Mortgage firm collapses, shuts Novato branch
By Keri Brenner, IJ reporter
As if hit by a bolt of financial lightning, Sacramento-based Capitol Commerce Mortgage Co. abruptly shuttered its doors yesterday, laying off 50 Novato workers and scuttling scores of Marin mortgage refinancing applications.
Company officials were unavailable for comment on the debacle, which experts said was apparently triggered by rapidly rising interest rates that left the company unable to cope with mortgage loans promised at lower rates.
"It's an emotional time," said Jennifer Faris, a Novato mortgage underwriter at Capitol Commerce, as she wheeled her files and personal belongings out of the company offices at 75 Rowland Way. "You just don't know what's going to happen. Nothing in life's a guarantee."
The company stopped funding loans Thursday afternoon, and employees were told to come back yesterday to clean out their desks.
The closure came just a few weeks after Capitol Commerce celebrated one of the busiest months in its 17-year history - the lender funded $3.7 billion in mortgages during July, account executives said yesterday. Capitol Commerce had 15 offices in California, Oregon, Washington, Arizona, Colorado, Texas, Illinois and Florida and employed more than 300 workers.
"I feel sorry for consumers because they are really going to get stung by this," said Steve Crago, a Capitol Commerce account executive who learned of the company's demise after returning from a business trip. "It's a major shock."
Marin mortgage experts said the company made a big bet on mortgage interest rates dropping again - and lost.
Mortgage companies, which borrow millions or even billions of dollars to finance the loans they originate and then sell, generally buy bonds as insurance in case interest rates rise before they can sell their inventory.
Marin brokers said executives at Capitol Commerce's Sacramento headquarters apparently decided not to buy the bonds, hoping interest rates would drop, maximizing profits on their loans. Instead, the company suffered losses as interest rates rose.
"They did not hedge their bet, very simply," said Jim Chapman, chief executive of First Security Loan Corp., a mortgage brokerage and mortgage banking firm in San Rafael. "They had to deliver loans with low interest rates, at a time when loans were at high interest rates."
Chapman said he was saddened because his company had a "fair amount" of loans with Capitol Commerce, and had a good working relationship with people at the Novato branch.
"We know a lot of employees there - they're really nice people," he said. "You hate to see that happen.
"Capitol Commerce is an excellent company," Chapman added. "They've done a terrific job for the community. They're very reputable, and the local branch is one of the better ones."
He said the Marin office had "nothing to do with what the head office did in Sacramento." The office reportedly handled nearly $500 million in loans last month.
Mortgage broker Gina Lefebure, of Pacific Guarantee Mortgage in Greenbrae, said she was getting ready to call five of her clients whose Capitol Commerce loans had locked-in low interest rates to give them the news.
"They don't even know," said Lefebure, who estimated her office had a total of about 20 loans with the company. "It's just a terrible thing."
Dru Parker, a broker with Pacific Capital Mortgage in Novato, said she and her colleagues will have to face disappointed clients who thought they had locked in 30-year, fixed-rated mortgages in the low 5 percent range.
If those clients want the same loan, it's now offered for 6.25 percent or more, she said.
"We're going to have to tell them that the best we can do for them is keep our eye on the interest rates and hope they go down again," Parker said. "Or, we may offer them an adjustable rate or other alternatives - unfortunately, those low rates are gone."
Parker said she was distressed by the news at Capitol Commerce.
"It's a big loss to the industry as a whole when something like this happens," she said. "None of us likes to see this kind of thing happen."
Officials at Capitol Commerce's headquarters in Sacramento could not be reached for comment. Repeated attempts to reach a corporate spokesman led to voice mail, or to being automatically put on hold.
The company, led by Chief Executive Chris Sorti, reports its motto is "Commitments Made and Met," according to its Web site.
At the Novato office yesterday, managers gave employees their last paychecks and told them they were out of work starting Monday.
Kiyana Coleman, one of the workers, said she had "no idea" what would be done with all the mortgage loan and refinancing applications still pending.
"We don't know how to handle it," she said. "We're waiting for news from headquarters."
"We're closed as of today," Novato office receptionist Amanda Pamatmat told callers yesterday. "All of our branches are closed."
Larkspur financier Peter T. Paul, who is in the process of opening his own mortgage company, Paul Financial, in San Rafael, said he had no word on what happened at Capitol Commerce.
However, in general, he said, record low interest rates, such as those earlier this year, cause a "huge explosion of volume" of business for mortgage companies.
"It's difficult for any business to cope with that type of volume," Paul said.
The high volume can cause a lag time between the point at which a mortgage company originates a mortgage and the point at which it sells the loan.
"If interest rates rise, then the price a mortgage company receives when it sells a mortgage falls," Paul said. "This can be a real problem if the interest rates rise very quickly and the mortgage company's inventory is not sold.
"This could be what happened," he said.
Paul, a founder of the former Headlands Mortgage Co., which was sold to what is now GreenPoint Mortgage in Novato, said he expects to interview former Capitol Commerce employees for jobs with his new company.
"I will be talking to some of them," he said.
Many of the prospective borrowers affected by Capitol Commerce's collapse might not have been aware their applications were being handled by the firm.
That's because Capitol Commerce primarily acted as a wholesaler that sold its loans in the secondary market after funding them. The lender appealed to mortgage brokers by offering some of the lowest available interest rates, employees said.
The rate on a 30-year conventional mortgage averaged 6.6 percent as of Thursday compared with a low of 5.31 percent on June 11, according to HSH Associates, a Butler, N.J. firm that surveys 2,000 lenders nationwide.
"That's the kind of difference that can set you on your ear real quick," said Keith Gumbinger, an HSH vice president. "I'm surprised we haven't seen more failures like this. It might not be the last."
A small or midsized lender unprepared for a sudden swing in rates can get into trouble if it is holding a large basket of unfunded loans locked in at the low rates available a few weeks ago, Gumbinger said. Getting the money to fund the loans would be difficult now because low-rate loans diminish in value in a rising-rate environment, Gum-binger said.
In Novato, Faris, who has worked at Capitol Commerce for more than a year, said she and her colleagues are saying goodbye.
"We're telling each other, 'See you on the other side,'" she said.
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