Sprout Mortgage, a Long Island-based lender, abruptly closes 

Employees at Sprout Mortgage, an East Meadow-based mortgage lender, filed a class-action lawsuit against the company after it shut down Tuesday without notice. The laid-off staffers said the company failed to issue paychecks this week for work dating to mid-June.  

An executive for Sprout Mortgage, which specializes in loans to borrowers who might not otherwise qualify for mortgages from other lenders, notified employees of the layoffs on a video conference Tuesday afternoon, according to the lawsuit, which was filed Friday.

The lawsuit estimated more than 100 Sprout employees were based in East Meadow. The next day, employees didn’t receive their scheduled paychecks for the period from June 16 to June 30. The employees also said they are owed wages for work between July 1 and July 6.

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

Sprout billed itself as one of the country’s largest originators of non-qualified mortgages. A qualified mortgage must adhere to certain standards that make it more likely borrowers will be able to pay back their loans. The federal government began separating mortgages into classes of qualified and non-qualified mortgages as part of the Dodd-Frank Act in 2010 to discourage the 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 could benefit from non-qualified mortgages, including start-up entrepreneurs and wealthy retirees interested in buying investment properties. These borrowers could have the funds to purchase a home but might not be able to document income in the way that other banks might require.

Non-qualified mortgages are offered at higher interest rates than qualified loans and, for the most part, are not eligible to be purchased by the major mortgage purchasers Fannie Mae and Freddie Mac. Instead, the loans are typically sold to private investors in mortgage-backed securities.

 Sprout received a nearly $6.2 million Paycheck Protection Program loan in April 2020, according to Newsday’s database of Long Island companies that received PPP loans. At the time, the company had 387 employees, and the Small Business Administration later forgave the loan. 

Mortgage rates rose dramatically in the first half of the year, and Sprout could have faced a tougher time selling its loans to investors, said Guy Cecala, executive chair of Inside Mortgage Finance, a research firm and publisher tracking the U.S. residential mortgage market.

“They depend on a ready secondary market in those loans, and that market has dried out, mostly as a result of rising interest rates,” Cecala said. “Ultimately, the whole mortgage market is controlled by a secondary market, which allows you to sell off loans you make, and then take that money and make more loans. If someone chokes off that avenue of the secondary market, or your ability to sell off those loans, you just can't make any more mortgages, because you don't have the money to fund it. “

The non-qualified mortgage market represents a small slice 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 non-qualified mortgage lenders last year,  with $2.04 billion of loans it originated going into expanded-credit mortgage-backed securities.

Rising mortgage rates have hurt the broader mortgage industry, especially banks that have geared their business toward a steady stream of refinancing as rates fell to historic lows in 2020 and 2021. A year ago, the average 30-year fixed home loan was 2.9%. This week, the average was 5.3%. Historically, that rate has averaged about 7.8%.

Large banks such as JPMorgan Chase and Wells Fargo have recently announced layoffs of hundred of employees in their home-lending units.

“The larger question is: Is this the tip of the iceberg in terms of mainstream lenders feeling the pinch and having to close down or do something else?” Cecala said. “We’re at the early stages. We can’t really tell … We’re seeing a lot of layoffs at companies but [they're] not closing their doors completely.”

By Jonathan LaMantia

jonathan.lamantia@newsday.com@jonlamantia

Jonathan LaMantia covers residential real estate and other business news on Long Island. He previously covered the business of health care for Crain's New York Business.