Sprout Mortgage, a Long Island-based lender, is closing abruptly

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Employees of Sprout Mortgage, an East Meadow-based mortgage lender, filed a class action lawsuit against the company after it closed Tuesday without notice. The laid-off employees said the company did not issue paychecks this week for work dating back to mid-June.

An executive at Sprout Mortgage, which specializes in lending to borrowers who might not otherwise qualify for mortgages from other lenders, told employees of the layoffs during a videoconference Tuesday afternoon, the lawsuit alleges. which was filed on Friday.

The lawsuit estimated that more than 100 Sprout employees were based at East Meadow. The next day, the employees did not receive their pay checks scheduled for the period from June 16 to June 30. Employees also said they owed wages for work between July 1 and July 6.

The class action lawsuit was filed by employees Nathaniel Agudelo and Helen Owens in the U.S. District Court for the Eastern District of New York. Plaintiffs allege that defendants Recovco Mortgage Management LLC, Sprout Mortgage LLC and Sprout CEO Michael Strauss violated federal and state labor laws by failing to provide the required notice of mass layoffs under the WARN ACT. The lawsuit was reported earlier Friday by HousingWire. The state Department of Labor told Newsday Friday afternoon that it had not received a WARN notice from Sprout.

Sprout billed itself as one of the nation’s largest unqualified mortgage originators. A qualifying mortgage must meet certain standards that make it more likely that borrowers will be able to repay their loans. The federal government began separating mortgages into qualified and unqualified mortgage categories under the Dodd-Frank Act in 2010 to discourage risky lending practices that caused the subprime mortgage crisis in 2007.

The company did not return a phone call seeking comment on Friday.

On its website, Sprout advertised to several types of borrowers who might qualify for ineligible mortgages, including start-up entrepreneurs and wealthy retirees interested in buying investment properties. These borrowers might have the funds to buy a home, but might not be able to document their income in the way that other banks might require.

Ineligible mortgages are offered at higher interest rates than eligible loans and, for the most part, cannot be purchased by prime mortgage buyers Fannie Mae and Freddie Mac. Instead, loans are typically sold to private investors in mortgage-backed securities.

Sprout received a nearly $6.2 million loan from the Paycheck Protection Program in April 2020, according to The Newsday Database Long Island businesses that have received PPP loans. At the time, the company had 387 employees, and the Small Business Administration later canceled the loan.

Mortgage rates rose dramatically in the first half of the year, and Sprout might have had a harder time selling its loans to investors, said Guy Cecala, executive chairman of Inside Mortgage Finance, a research firm and publisher that tracks the US residential mortgage market.

“They depend on a ready secondary market for these loans, and that market has dried up, mainly due to rising interest rates,” Cecala said. “At the end of the day, the whole mortgage market is controlled by a secondary market, which allows you to sell the loans you make and then take that money and make more loans. If someone stifles that avenue of secondary market, or your ability to sell those loans, you just can’t do mortgages anymore, because you don’t have the money to fund it.”

The nonqualified mortgage market represents a small portion of loans, about 4%, of first mortgages issued in the first quarter of the year, according to CoreLogic. Cecala said Sprout ranked No. 3 among unqualified mortgage lenders last year, with $2.04 billion in loans it originated for credit-extended mortgage-backed securities.

Rising mortgage rates have hurt the entire mortgage industry, particularly banks which have steered their business towards a steady stream of refinancing as rates fell to historic lows in 2020 and 2021. A year ago , the average 30-year fixed mortgage was 2.9%. This week, the average was 5.3%. Historically, this rate has averaged about 7.8%.

Major banks such as JPMorgan Chase and Wells Fargo recently announced the layoff of hundreds of employees in their home loan units.

“The broader question is, is this the tip of the iceberg in terms of traditional lenders feeling the pinch and having to close or do something else?” said Cecala. “We are only in the early stages. We can’t really say… We are seeing a lot of layoffs in companies, but [they’re] not closing their doors completely.

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