There’s something to be said about the financial woes that several mortgage companies have suffered amid the shifting lending market. While experts forecasted tough times ahead for the sector, recent weeks have highlighted how bad things have gotten for several brands.
That has been evident in the past month and a half as two lenders that provided “non-qualified mortgages” crumbled as rising mortgage rates and changing tides strained their bottom lines. The most recent was Sprout Mortgage, which shut down abruptly earlier this month and left hundreds of its employees in the lurch following a virtual conference call.
“This is just unbelievable what happened,” said a former Sprout employee, who asked that they remain anonymous so they could speak candidly about the event.
“I had no idea that this was coming,” the former employee continues, adding that they were reassured in a meeting before the conference call that there was nothing to worry about.
They tell RISMedia that employees were called to a mandatory “all-hands call meeting” where Sprout President Shea Pallante conducted the meeting to break the news to all staff.
According to National Mortgage Professionals reports, Pallante informed the staff that the company would close up shop, including both its retail and wholesale divisions.
“We got on there, and pretty much he said that, ‘with a heavy heart, I have to tell you that Sprout is closing their doors,’” they said, adding that the news came a day before payroll and without a severance package.
“They left us hanging,” the former employee says.
That wasn’t the end of Sprout’s troubles, however, as the company was swiftly sued by former employees looking for three weeks of back pay. The class action lawsuit, filed by former closing disclosure specialists Nathaniel Agudelo and Helen Owens, names Sprout, its parent company, Recovco Mortgage Management, and Sprout CEO Michael Strauss as its defendants and alleges that Sprout failed to provide the required advanced notice of the mass layoffs under the WARN Acts.
Owens and Agudelo filed the suit on July 8 on behalf of themselves and all similarly impacted current and former employees.
It also claims that Strauss instructed others at the company not to issue paychecks due to be sent out to employees on July 7 following the shutdown announcement the day before.
Since the shutdown, the plaintiffs claimed they hadn’t been paid for work dating back to June 16, 2022.
Sprout officials did not immediately reply to RISMedia’s attempts to gain comments for this story.
In a statement featured in National Mortgage News, attorney Brenna Rabinowitz of New York-based Menken Simpson & Rozger, spoke on behalf of plaintiffs.
“These employees are now left holding the bill for the company’s decision to take this drastic action without warning, which we believe violates federal and state law,” she said in the statement. “We hope the federal lawsuit we have filed on behalf of Sprout Mortgage’s employees secures justice for those affected.”
The fallout at Sprout came mere weeks after First Guaranty Mortgage Corp (FGMC) implemented a massive labor cut and filed for bankruptcy amid tumbling profits from the volatile mortgage lending market.
“While we have made considerable efforts to address our ongoing financial challenges related to the state of the mortgage market, we ultimately must do what is best for our borrowers and consumers,” said FGMC CEO Aaron Samples in a June 30 press release.
The bankruptcy filing came less than a week after the Texas-based mortgage lender abruptly laid off nearly 80% of its workforce—428 of its 565 employees—during a 10-minute virtual meeting on Microsoft Teams.
The woes of Sprout and FGMC are merely the most recent cases of mortgage lenders buckling under the pressure of shifting market conditions. Arguably the most notorious brand that has continued to make headlines has been Better.com, which has had to weather a storm of public scrutiny for several mishandled—and infamous—waves of layoffs and litigations.
The hits haven’t stopped for the online mortgage company, which now has U.S. Regulators investigating it, and Aurora Acquisition Corp., the special purpose acquisition company (SPAC) that Better agreed to merge with.
According to a recent SEC filing, Better and Aurora received “voluntary requests” for documents to determine “if violations of the federal securities laws have occurred” as the online mortgage company pushed to go public. The requests cover aspects of Better’s operations, related-party transactions, and “certain matters relating to certain actions and circumstances” of Better CEO, Vishal Garg.
“As the investigation is ongoing, neither Better nor Aurora are able to predict how long it will continue or whether, at its conclusion, the SEC will bring an enforcement action against either of them and, if it does, what remedies it may seek,” read an excerpt from the filing.
Despite the uncertainty surrounding how the investigation will pan out, Aurora stated in the filing that the probe could impose a “significant cost” on the company.
“Such costs, together with the outcome of the actions if resolved unfavorably, could materially and adversely affect our business, financial condition, and results of operations,” Aurora stated in the filing.
The company also acknowledged that the publicity surrounding the SEC probe and potential enforcement could harm the reputation and business of Better and Aurora.
Part of the investigation will also focus on recent allegations made in a whistleblower lawsuit filed last month by Better’s former head of sales and operations, Sarah Pierce.
Pierce, who parted ways with Better in February for undisclosed reasons, alleged in the suit that she was driven out of her role after she repeatedly raised concerns about Garg’s misleading statements regarding the company’s financial standing, market forecasts and its labor cuts.
It also accused Garg and the company of duping investors and shareholders to keep the planned merger with Aurora afloat.
The deal, which has yet to close, is valued at $7.7 billion between the two companies. According to TechCrunch reports, Better is still moving forward with its planned merger with Aurora despite recent hurdles.
The SEC declined to comment on this story.