At the end of June, First Guaranty Mortgage Corp. (FGMC), a non-QM lender, filed for Chapter 11 bankruptcy, leaving four warehouse lenders liable for more than $415 million.
Early in July, Sprout Mortgage collapsed, abandoning its staff in the cold. Due to the lender’s abrupt closure, it was impossible to give federal lawful advance notice of the layoffs. Now, one of its former workers is suing. The examples, which all occurred within a month or so, show the chaos that has recently overtaken the non-QM lending industry as originators struggle with an unstoppable force that they are powerless to stop rapidly rising interest rates. At least two lenders, FGMC and Sprout, have already lost the continuing conflict.
And now, other players in the sector, like warehouse lenders, must deal with the aftermath, pay attention to the indicators, and move to prevent a similar fate. Given the current environment, one executive claimed it would be naive to believe Sprout and FGMC would be the sole casualties. They might eventually become “more of a trend than outliers,” he predicted.
According to John Toohig, managing director of whole loan trading at Raymond James in Memphis, the non-QM sector is more susceptible to the present interest-rate spread pressure cooker than the prime mortgage market is.
Several coupons are underwater due to the quickly rising rates, according to Toohig. The issue with non-QM is that most banks will not be the source of liquidity for those loans in the whole-loan form [buying] against the aggregators placing them into RMBS [private label securitization transactions], which is also ineffective now. To read more on how Non-QM Lenders are responding to the rising rates in the Industry with Non-QM loans serving as succor to every day mortgage loan originators in this period, click here.
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