Flagstar Faces $74 Million in Exposure on Heels of Live Well Closure

Bank holding company Flagstar Bancorp (FBC) disclosed new financial exposure of $74 million on Monday, believed to stem from the downfall of major reverse mortgage lender Live Well Financial.

The company attributes the exposure, comprising a $69 million commercial loan and a $5 million warehouse line, to an unnamed, recently closed reverse mortgage lender, which analysts believe is Live Well.

“Subsequent to March 31, 2019, we became aware that one of our commercial borrowers was unexpectedly ceasing their reverse mortgage origination business,” Flagstar’s 10-Q filing with the SEC reads. “While it is too early to determine the extent of the loss we may have on this loan, we plan to pursue all available sources of collection including other assets of the company, a personal guarantee and other legal remedies to minimize our credit exposure related to this loan.”

An independent valuation of the loan gives the collateral a fair market value between $35-40 million, according to the 10-Q filing with the SEC.

FBC will pursue all remedies to ensure repayment of the loan, and will determine the appropriate carrying value in the second quarter of their fiscal year, the company said in the filing. “We expect to be fully repaid on the outstanding warehouse line and no further draws on this line can be made,” the relevant note concludes.

“Given the size, the news flow and timing that occurred, and then, the fact that Live Well ceased operations on May 3, it makes sense that Live Well is this credit,” Piper Jaffray Senior Research Analyst Kevin Barker told RMD in an interview. Live Well is believed to be the only reverse mortgage lender FBC is lending to, Barker said.

The company outlook for FBC is expected to be weakened because of this news, according to the analyst note.

“We expect FBC to be weak on this news as the market will increasingly discount the company’s credit exposure despite FBC taking no losses in the commercial and industrial (C&I) portfolio over the past several years,” the note said.

This new exposure could affect the standing of FBC going forward, Barker explained.

“So, given the stress that’s in the reverse mortgage market, it makes us feel a little bit better about [FBC’s] overall book, but definitely increases concern about what is happening there,” he said.

Employees of Live Well Financial first reported on May 3 that the company was closing, several days prior to Live Well confirming the news via its website. A subsequent filing with the Virginia state employment agency indicated the immediate necessity of 103 lay-offs related to employees who worked at the company’s headquarters.

A former Live Well employee also filed a class action lawsuit against the company shortly thereafter, alleging wrongful termination and a lack of legally-required notification of termination for she and all other similarly situated former employees. The class has yet to be certified by a judge.

Live Well has long held a position among the top reverse mortgage lenders by volume, ranking in the top 10 by both retail and wholesale volume. The company recorded 74 reverse mortgage endorsements in April, according to data analysis by Reverse Market Insight.

As of press time, representatives for Flagstar Bancorp had not responded to a request for comment. FBC is a top-five warehouse lender, according to a ranking by Inside Mortgage Finance.

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