Recent pleadings filed in bankruptcy case of First Guarantee Mortgage Corp. (FGMC) show that the lender has left its camp where lenders mistake the bag for a bunch of debt.
FGMC and its subsidiary, Maverick II Holdings LLC, filed June 30 to reorganize under Chapter 11 bankruptcy protection. Briefs filed in the case – now pending in US bankruptcy court in Delaware – show the lender owes more than $400 million to four warehouse lenders, including Customer Bank, Flagstar Bank, Texas Capital Bank and JVB Financial Group LLC.
“Regarding non-agency loans and non-QM loans, inventory lenders fund between 90% and 95% of the original principal amount of the loan, which is required [FGMC] to use working capital to fund the remaining portion of the principal amount of the mortgage loans,” said a statement filed with the court by Aaron Samples, CEO of FGMC. “On the application date [June 30]the debtors [FGMC and affiliates] It is estimated that they collectively owe the warehouse lenders approximately $418 million.”
Samples reveals in its statement that FGMC bled cash just before filing for bankruptcy protection — and posted an after-tax loss of $23.3 million in the four months ended April 30 on “mortgage loans, cash and related collateral “.
“Obligations to the client bank are further secured by a cash reserve account and associated collateral,” Samples’ court pleadings add. “Also a portion [FGMC’s] Obligations to the customer bank not exceeding $25 million are subject to full recourse…”
FGMC also owes $18.4 million to a bridge lender, which court filings describe as “an indirect subsidiary of a private investment firm managed by Pacific Investment Management Co. (PIMCO)” – a large asset management firm that acquired a stake in FMGC in 2015. This debt is listed as a secured debt.
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In addition, FGMC states in court that it has approximately $37 million in unsecured debt, “including commercial debt and payables, amounts owed to former and current employees, and a fully drawn $25 million line of credit at the Customers Bank”.
Customers Bank says in a filing with bankruptcy court that it is a party to “two financing arrangements” with FGMC. One is the department store line, which was established to facilitate FGMC’s financing of mortgage loans. The other is a separate “revolving credit facility” made available to FGMC for “working capital”.
Although Sample’s statement lists the fully drawn $25 million line of credit as unsecured debt, Customers Bank’s filings allege that both the warehouse and working capital lines of credit are secured by collateral.
Another warehouse lender, Flagstar Bank, also alleges in briefs filed with the bankruptcy court that FGMC owes it a tidy sum through a secured warehouse line with the bank.
“As of the filing date, there were approximately 161 pledged mortgage loans originated, funded or acquired by FGMC in whole or in part through advances under the Flagstar Loan Agreement,” according to a Flagstar bankruptcy court filing. “Approximately $50 million remains outstanding under the Flagstar loan agreement [the warehouse line of credit]excluding interest, fees and other costs, including curtailment fees, which will continue to accrue.”
Both Flagstar and Customers Bank have filed petitions in the bankruptcy court denying portions of a recently filed FGMC filing. These briefs, among other motions, seek court approval for FGMC to receive post-bankruptcy warehouse financing (so-called debtor-in-possession or DIP financing).
But the catch is that FMGC is asking the court to give “top priority” to the provider of this DIP funding [status] before all other creditors, including pre-secured creditors,” such as Flagstar and Customers Bank, the court pleadings filed by Customers Bank allege.
A hearing on the matter has been scheduled for July 28 at the US Bankruptcy Court for the District of Delaware in Wilmington, according to the bankruptcy court’s filing in the case.
In a related matter, a lawsuit seeking class action status has been filed by former FGMC employees against the lender. The lawsuit seeks back payments and other compensation for former FGMC employees who were summarily fired by the lender in late June for alleged violations of the US WARN Act.
“Plaintiff [employees] were dismissed along with around 470 similarly situated employees as part of … arranged mass redundancies or plant closures [FGMC leadership] on June 24, 2022,” was filed with the United States Bankruptcy Court for the District of Delaware in late June. “[FGMC] failed to give [employees] …at least 60 days’ notice of their termination, as required by the WARN Act.”