages, and bought by groups such as hedge funds.

When the American housing market slowed and the original mortgage lenders suffered from surging default rates, the value of those debt packages and derivatives tumbled. Last week, American Home Mortgage said that the rise in defaults had triggered significant write-downs in its loan book. It then pulled the plug on mortgages that had already been agreed because its own credit lines had been cut.

American Home Mortgage failed to return calls yesterday.

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