Mortgage lender closes, leaves borrowers in limbo

Monday, Aug. 18, 2003 | 10:48 a.m.

SUN STAFF AND WIRE REPORTS

SAN FRANCISCO -- Mid-sized lender Capitol Commerce Mortgage abruptly closed Friday, stranding hundreds of prospective borrowers who had been counting on the firm to finance home purchases and refinancings at low rates that are no longer available.

The closure came just a few weeks after Sacramento-based Capitol Commerce celebrated one of the busiest months in its 17-year history; the lender funded $3.7 billion in mortgages during July, according to several account executives interviewed Friday.

"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 Friday after returning from a San Diego business trip. "It's a major shock to me and a lot of other people."

Capitol Commerce had offices in California, Oregon, Washington, Arizona, Colorado, Texas, Illinois, Nevada and Florida. Based on an employee directory on its website, the company employed more than 300 workers.

The company had one Las Vegas office and one office in Reno, a Capitol Commerce manager in Las Vegas said. The manager said about 20 full and part-time workers lost their jobs in Las Vegas because of the closure.

Amanda Getzoff, a spokeswoman for the the state Financial Institutions Division, said the company was exempt from Nevada licensing requirements.

Companies that make loans strictly through federal lending programs are not currently required to obtain a license in Nevada. Getzoff said the FID had received several calls regarding Capitol Commerce, but the division was referring calls to the California Department of Real Estate.

Messages left at Capitol Commerce's headquarters in California weren't returned Friday.

Losing a loan now is particularly painful because mortgage rates have been rising since mid-June. That means borrowers who have to reapply for loans might get stuck with a much higher monthly payment than on the loans they thought they had locked into a few weeks ago.

The difference may add up to several hundred dollars a month, making a home purchase or refinancing less viable.

"It's really sad to have to deliver bad news like this," said Capitol Commerce account executive Steve Genakos as he prepared to tell another customer about the firm's collapse. "This is one of the hardest things I have done in my life."

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.

Even employees said that what went wrong isn't clear. The aggressive pricing could have landed the lender in trouble if Capitol Commerce's management didn't take adequate protective measures, known as "hedging," to guard against the recent spike in mortgage rates.

The rate on a 30-year conventional mortgage averaged 6.6 percent as of Thursday compared to 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 mid-sized 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, Gumbinger said.

Capitol Commerce began making loans in 1986, according to its website. Chris Sordi is listed as the company's principal on its California incorporation records. The lender has a clean record with its chief California regulator, the state's Department of Real Estate.

The company boasted of its reliability on its website, noting that "the market may change, but our commitment won't. Year after year, Capitol Commerce Mortgage is there for you, in good markets and bad."