Metrocities Mortgage LLC says it’s paid an undisclosed sum to satisfy “known and unknown” repurchase claims on its past loans.
The move to retire past and future buybacks is one aspect of a roughly $125 million investment in Metrocities Mortgage by Sterling Partners, said Paul Wylie, Metrocities founder and chief executive officer.
“The fact that we have the foresight to settle up with investors means we don’t have to look over our shoulders as other lenders do as loans continue to go bad, probably over the next six quarters,” Wylie told Inman News.
Sterling — a $2.2 billion private equity fund — is also guaranteeing Metrocities’ major warehouse line of credit, ensuring the company will have continued access to the funds it needs to make loans, Wylie said.
That allows Sherman Oaks, Calif.-based Metrocities to engage in a countercyclical growth strategy. Metrocities is recruiting more loan officers and launching companywide technology upgrades as part of a plan to increase market share, Wylie said. The company’s Web site listed seven job openings Wednesday, including loan originators in Idaho, Washington, Colorado, Arizona and California.
Wylie said he could not go into specifics of the payments to resolve repurchase claims by investors who purchased loans originated by Metrocities, but gave some hypothetical examples.
“It’s a negotiation process, where you start with some of the known claims, and the collective loan amounts where there were issues — some serious, some minor,” he said.
On a loan that was still current, for example, a borrower may not have actually occupied a home that they’d claimed as their primary residence, Wylie said.
“That’s a technical breach of the agreement (to the investor who purchased the loan from Metrocities) — even though it’s not a breach our company committed, we were responsible for the borrower’s misrepresentation.”
Metrocities reported more than $5.7 billion in loan production in 2006. The cash payments give Metrocities a “clean slate,” which it will use as part of a strategy to put its old lending guidelines — and those of its former affiliate, No Red Tape — behind it.
“We wanted to put those behind us, tighten up guidelines, and underwrite loans on a more conservative basis,” Wylie said. “We are selling loans to Fannie and Freddie, we are selling whole loans and FHA loans to other institutions. We have very limited credit and underwriting risk at this point.”
That doesn’t mean that Metrocities is out of the subprime and alt-A business altogether.
“As a mortgage company we’re still here to offer a full range of products, and if we can’t, we broker to other institutions that are still competitive,” Wylie said. On subprime and alt-A loans, “the underwriting guidelines have tightened up — the borrowers are more qualified, and some loan-to-value ratios have been reduced.”
He said Metrocities is a partner in roughly 200 affiliated business arrangements with real estate companies, credit unions, financial advisors and builders, and its loan officers have access to more than 7,000 loan programs.
Not having potential repurchase claims hanging over the company’s head “is a huge advantage as we are talking to people who may want to join us,” he said. “Whether they are joint venture partners or loan officers, we can tell them that issue is behind us.”
Wylie said that Metrocities relies on warehouse lines of credit to fund loans, rather than the commercial paper that some lenders issue to finance short-term debt. The market for commercial paper virtually dried up in August after investors lost confidence in the ability of mortgage lenders like Countrywide Financial to repay such debt.
“Our main line is from a very large, well-capitalized savings and loan, and Sterling has guaranteed the performance of that line,” Wylie said.
Sterling’s guarantee is important to warehouse lenders — who buy and “warehouse” mortgage loans until they can be bundled together as collateral for securities that are sold to Wall Street investors — who worry about being stuck holding the bag if the market for such investments sours.
“One problem plaguing warehouse lenders was when the value of loans dropped, they were left with loans that were not worth as much as they thought,” Wylie said. The guarantee “really shores up our funding source — we don’t have the concern some other lenders have had” about losing their warehouse lines of credit.
Sterling had invested $100 million in Metrocities as part of a deal in which Metrocities became part of Sterling’s Prospect Mortgage Co. LLC, Wylie told Inman News in June. Sterling has since upped that commitment by $25 million, Wylie said.
