A recent lawsuit claims Sprout Mortgage left its warehouse lender FirstFunding holding over $220 million of its debt when the mortgage lender abruptly closed on July 6.
Sprout was founded in 2009 by industry veteran Michael Strauss and became “one of the fastest growing non-QM lenders in the country,” according to the lawsuit. The company relied on several warehouse lenders to obtain advances in order to originate residential mortgages, paying off these lines of credit after selling the loans in the secondary market.
In October 2020, Sprout signed a $50 million funding agreement with Texas-based FirstFunding, a subsidiary of First American Financial Corporation, which included an unconditional guaranty agreement, the lawsuit claims. The agreement’s maximum funding amount changed seven times, increasing to $230 million in April 2022 but returning to $175 million in May 2022.
FirstFunding alleges that on July 6, Strauss informed the warehouse that Sprout was going under and ceasing operations, meaning that the mortgage lender could not pay its debts. As of that date, “the outstanding amount of principal due was $220,281,891.35,” which does not include attorneys’ fees, court costs, or other out-of-pocket expenses FirstFunding believes Sprout owns.
Representatives for FirstFunding and Sprout did not return requests for comments.
On August 5, about one month after Sprout shutting down, the parties executed a new agreement saying FirstFunding “is permitted to immediately exercise all of its rights,” including FirstFunding receiving mortgage loan proceeds directly from Sprout or any borrower, according to documents attached to the lawsuit.
The secondary market is providing a prime opportunity to pursue better margins, more competitive rates and increased profitability.
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However, FirstFunding’s attorney Benjamin A. West, of the law firm Frost Brown Todd LLC, wrote that “Sprout and Strauss are no longer working cooperatively with FirstFunding to effectuate the prompt disposition of the Pledged Mortgage Loans and reduction of advances under the Funding Agreement to maximize value.”
Consequently, the warehouse lender filed the lawsuit against Sprout on Wednesday for breaching the contract and injunction in the U.S. District Court for the Central District of California Southern Division. FirstFunding wants to recover $262,500 in damages it believes are held in a Banc of California account.
A sharp rise in mortgage rates this year saddled Sprout with tens of millions of dollars in loans it couldn’t sell to investors in the secondary market at par and, consequently, the company was not able to pay its business partners and employees.
Since its closing, the company has been the target of several lawsuits.
Just two days after it abruptly shut down its operations, two former employees sued Sprout, its affiliated company Recovco Mortgage Management LLC and chief executive officer Strauss, alleging they laid off about 100 employees at the New York office without giving legally required written notice and failed to issue their paychecks which were due the following day.
Among business partners, California-based wholesale/correspondent lender New Wave Lending Group accused the company of defaulting on a pool of $32 million in loans it agreed to purchase. According to public filings, Sprout’s attorney, Nathan Jones, of the law firm Forchelli Deegan Terrana LLP, denies the allegations.
In another lawsuit, Merchants Bank of Indiana claimed it purchased a mortgage loan from Sprout, the underlying borrowers subsequently tendered a full payoff of the mortgage loan to Sprout, but the company failed to remit it to Merchants as required by the parties’ written agreement. The total value was $1.2 million.
According to sources, Strauss is trying to sell his Manhattan penthouse, located at Park Avenue. According to Zillow, the estimated price is $26.5 million.