Mortgage company suddenly closes doors

Seattle Times ^ | Saturday, August 16, 2003 | Bradley Meacham and Peter Lewis

[mrweb]

Mortgage company suddenly closes doors

A national mortgage company with operations in Washington abruptly closed its doors yesterday, potentially leaving thousands of homebuyers without loans. Capitol Commerce Mortgage, a Sacramento, Calif.-based company that buys loans and sells them to investors, closed after it likely failed to adjust for rising rates for home loans. The company had an office in Bellevue and total loans of more than $1 billion in Washington, said Chuck Cross, acting director of consumer services for the state Department of Financial Institutions (DFI). "We're hearing that they have closed," Cross said. "They have advised people that they are unable to fund their loans."

Individuals have rushed to lock in record-low interest rates in recent weeks, overwhelming many mortgage processors. Mortgage wholesalers buy home loans from originators and then sell them to investors. Some wholesalers haven't been able to find investors before rates rose. The rate on a 30-year mortgage averaged 6.6 percent as of Thursday compared to a low of 5.31 percent June 11, according to HSH Associates, a New Jersey firm that surveys 2,000 lenders nationwide.

Michelle Bentley, a Capitol Commerce employee in Bellevue, said she and her co-workers were shocked Thursday night when a boss said, "We no longer exist." No reason was given, said Bentley, who had worked as a funder, closing loans since Capitol Commerce opened its Bellevue branch two years ago. The extent of the closure's impact is unclear, though borrowers likely will have to go to another lender and likely pay a higher rate. Since mortgage rates have risen about one percentage point in the last month, for a borrower financing a $270,000 home the difference works out to about $172 a month, said Dean Stewart at Evergreen Pacific Services, a mortgage broker in Renton. "Over the life of the loan, that's a lot of money," he said. "This makes brokers look bad."

Cross said there could be similar closures among small or midsized lenders if they are unprepared for a sudden swing in rates and are holding a large basket of unfunded loans locked in at the low rates.

Cross said Capitol Commerce had assets of more than $400 million last year and made nearly 7,000 loans in Washington, averaging about $168,000 each. The company appeared viable, based on financial statements submitted to the agency in 2001, 2002 and 2003, Cross said. As of late yesterday, Cross' department said it had received two consumer complaints about Capitol. One came from an Enumclaw couple, who reported they had refinanced with Capitol and expected to be signing papers Monday or Tuesday. Yesterday they received a call from their broker saying the company had closed, according to the couple's complaint.

The DFI issued a statement late yesterday that it knows of two out-of-state lenders operating in Washington that have been unable to honor loan commitments in the past few days.

In addition to Capitol, a department spokesman said the other is Tucson, Ariz.-based Fidelity Mortgage Co., a broker that also has an office in Bellevue that continues to operate. It has been the subject of at least 13 consumer complaints filed with the DFI or the state Attorney General's office.

Fidelity attracted homeowners with offers of low-interest mortgages with no closing costs. This month it has sent letters to nearly 50 would-be borrowers in Washington informing them it will not be able to obtain financing for them before their lock-in periods expired. Cross said his agency's preliminary review found no indication Fidelity had violated state law. He said the company apparently acted in good faith, and the standard disclosure documents borrowers received and signed included a clause allowing Fidelity to relock at a different rate if it could not obtain funding for "any reason."

Fidelity president Scott Brittenham said earlier this week that, while "we wish the heck this hadn't happened," the company has done nothing illegal. He said "no one on the planet" could have foreseen the swift jump in interest rates. But some consumers are exploring legal action. Bellevue lawyer Gary Abolofia said a class-action suit for breach of contract is possible. But "people have a right to feel as if they are victims," Cross added.

Among the upset homeowners is John Donovan of Bellevue, who thought he had "a slam-dunk deal" with Fidelity to lower his house payments and finance home improvements. "A rate-lock agreement was signed," he recalled. "There were signed documents from both parties." But Donovan got a letter from Brittenham, dated Aug. 1. "Due to the unusually high demand for mortgage loans this past several weeks," Brittenham wrote, "we will not be able to fund your loan at your fee and interest rate lock agreement within the required time period. We will contact you as soon as we are able to fund your loan."

Brittenham also apologized for "any inconvenience our temporary inability to fund your loan has caused." In an Aug. 8 e-mail to Donovan, Fidelity's regional manager, Ron Greene, wrote: "I completely share your disappointment and frustration. The company let you down and it let every employee in my office down." Brittenham said the company plans to refund customers for out-of-pocket expenses, such as appraisal costs or late-payment fees some borrowers may have been assessed if they did not pay their old lender because they believed they had a new mortgage through Fidelity. But such sweeteners have not appeased all borrowers. Scott Hughes of Snohomish said in a complaint to state regulators that he had been expecting a $50,000 check to pay for home improvements by refinancing through Fidelity. Like Donovan, he got a letter this month from Brittenham pulling out of the deal. "I had no idea this company wouldn't do this," Hughes said. "It was nothing but smoke and mirrors."

Fidelity Mortgage has sued The Seattle Times Co., alleging the newspaper has published false and deceptive information "in regular and ongoing seasonal and weekly mortgage-rate directory articles." The Times has filed papers to dismiss the suit, which is pending in U.S. District Court in Seattle.

[Lijahsbubbe]

where's the grass?

LOL!

[Lijahsbubbe]

Unscrupulous (read: "crooked") mortgage companies promise customers that they have "locked in" a rate for, say, 30 days or 60 days, whatever, and meantime, the company is routinely selling into the secondary market at a 15 day price

Are you saying the broker, or mortgage co. is making money w/o any money being exchanged between the customer and the mortgage company?

[FITZ]

Yes ---- or even before when they start having to repo those cars from them because they can't make the $400 monthly payments on a car. A home mortgage is one thing I can live with --- but car payments are not in my vocabulary. I'm saving my cash up now so when a good deal comes by, I'll be ready.

[FITZ]

It seems like the entire tone of the refi industry is "why should you leave that equity in your home?".

That saying "let the buyer beware" has never been more true. I've been bombarded with offers to refinance --- but I'm not budging. The only thing would be to stretch out the loan for 30 more years but have a low house payment just in case things go bad and I can't make the income I have now.

[ErnBatavia]

where's the grass?

Most of us "don't do no grass" here in the desert...You have to do two kinds per year, which is a pain and expensive, and it Reallllly takes a lot of water when it's over 110. We either do a sandy pea gravel like you see on the Santa Fe style house to the left, or river rock like in front of my bunker wall.

[AdamSelene235]

Bump!

[BurbankKarl]

Yes, the credit bubble is about to burst wide open. With the shenanigans at Freddie Mac and Fannie Mae coming to light.

[Ernest_at_the_Beach]

Looks comfy, as long as the A/C works!

[knak]

I was just joshin'! I'm fixing to move to the Snake River Plain in Idaho in the next few weeks. Not much of our property has grass either, just right around the house. Looks like sagebrush (or something greek to me) everywhere else.

[Lancey Howard]

Are you saying the broker, or mortgage co. is making money w/o any money being exchanged between the customer and the mortgage company?

That is correct.
When I had a mortgage company (and personally handled all of the secondary sales) the only money we collected up front was the application fee to cover the cost of the appraisal and the credit report, both of which we ordered and got invoiced for by the appraisers and the credit reporting companies. Sometimes, we even collected a point up front (to ensure "loyalty").

These days, most companies do not even collect an application fee. (It can be a competetive edge to get the application in the mill "for free".) The mortgage originators tell their customers to pay the appraiser directly, and they run their own credit reports. Everything else is made at settlement when the loan is closed and assigned to its ultimate holder (or, for a refinance, three days after settlement when the right of rescission period has expired).

[riri]

I don't know about you but we finally got a little reprieve from the heat. We actually sat outside for about an hour last night, it was 91 degrees with a slight breeze. It felt heavenly. (Once you can experience 91 feeling like a big cool down, you understand the true meaning of the words "everything is relevant)

[Lancey Howard]

Right now, it would be smart to max out your loan against home equity. You can borrow a big bag 'o cash at a 15 year rate of 5% or 6%. There is no downside, unless you are really stupid. Even if you just keep that big bag 'o cash around for a few years and wait for the economy to tank (or thrive, whatever) and money market rates go up to 8% or 9% (or higher), you can take that bag 'o cash and invest it risk-free at 9% while you are paying 5% on the exact same money! Hello? That is free money.

I would recommend to everybody to borrow as much as you can against your home at today's rates. You may never again have an opportunity to borrow money this cheaply (while you also write off the interest on your taxes!). Use the money to pay off every other debt you have, and put the rest in the bank.

[bets]

I work at a large mortgage company that claims it's the only one w/this product: a credit card line against the mortgage. When you sign the papers for the loan, you sign one called the Credit Card Addendum, and you opt in for an open credit card against your mortgage. And this on top of the fact that it's the second mortgage.

[Southack]

"But if the company is sitting out there with a big pipeline that is not locked in, and rates take a dramatic turn and go up, then they can either honor the rates they promised their customers and sell into the secondary market at a loss (not gonna happen) or they can empty out the office at midnight and disappear. This is happening all over the country, and it has always happened just like this in the past."

Precisely.

Besides the duped homeowners who now have to go get a higher interest rate loan, there are also people who will misinterpret the above scenario to mean that some fictional "credit bubble" is about to burst.

Those people will see a mortgage broker go bust and wrongly extrapolate that fact into a bogus conclusion of something along the lines of "if mortgage brokers are going under, then there is not going to be anymore credit extended to homeowners", which is the wrong conclusion to draw.

All that has really happened is that you will see the slower crooks get caught with their pants down, or in this case, with their promised interest rates lower than what they can actually get their money for. So yeah, such mortgage brokers will get shut down for playing loose with the money of others, but no, it doesn't herald an impending crash of credit (much as many around here would like to see for some wierd reason or another).

It just means that people will have to go get loans from the honest mortgage brokers, as the crooks tend to get caught and put out of business when interest rates turn.

[arete]

I think that Roger Arnold expected up to 60% of mortgage loan operators to be out of business within a year. He's in the business and says the refi business is dead.

Richard W.

[riri]

I would recommend to everybody to borrow as much as you can against your home at today's rates. You may never again have an opportunity to borrow money this cheaply (while you also write off the interest on your taxes!). Use the money to pay off every other debt you have, and put the rest in the bank

You are assuming that people have the slightest bit of self discipline. They clearly do not. They are taking out second mortgages (home equity loans) to pay off debt on a bunch of crap that they bought with credit.

Most will be back in debt in a few years. Only this time with no equity in their homes.

[ErnBatavia]

Ditto here; I actually opened a couple of windows slightly to let some fresh air in overnight, but it backfired because the Salton Sea chose that time to kick in it's periodic funky fragrance....so now we're all closed back up.

We're also getting the Monsoon flow of humidity from your side of the river, so it's pretty nasty outside.

[ErnBatavia]

Looks comfy, as long as the A/C works!

Funny you should say! Just last week, we had to get the coil/blower part in the attic replaced and the repair clown - AFTER powering down the condenser on a 115 degree day - decided it was too hot to work; so he left us high, dry and hot from noon that day until around 9 the next morning. What a D-head!

[Rebelbase]

So what exactly happened? Did Capitol fail to adjust the lending rate versus what the market was paying for the paper--so instead of getting stuck with millions in unsellable paper, they just bailed?

[Rebelbase]

Those 125% equity line mortgates are really going to hurt a lot of people when it comes time to sell the house.