The U.S. housing market slowed dramatically this year after the end of record-low mortgage rates. Plano-based First Guaranty Mortgage Corp. could be the first mortgage company to go bankrupt in response, despite the backing of investment giant PIMCO.
The industry has seen layoffs and acquisitions both at big banks JPMorgan Chase & Co. and Wells Fargo as well as smaller players such as LoanDepot and Sprout Mortgage. Still, there are some signs from former employees that the situation at First Guaranty wasn’t entirely tied to market conditions.
Jay Davies, a former senior loan officer for First Guaranty, said being at a company with so many different avenues of business initially gave him a sense of security. The company offered purchase and refinance loans directly to customers and also produced loans for government-backed agencies and bought mortgage loans closed by other lenders.
“I feel like we were under the impression that First Guaranty Mortgage Corp. was in a good position, from a funding perspective, to weather this type of storm, that this is the type of company that comes out on top when there’s a market shift — and clearly that wasn’t the case,” he said.
Davies and several other employees are suing the company over the company’s short notice of hundreds of layoffs, which they claim are violations of the Worker Adjustment and Retraining Notification Act of 1988.
Shifting tides
Mortgage companies increased their workforces in 2020 to meet the tremendous demand as buyers and homeowners took advantage of historically low mortgage rates. Lenders originated a record $4.1 trillion in loans for new homes and refinances that year, 92% more than in 2019, according to the Mortgage Bankers Association.
The market boomed until the first few months of 2022, when rates increased sharply and demand for home loans dropped. Buyers nationwide found it difficult to afford monthly payments with the higher rates combined with rising home prices.
Refinance activity mostly vanished. As of July 15, refinance applications were down about 80% from the prior year and purchase loan applications were down 19%, according to the Mortgage Bankers Association.
“Now you’re in a situation where activity is going down, and they’re adjusting accordingly once again,” said Adam DeSanctis, vice president of communications at the Mortgage Bankers Association.
In the first four months of 2022, First Guaranty lost $23.3 million, in part due to lower origination volumes, CEO Aaron Samples wrote in a bankruptcy filing. The company estimates that it owes about $418 million to lenders it borrowed funds from to originate and buy loans.
The company originated $1.7 billion in mortgages in the first four months of 2022 and was on pace to do just $5 billion to $6 billion this year, Samples wrote. In 2021, First Guaranty originated $10.6 billion in loans, the majority of which were government-backed loans through Fannie Mae, Freddie Mac and Ginnie Mae.
Samples said the nation’s limited housing inventory and still-rising home prices contributed to the lower demand for home loans in addition to rising rates. “Accordingly, mortgage companies are currently under more financial and operational stress than any time in decades, in my experience,” Samples wrote.
First Guaranty kept on 129 employees to complete loans that were in the pipeline before it declared bankruptcy.
“The company is closing as many of these transactions as possible and also helping to facilitate closings at other lenders, should the customer decide that another route is best for them,” First Guaranty said in an emailed statement.
DeSanctis said mortgage companies, especially those focused on refinances, may choose to shift employees to other lines of business, lay off employees or merge or sell to other firms.
Management missteps
Unlike other companies in the business, First Guaranty didn’t pivot in response to the possibility of the Federal Reserve raising interest rates, former loan officer Deniz Dogru said.
“A lot of lenders adjusted, and it didn’t seem like adjustments were being made or the team was being proactive whatsoever,” said Dogru, who worked at First Guaranty for several months in 2021. “Even if, I don’t know, maybe they were trying to, the message wasn’t perceived among everyone.”
That was indicative of the broader leadership culture at First Guaranty, Dogru said. He had the sense that leaders set priorities but rarely followed up on them or held employees accountable for carrying them out.
First Guaranty claims that it did adjust its business in response to the change in demand. The company tried to increase profitability in the first four months of 2022 by selling more residential mortgage loans directly to consumers, which was its most profitable business line, Samples wrote in the bankruptcy filing. That came at the expense of additional labor costs. Additionally, the company said in an email that it increased nonqualified mortgage originations, one of its highest-margin products, and “took significant steps to reduce expenses.”
It became hard to get some loans processed in the months before the layoffs, former mortgage loan originator Walter Henderson said. Processors were strict in adjusting clients’ incomes, sometimes to levels where the loans wouldn’t get approved.
“This happened before the market changed,” he said. "I think it was just personnel, if you ask me. I think it’s just the people.”
Henderson worked at the company twice, from 2019 to 2021 and again for several months this year. For the most part, he thought company leadership was effective. But he left First Guaranty in May because of the problems getting loans approved, and because he saw the writing on the wall after a previous round of layoffs in the spring.
Samples wrote that management tried to raise capital or financing but was unable to “despite their best efforts.”
Gender discrimination suit
In addition to the WARN Act lawsuit, former employees Lynley VanSingel, Melanie Meyer and Jessie Palmer are suing the company over what they call gender-based discrimination.
The suit claims that First Guaranty provided fewer opportunities to the plaintiffs than male employees, and removed responsibilities from them and changed their pay and reporting structure because they were women. It says the company terminated Palmer in January and VanSingel in February in retaliation for complaining about gender discrimination by management at the company.
They also claim PIMCO, which owns a large stake in the mortgage lender, “knowingly allowed FGMC to be undercapitalized and/or improperly transferred assets out of FGMC causing FGMC to be undercapitalized.”
VanSingel declined an interview for this story, with her attorney citing a non-disparagement clause in her employee agreement. The other two plaintiffs’ attorneys did not respond to requests for comment.
VanSingel was senior vice president of learning and organizational development from April 2019 to February 2022. As the company grew when mortgage refinances boomed, her team got bigger. While the company continued to invest in expanding her team, “she had doubts about this fast expansion strategy,” the lawsuit says. It claims First Guaranty was experiencing turnover from the C-suite level down and she was concerned her department was overstaffed.
Dogru left the company late last year, seeing market upheaval on the horizon. His productivity fell off shortly before he left, but his manager was slow to check in on him.
“I don’t know where it comes from, but if my manager doesn’t care, it’s likely because their manager doesn’t care,” he said.
