Reverse Mortgage Funding, LLC (RMF), one of the nation’s largest reverse mortgage lenders, on Wednesday filed for Chapter 11 bankruptcy, just over a week after “pausing” originations. 

The voluntary petition was filed with the U.S. Bankruptcy Court for the District of Delaware on Wednesday morning. The case has been assigned to Judge Mary Walrath, according to the filing.

While the company has not closed, nearly 500 employees were laid off this week, according to a source with direct knowledge of operations.

According to the website for the Delaware district of the bankruptcy court, five total entities associated with RMF, including the company itself and its parent, Reverse Mortgage Investment Trust, Inc. (RMIT), have filed for Chapter 11 bankruptcy protection.

Company statement

In a statement announcing the bankruptcy filing, representatives of RMIT describe the efforts being made for RMF’s servicing portfolio.

“The Company is in ongoing, productive discussions with its Mortgage Servicing Rights (MSR) secured lender and other industry players, including Ginnie Mae, to achieve an agreement that ensures a smooth landing for the Company’s servicing portfolio, as well as other obligations,” the statement said in part. “In the meantime, RMIT has already begun work to transfer the remaining loans in its pipeline to other lenders in order to support seniors looking to unlock value in their homes.”

The company attributed the bankruptcy restructuring as symptomatic of broader issues facing the forward and reverse mortgage industries, including “unprecedented interest rate hikes combined with  credit spread widening and overall volatility in fixed income markets, including agency mortgage markets.”

Disruptions in the market increased the capital requirements of both funding and servicing loans, straining RMIT/RMF’s liquidity position. This is what led the company to pause all origination activities just over a week ago.

Filing details

A company that files for Chapter 11 bankruptcy protection is still permitted to operate under court supervision while reorganizing its finances, and is allowed to create a plan to pay back its creditors over time. Financial decisions, including which creditors are paid, must be approved by the bankruptcy court.

In December 2019, RMIT agreed to be acquired by an affiliate of Starwood Capital Group, a global private investment firm focused on real estate investments that has more than $60 billion in assets under management. Terms of the deal were not disclosed.

The deal ultimately closed in January of 2021, and according to documents related to the filing, Starwood owns 94.3% of RMIT shares. RMF intends to enter into a debtor-in-possession (DIP) financing agreement with “BNGL Parent, LLC,” but an amount for such a facility was not specified.

Securing DIP financing will provide RMIT/RMF with “near-term liquidity to operate and cover  administrative expenses as it pursues restructuring options, once approved by the Bankruptcy Court,” the company statement said.

A series of customary, first-day motions will soon be filed in the bankruptcy court by the company, which will “enable [RMIT] to preserve the value of its assets for  its stakeholders and minimize business disruption during the process,” the company statement said. “Under Federal law, the Company and its filing affiliates are prohibited from paying amounts owed for obligations arising prior to today’s date without a court order.”

The company estimates both its assets and liabilities between $10 billion and $50 billion, according to bankruptcy documents. Unsecured creditors include reverse mortgage subservicer Celink (it did not list an amount), as well as companies like Microsoft, Bloomberg, Lowenstein Sandler LLP, Texas Capital Bank, Mortgage Information Services, Inc., Class Valuation, as well as reverse mortgage technology companies ReverseVision and Bay Docs, LLC. The credit with the highest listed amount owed was law firm Lowenstein Sandler, LLP, at just over $1 million.

Origination pause

The news of the bankruptcy filing arrives on the heels of the abrupt halting of all origination activities by the company just over a week ago. RMF reportedly was forced to pause its origination activities due to a collapse of the lender’s warehouse lines, according to multiple sources.

“On Monday, November 21, Reverse Mortgage Funding and its affiliates made the difficult but necessary decision to pause mortgage origination activities,” the spokesperson wrote in an email to RMD. “RMF, like many of its peers, has been challenged by unprecedented interest rate hikes and overall macroeconomic volatility.”

The spokesperson said that “the cost of financing and securitizing reverse mortgages has made it impossible for RMF to continue originations for seniors looking to unlock value in their homes at this time.”

Mortgage brokers who spoke with RMD described needing to transfer loans that were previously under RMF, but had not yet closed, to other lenders as quickly as possible in order to serve borrowers.

RMF has for years been a leading reverse mortgage lender, offering both Federal Housing Administration (FHA)-backed Home Equity Conversion Mortgage (HECM) loans as well as a suite of proprietary reverse mortgages under its “Equity Elite” brand.

The company’s move represents a blow to industry distribution channels and the displacement of nearly 500 employees at all levels of the business, according to a source familiar with the company.

According to HECM endorsement data compiled by Reverse Market Insight (RMI), RMF was the fifth-largest HECM lender in the country, with 4,804 endorsements over the 12-month period ending on October 31.