Breaking News: Lender with 9 Local Branches Can’t Fund Loans, Ordered to Cease and Desist

by Alex Stenback on March 28, 2008

We’ve only got a single source on this for now (working on more) so we’ll leave the name of this outfit blind until we can get some confirmation.  Name now confirmed as Centennial Mortgage and Funding, out of Bloomington, see update below.
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The word is a south-metro headquarted Mortgage lender Centennial Mortgage and Funding, a local correspondent/broker with 9 Minnesota branches, and two in Wisconsin, has had their warehouse lines pulled, and cannot fund loans.  Allegedly the company CFO was using one warehouse line to fund another (this is bad, see below.)

40 some odd loans scheduled to close today cannot fund, leaving the borrowers, some of whom were set to close on purchase transactions, in the lurch.

UPDATE 3:54P Friday 28 March

We just received the following confirmation via email from Bill Walsh, Director of Communications for the Minnesota Department of Commerce:

The Minnesota Department of Commerce issued a Consent Cease and Desist Order today against Centennial Mortgage and Funding of Bloomington because of their substantial financial problems. The company agreed to cease and desist from engaging in any and all new mortgage loan origination or servicing activities in the State of Minnesota.

The order should be on our website soon.

Though the name has now been confirmed, the exact nature of the financial problems remain a bit of a mystery, but since our original sources information has now largely been substantiated, we can only assume it was warehouse line shenanigans that did them in.

UPDATE 2, 4:43P Friday 28 March
Here is a copy of the consent order: Download CentennialMortgage.pdf

For the civilians and non-mortgage people:
A warehouse line, or warehouse line-of-credit is the mechanism that most larger brokers (or correspondent lenders) use to fund loans before they are sold off to the investor (such as a Countrywide, Chase, Wells Fargo, etc.) who will ultimately own and/or service the loan.

Warehouse lines are used because the typical broker does not have the cash to fund each loan themselves, so they need short term borrowing capacity to fund production.  A warehouse line is essentially a giant revolving line of credit, and their use is the standard business model for non-bank lenders.

Normally, and by design, closed loans are "on" a warehouse line for very short periods of time – a matter of days or weeks – until the loan is shipped off to the investor.  For this reason, there is not normally a lot of risk for the providers of these types of facilities. 

But occasionally, the investor the loan was destined for will reject the loan and push it back to the originator/broker.  There are many reasons this can happen.  Maybe the loan was underwritten incorrectly, maybe it was flagged for fraud, maybe it was an early payment default, or some other violation of the representations and warranties the lender and originator agree to. 

So if nobody will buy the loan, it sits on the warehouse line.  Once enough loans (or just one of the wrong kind- warehouse lenders are VERY conservative these days) get put back on the warehouse line, the warehouse lender says something like: "Hey, this is supposed to be a short term deal here, we didn’t sign up to take the long term credit risk for you on a loan, so you need to pay this loan off yourself if you can’t sell it on the secondary market." This is known as a margin call.

And if the broker/originator does not have the cash to pay up, they might just look to other sources to raise cash.  If desperate, they might just use one warehouse line to meet the margin call of another.

But back to our story:

If this is what happened here, they are up a creek.  And the solution is not likely to be just about throwing the CFO under the bus, offering a mea-culpa to the warehouse lender, and re-instating the line.  It may not be that easy.

That’s because, presumably, the broker faced a cash call it could not meet, and tried to use another warehouse line to come up with the dough.  Point being: The original obligation that caused this may remain unmet, and unless they’ve got another way to quickly raise capital, or a VERY cozy relationship with another warehouse lender, it could spell the end.

Again, this is speculation and theory to a large degree at this point, and we will work on confirming the brokers identity.  Anyone with any personal knowledge, especially borrowers caught in this, feel free to jump in the comments. 

More as things develop.

{ 8 comments… read them below or add one }

Happy Customer April 2, 2008 at 12:05 pm

This figures. The president of this company has been living the good life for years now. Walks around with the “my SH*t doesn’t stick” attitude. I hope he gets all that is going to be coming his way. It figures he is trying to blame his CFO. I’d bet any money that Alvin orderd the shuffle just to try to save his sorry self. Know any good BK attorneys Alvin?

terry April 3, 2008 at 8:49 am

I am one of the customers who is in limbo and do not know what to do. my mortgage broker is trying to take care of this as fast as they can but the waiting is killing me. am i going to lose my house? what does one do?

BILL SAM April 7, 2008 at 11:11 am

WHAT WILL HAPPEN TI THOSE PEOPLE WHO HAVE HAD LOAN FROM CENTENIAL?

Jimbo April 9, 2008 at 10:46 am

These guys are crooks and try to throw loans back onto hard working brokers!!! Now we know why, they were broke and desperate!!!

kjh April 11, 2008 at 8:54 pm

this is or was one of the only true faithful & honest mortgage bankers out there and that is why they made it through 2006-2007 & were still profitable. these comments appear to be from competitors who couldn’t compete and possibly “jealous” of what Alvin had accomplished!
Per my contacts, the loans that fell into this mishap are still closing, if not closed already.

rmf April 14, 2008 at 8:37 am

first of all they were not mortgage “bankers” they were brokers. Second they were far from faithful & honest, they had the same practices as all the other brokers, they may have been better snake oil salesmen which allowed them to survive longer than the others. Back to selling used cars folks, the show is over!

Screwed Employees June 27, 2008 at 7:18 pm

What’s really sad, is all employees have not been paid their wages and are told they never will be. Also, they have no COBRA benefits either. Hopefully, the shareholders can be held liable for the employees due wages!!!!!!!!!!!!!!!!!!!!!!!!!!!! They are working very hard to cover their personal butts!!!!!

Not Feeling Sorry August 18, 2008 at 9:26 am

From what I hear, there were several employees that felt fraudulent activity was taking place and tried bringing it to management’s attention to try and stop it. But at that time money was flowing in and executives didn’t seem to think the loans would ever come back to haunt them. All of a sudden, they ended up with a handfull of bad loan buy backs, and ran into a cash liquidity crisis and couldn’t figure out how to pull themselves out!

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