Tech-fueled mortgage lender UpEquity just wants answers. Roughly a year ago, the Austin-based fintech began to sell its loans to First Guaranty Mortgage Corporation (FGMC), a lender that specializes in non-qualified mortgage loans and is controlled by behemoth investment management firm Pacific Investment Management Company (PIMCO).
UpEquity sent between 30 and 40 loans per month to FGMC, worth about $60 million in total volume, executives said. Depending on the month, FGMC bought between one-fourth and one-third of the loans UpEquity sold to investors through the correspondent channel.
One week ago, problems emerged: FGMC’s loan approval, which usually took one business day after due diligence was completed, was taking four days. Questioned by UpEquity, FGMC answered that nothing was wrong; they would approve and buy the loans.
Then, without apparent notice to its correspondent partners, FGMC on Friday cut most of its workforce, and former high-level employees said the company has essentially shuttered.
It’s caused frustration for FGMC’s lending partners.
“We have about 14 loans, $5 million worth of loans, in the process of being purchased by them,” said Louis Wilson, co-founder and chief operating officer at UpEquity. “On Friday, we stopped getting responses via email. Then, we read about the layoffs. On Monday, no one responded to my email.”
He added: “We’re sitting here wondering what will happen to those loans. We’ll probably sell to another investor. For us, it’s nowhere near life-threatening, but it’s a painful day.”
A West Coast-based lending executive told HousingWire that FGMC said it can’t or won’t honor locks in its correspondent pipeline, even loans that were cleared for funding and underwritten by FGMC.
“I have done this 30 years and not seen it done this poorly,” he said.
A spokesperson for FGMC, which stopped taking mortgage applications late last week ahead of the mass layoff, declined to answer HousingWire’s questions. However, the spokesperson said that the company is continuing to fund loans, engaging proactively with its customers and “working closely with financial stakeholders to navigate this challenging moment.”
Mispricing at FGMC?
Two mortgage executives whose companies sold loans to FGMC said the firm often paid 20 basis points higher than other investors on 30-year fixed-rate mortgages.
However, mortgage rates rose sharply in the last few weeks, largely due to news of higher-than-expected inflation and the anxiety leading up to the Federal Reserve‘s 75 basis point hike.
FGMC approved loans to purchase at a rate of 5.3%, locked 20 days ago, according to Wilson, but now rates are around 6%. And investors are asking for higher premiums to invest in these assets amid a flight to quality caused by the expectation of higher U.S. Treasury rates.
Days before the layoffs, FGMC was negotiating to purchase loans with more lenders, and all seemed business as usual, multiple sources told HousingWire.
“We signed up with them as a correspondent; we signed the paperwork on Monday, June 20. Then, on Friday, the 24th, they went out of business,” said Rich Weidel, the CEO of multichannel lender Princeton Mortgage. “This happens when companies get desperate, and they try to win loans by mispricing.”
According to Weidel, Princeton signed the papers but did not sell loans to FGMC.
Funding falls through
FGMC sent a WARN Notice to the Texas Workforce Commission on Friday, explaining the company has decided to terminate the employment of 428 of its 565 employees on June 24, 76% of the total workforce.
“FGMC has experienced significant operating losses and cash flow challenges due to unforeseen historical adverse market conditions for the mortgage lending industry, including unanticipated market volatility,” Cassie Vacante, senior vice-president of Human Resources, wrote in the document.
Vacante added that “in addition, FGMC’s recent efforts to obtain funding that could have prevented this layoff have proven unsuccessful.”
Former employees told HousingWire on Friday that they were laid off without severance pay. A spokesperson wrote that FGMC has paid salaries, accrued paid time off, and commissions that have come due. However, the spokesperson said, the company is in the process of making severance payments to those who are eligible.