Despite Mortgage Lenders Network USA’s filing for Chapter 11 bankruptcy, construction continues in Wallingford on what was to be MLN’s 305,000-square-foot headquarters. Property owner Workstage-Connecticut LLC is now seeking other tenants.
Mortgage Lenders Network USA’s colossal collapse has had a ripple effect across the country, as creditors and borrowers alike wait for their money.
In its Chapter 11 bankruptcy filing, MLN lists more than 5,000 creditors seeking payment from the shut-down lending and brokerage firm. The top five creditors, all based in New York, are: Merrill Lynch Bank USA, $36.6 million; Ixis Real Estate Capital, $25 million; Lehman Brothers Bank, $9.9 million; Wachovia Bank, $7.6 million; and Goldman Sachs Mortgage Co., $4.7 million.
A little further down the list is Duffy White Construction, based in Ardmore, Pa., with a claim of $1.9 million. That’s the outstanding balance of a $3.3 million job the construction company did for an MLN office in Philadelphia, according to co-owner Mike Duffy.
MLN was leasing 45,000 square feet of space from a building owned by Liberty Property Trust, Duffy said, and MLN hired Duffy White Construction to get the space ready for business.
Initially, the plan was to use the location for both retail and wholesale lending, but the plan changed to dedicate the space solely for wholesale lending, Duffy said. That proved to be unfortunate for the workers in Philadelphia, because wholesale lending became the first part of MLN to fold.
“We moved [the workers] in on Dec. 8, and the following week everyone was laid off,” Duffy said.
While Duffy is understandably frustrated, he recognizes his company is not the only one suffering. MLN had similar projects going on in cities such as Atlanta, Chicago and Phoenix, he said.
MLN’s list of creditors does include building, construction and office furniture companies with those addresses.
In Wallingford, however, work continues on the 305,000-square-foot state-of-the-art facility MLN had planned to call home. Shortly after the state Department of Banking issued a summary suspension order against MLN, Workstage-Connecticut LLC – the Wallingford project’s general contractor, which owns the property – issued a statement that work would continue.
“We are convinced that companies will look at this workplace and see a smart investment,” said Workstage Chief Executive Officer Jack Cottrell.
Workstage has been talking to officials at the state Department of Economic and Community Development in an effort to find other businesses to lease the space.
“We’ve had contact with them,” confirmed DECD spokesman James Watson. “We’re appreciative of the fact that this asset is out there.”
While thousands of creditors wait for their money, two dozen borrowers remain with unfunded loans.
When the DOB issued a suspension order against MLN, the department cited 93 loans in Connecticut and 1,409 in other states that MLN had failed to fund. That total is now down to 24, with one in Connecticut, according to DOB spokesman James Heckman.
“Lehman Brothers came in and funded a bunch of their loans,” he said. “[MLN] had a written agreement with Lehman Brothers.”
Lehman did not take all of the outstanding loans, but the number of customers waiting for funds dropped further when some borrowers gave up on pursuing their MLN loans, Heckman said.
But the DOB’s stance is that if a customer is promised a loan at a given rate, “then they are owed that deal,” he said.
‘Out of Control’
In addition to the creditors and borrowers, MLN is looking at $7.6 million in fines from the DOB. Apart from the unfunded loans, DOB is citing MLN for employing at least 40 unregistered originators, not cooperating with the DOB and exceeding the state’s cap in prepaid finance charges on multiple loans.
MLN has the right to request a hearing regarding the state’s citation, fines and suspension order, but had not opted to do so as of press time. Separately, the bankruptcy case is in U.S. Bankruptcy Court, District of Delaware.
As for the company’s solvency issues, “I think that’s something the [DOB] investigation uncovered,” Heckman said. But the root cause of MLN’s financial woes remains unclear.
“I don’t think the department can come up with a case for their troubles at this time,” he said.
Plenty of subprime lenders have run into recent financial troubles as they encounter a rising number of delinquencies. But MLN blames its financial problems on a product geared for low-risk borrowers. Chief Executive Officer Mitch Heffernan points to $600 million in “A++” mortgages that he claims the company mistakenly lent at below-market rates.
Other subprime lenders running into trouble recently include London-based HSBC Holdings PLC and Irvine, Calif.-based New Century Financial. Both companies have acknowledged that they severely underestimated the number of subprime loans they would have to buy back from the secondary market due to early defaults.
“Delinquencies are at an all-time high, and it’s going to get uglier before it gets better,” said Joseph Antonios, president and chief executive officer of EPI Mortgage Center, formerly Metro Mortgage, in Waterbury.
As the real estate market sped ahead with higher and higher appreciation values a couple of years ago, “a lot of lenders were very lax with underwriting guidelines,” Antonios said. “And the secondary market was gobbling [subprime loans] up.”
Then, sometime around July 2006, the delinquencies began, he said.
“Now they’re out of control,” Antonios said. “It’s a mess.”
Michael Rosella, branch manager at Back Bay Mortgage in Stratford, agreed.
“The attractiveness of the subprime loan is that there are less qualifications required,” he said. “It makes it easier for people who couldn’t otherwise get approved.”
The leniency in standards, coupled with expiring “teaser” introductory rates on the loans, has helped fuel the acceleration of delinquencies.
And the secondary market is more than wary. Investment in subprime loans by the secondary market is expected to drop between 30 percent and 40 percent this year, Rosella said.
Still, Rosella said he believes the subprime market will keep going, even if at a slower pace.
“We have to be smarter,” he said. “I think there’s opportunity for people who know how to do it right.”
One of the keys, he added, is “a higher standard in how the [loan] paper has to be written.”
Antonios is also predicting changes in the coming year.
“We all need to reinvent,” he said. One way he expects that to happen is for mortgage brokers to develop niche markets, in the way his company has carved out a niche for itself in new construction and rehabilitation projects.
And the loans that are already on the market may have to change, too.
“Lenders are going to have to modify existing delinquent loans,” Antonios said. That could mean lowering the monthly payments by extending 30-year loans to 40- or 50-year loans, he added.
