Sprout Mortgage Shuts Down

An unfortunate headline in the troubled mortgage industry this week, Sprout Mortgage abruptly shut down its operations on July 6th, laying off all 300 employees.

The leading non-QM mortgage originator, was reportedly finalizing a lifeline from Citi when the CEO decided to pull the plug, call off the deal and close down the company.

According to reports, Michael Strauss, CEO of Sprout Mortgage, cancelled the Citibank financing Wednesday morning. At 3pm EST, he informed Elliott Salzman, Sprout Mortgage EVP, of his decision to close the company. At 4:30pm, Shea Pallante, President of Sprout Mortgage, delivered the unfortunate news on at an all hands conference call.

Employees were informed that they would not be receiving pay for the current and prior pay period (a total of nearly 3 weeks).

The collapse of Sprout Mortgage comes during an extreme downturn in the mortgage lending industry. With interest rates on the rise, the demand for mortgages has hit a multi-decade low, with lenders seeing nearly 40% decline in purchase loan volume and a nearly 80% decline in refinance demand.

30 Year Fixed Rate Mortgage vs. Non-QM DSCR Loan Interest Rates

DSCR Loan Index

Source: DSCR Loan Index by OfferMarket

What Happened To Sprout Mortgage

Like so many other lenders, Sprout Mortgage was unable to sell off newly originated mortgages, a critical part of the origination business that replenishes capital to originate new loans. To clarify, very few firms that originate 30 year fixed rate mortgages want to keep these relatively low interest loans on their balance sheet, so they them into the securitization market for a profit and continue their origination operation.

When rates increase, the value of the mortgages held by origination firms (private lenders, non-QM lenders) decline in value, meaning they would likely need to be sold at a loss in order to get them off their balance sheet. As if this scenario isn’t bad enough, the firms that purchase and securitize these loans have stopped or dramatically slowed down their purchasing of these loans because their clients who buy these securities — institutional fixed income investors (pension funds, insurance companies) — stopped or slowed down their purchasing of non-QM mortgage backed securities.

It was reported that Sprout Mortgage was trying to sell a $190 million loan portfolio, but was only able to offload $90 million.

There are important questions that remain unanswered:

  • Why did Sprout Mortgage call off their funding lifeline from Citibank?
  • Does shutting down imply industry executives foresee a prolonged dysfunctional environment for non-QM lending?

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