Recent pleadings filed in the bankruptcy case of First Guaranty Mortgage Corp. (FGMC) show the lender left its warehouse lenders holding the bag for a mound of debt.
FGMC and its affiliate, Maverick II Holdings LLC, on June 30 filed to reorganize under Chapter 11 bankruptcy protection. Pleadings filed in the case — now pending in U.S. Bankruptcy Court in Delaware — show the lender owes more than $400 million to four warehouse lenders, which include Customers Bank, Flagstar Bank, Texas Capital Bank and J.V.B. Financial Group LLC.
“With respect to nonagency loans and non-QM loans, warehouse lenders will finance between 90% and 95% of the original principal amount of the loan, which requires [FGMC] to use working capital to fund the remaining portion of the principal balance of the mortgage loans,” states a declaration filed with the court by FGMC CEO Aaron Samples. “As of the petition date [June 30], the debtors [FGMC and affiliates] estimate that they collectively owe the warehouse lenders approximately $418 million.”
Samples reveals in his declaration that FGMC was hemorrhaging cash just prior to filing for bankruptcy protection — posting a $23.3 million after-tax loss over the four months ending April 30. He also contends in his court pleadings that the amounts advanced under the warehouse lines are secured by “mortgage loans, cash and related collateral.”
“Obligations to Customers Bank are further secured by a cash reserve account and related collateral,” Samples court pleadings add. “Further, a portion of [FGMC’s] obligations to Customers Bank, not to exceed $25 million, is subject to a full recourse guarantee….”
FGMC also owes $18.4 million to a bridge lender that is described in court filings as “an indirect subsidiary of a private investment firm managed by Pacific Investment Management Co. (PIMCO)” — which is a large investment management firm that in 2015 purchased a stake in FMGC. That debt is listed as secured debt.
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In addition, FGMC in court pleadings indicates that it has about $37 million in unsecured debt, “including trade debt and payables, amounts owed to former and current employees, and a $25 million fully-drawn line of credit with Customers Bank.”
Customers Bank, in a motion filed with the bankruptcy court, explains that it is party to “two financing arrangements” with FGMC. One is the warehouse line — set up to facilitate FGMC’s funding of mortgage loans. The other is a separate “revolving credit facility” provided to FGMC for “working capital.”
Although Sample’s declaration lists the fully-drawn $25 million line of credit as unsecured debt, Customers Bank’s pleadings allege that both the warehouse and the working-capital lines of credit are secured by collateral.
Another warehouse lender, Flagstar Bank, also alleges in pleadings filed with the bankruptcy court that FGMC owes it a tidy sum on a secured warehouse line with the bank.
“As of the petition date, there were approximately 161 pledged mortgage loans originated, funded or acquired, in whole or in part, by FGMC through advances under the Flagstar loan agreement,” a bankruptcy court filing by Flagstar states. “Approximately $50 million remains outstanding under the Flagstar loan agreement [the warehouse line of credit], exclusive of interest, fees and other costs, including curtailment charges that continue to accrue.”
Both Flagstar and Customers Bank also have filed motions with the bankruptcy court objecting to parts of a recent FGMC motion. Those pleadings, among other requests, seek court approval for FGMC to obtain post-bankruptcy warehouse financing (called debtor-in-possession, or DIP, financing).
The rub, however, is that FMGC is asking the court to give the provider of that DIP financing “super-priority [status] ahead of all other creditors, including pre-petition secured creditors,” such as Flagstar and Customers Bank, court pleadings filed by Customers Bank allege.
A hearing on the matter has been set for July 28 in U.S. Bankruptcy Court for the District of Delaware in Wilmington, according to the bankruptcy court docket for the case.
In a related matter, a lawsuit that seeks class-action status has been filed by former FGMC employees against the lender. The litigation seeks backpay and other relief on behalf of former FGMC employees who were laid off by the lender without notice in late June, in alleged violation of the federal WARN Act.
“Plaintiffs [employees] were terminated along with approximately 470 similarly situated employees as part of … mass layoffs or plant closings ordered by [FGMC leadership] on June 24, 2022,” state pleading filed in late June in U.S. Bankruptcy Court for the District of Delaware. “[FGMC] failed to give [employees] … at least 60 days’ advance notice of their terminations, as required by the WARN Act.”