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The Big Subprime Shovel
January 29, 2006: Once upon a short time ago, Mortgage Lenders Network USA (MLN) seemed an inexorable subprime force. Described as a top tier lender by its own execs, MLN was a major player in its home state of Connecticut. Not that the Nutmeg State was the only place MLN hung its hat. MLN is incorporated in Delaware, has outposts in states across the nation, and a sister entity (Emax Financial Group, LLC) based in the Virgin Islands. Still, the heart of MLN lies in Connecticut. At one point the company was posited as a model for the state's financial services. MLN had seen the future and it was subprime.

Subprime mortgage lenders serve borrowers with tainted credit, no credit, or with OK credit but unusual needs. Such as the desire to juggle more mortgage than a prime (also called "conforming") lender might allow. In return, subprimes charge higher interest rates and extra fees. Subprime loans deliver another round of profit when lenders sell them in bundles to Wall Street, where paper peddlers market them as mortgage backed securities. Some peddlers double as warehouse lenders; they provide lines of credit to subprime mortgage lenders. Thereby enabling subprime lenders to make more-- and larger-- loans.

In the Autumn of 2006, as result of increasing problems in the subprime lending world, plus their own erroneous corporate decisions, MLN was tossed off the subprime wheel. Their paper peddlers were only buying on the cheap, if at all. Lines of warehouse credit dried up. At the beginning of 2007, after months of denying the company was in trouble, MLN announced they were temporarily closing their wholesale indirect lending operations, which accounted for 90% of MLN business. MLN does a much smaller amount of direct lending. They also service mortgages issued by other subprime lenders. MLN's sister soldier, Emax or EMAX, is also in the subservicing biz.

At present MLN is seriously ill. At one point the doctor, aka Lehman Brothers, was said to be coming. But while Lehman was an MLN warehouse lender and paper peddler in the past, their interest in supplying go juice has waned. The phrase "troubled mortgage lender" is now glued to "MLN" in newsmedia stories. Some suggest the end is near. A restive mob of mortgage brokers, borrowers, ex MLN employees, and banking officials from various states are gathering outside the door. Why? Because as MLN sickened, they apparently shoveled with feverish strength.

Via a coordinated effort by banking officials in Connecticut, Massachusetts, Rhode Island, Vermont, Maine, New Hampshire, New York, Pennsylvania and Michigan, a temporary order to cease and desist was issued to Mortgage Lenders Network on January 19th by Connecticut's Department of Banking. The order claims MLN failed to respond to a December 13th request by the Connecticut Banking Department for info re the company's financial condition. Including the status of MLN's contractual relationships with warehouse lenders. The order also alleges that during 2006, MLN piled on excessive fees when refinancing a number of mortgages in Connecticut. And that MLN approved first and second mortgages in a number of states which they didn't close or when they did, "failed to timely disburse the loan proceeds."

In other words, MLN cut deals they didn't honor. The MLN loans (the number now stands at 1500) may have looked good on paper, but they were bad news for borrowers who expected to lay claim to new homes or refinance existing mortgages. And doubtless some sellers, given the current housing market, took a hit. Then there were the real estate professionals caught in the middle of undone deals.

As 2006 waned, MLN grew cagier and cagier in communications with their outside mortgage brokers. Missing funds were in the mail. The cause of the delays lay elsewhere, not with MLN. Calls to the company weren't returned. At times nobody even answered the phone. Rumors of trouble-- and predictions of demise-- were appearing on online industry bulletin boards such as Broker Outpost and Mortgage Grapevine, yet a goodly number of brokers were inclined to give MLN the benefit of the doubt. Some were whistling in the dark or may have been MLN touts. But others had done business with-- and made money for-- MLN for years and trusted the company. Some even speculated the lack of response might be due to MLN offices being closed for the holidays.

Also getting the MLN shovel were in-house employees. At the beginning of January, after finally acknowledging their wholesale division was in trouble, MLN laid off 80 percent of their work force. However, MLN execs told employees an investor (many assumed it was Lehman Brothers) was about to save the day and that most of the lay-offs were merely "furloughs". A few weeks later the furloughs turned into firings. An investor was still a-coming but the deal would be done too late to save peoples' jobs. Company health benefits are set to disappear in early February.

Among the fired in-house employees were sales managers and account executives who worked with outside mortgage brokers. On January 26th, MLN sales employees from Connecticut, Illinois, Maryland, Georgia and the West Coast were quoted in the Hartford Courant (Commissions An Issue At MLN) saying MLN dodged paying their commissions for several months. According to the Courant, the total amount owed sales people "could run into the millions."

Speaking of shovels, a massive new MLN headquarters is being built in Wallingford, Connecticut. A four million dollar loan for the project was set to be delivered via the Connecticut Department of Economic and Community Development (DECD). The loan now hangs in limbo, but the DECD, as of late January, was still pledging support. In the United States Virgin Islands, MLN's sister entity EMAX is also a recipient of government backed economic development assistance.

On January 26th, MLN and EMAX were the subject of a press release issued by Residential Funding Company, LLC. Announcing that in a January 4th filing with the Securities and Exchange Commission, Residential had terminated its business relationship with both MLN and EMAX. Residential Funding is a "master servicer" of subprime loans. MLN and EMAC were subservicers for Residential. Though MLN's mortgage servicing platform is relatively small, it had been seen as a prop for the company's fall back strategy. On January 2nd, two days before the SEC filing, MLN had issued a press release declaring that MLN's "servicing platform remains strong."

Residential Funding incidentally, is a subsidiary of Residential Capital, Inc. Which in turn is a subsidiary of GMAC LLC. GMAC, via Residential Funding, was one of MLN's warehouse lenders.

Further MLN developments: Lehman Brothers ultimately agreed to buy 400 of the closed MLN loans. Other mortgage lenders have picked up some, but not all, of MLN's unfunded loans. Salespeople who say they were burned for commissions are filing lawsuits. Several states (though not Connecticut) have lifted MLN's license. Investigations are being launched and restitution is being demanded. The banking department investigation connected to Connecticut's temporary cease and desist order could result in $7.6 million in fines. On industry bulletin boards rumors are flying (OK just flapping) about a mystery investor who'll be infusing MLN with capital any day now. Is it a bird, is it a plane, or is it a friend of the family?

In the mad mad mad world of subprime, anything is possible.

Carla Von Hoffmannstahl-Solomonoff

"When you look at the fact that one out of 10 sub-prime loans are currently in default, what is that telling you?" said Vickie Thivierge, a lending industry veteran in San Jose. "It basically says we are in for some changes."

"Mortgage shakeout felt locally," Jondi Gumz, Santa Cruz Sentinel, 01/29/07

Sources include but are not limited to:

"Residential Funding Company to Transfer Servicing of Mortgages Serviced by MLN," Residential Capital, LLC, PRNewswire, 01/26/07

"MLN issued a cease-and-desist," Cara Baruzzi, Journal Register News Service, 01/20/07

In The Matter Of: Mortgage Lenders Network USA, INC., Temporary Order To Cease And Desist, State of Connecticut Department of Banking, 01/19/07

"Mortgage Lenders Network USA, Inc. Remains a Strong Retail Originator and Mortgage Servicer," MLN, PRNewswire, 01/02/07

Beneficiaries, United States Virgin Islands Economic Development Authority

Earlier Mondo QT coverage re MLN can be found at The Tainted & The Prime: Mortgage Lenders Shake Out, Blogger News Network

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Copyright (c) 2007 by Carola Von Hoffmannstahl-Solomonoff. This material may be freely distributed subject to the terms and conditions set forth in the Open Publication License. This license relieves the author of any liability or implication of warranty, grants others permission to use the Content in whole or in part, and insures that the original author will be properly credited when Content is used. It also grants others permission to modify and redistribute the Content if they clearly mark what changes have been made, when they were made, and who made them. Finally, the license insures that if someone else bases a work on this Content, that the resultant work will be made available under the Open Publication License as well.


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