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First Guaranty Mortgage originated $10.6 bln in mortgage loans in 2021.

Laid off 80% of its workforce.

The company blamed a collapse in the secondary market for mortgage refinancing and collateralization.

Mortgage lender First Guaranty Mortgage Corp filed for bankruptcy in Delaware on Thursday, saying it had laid off 80% of its employees and stopped making new loans.

The company, based in Plano, Texas, originated $10.6 billion in mortgage loans in 2021, according to a court filing in its bankruptcy case. It entered Chapter 11 with more than $473 million in debt, largely owed to banks that provided funding for the company's residential mortgages.

First Guaranty Mortgage said it incurred significant operating losses and cash flow challenges due to worsening conditions in the mortgage market, including "a dramatic collapse of the mortgage refinance market and the weakening mortgage purchase market," factors exacerbated by a lack of housing inventory and increasing affordability issues in the U.S.

Rates on home loans surged earlier this month after the Federal Reserve hiked interest rates by three-quarters of a percentage point, the largest increase since 1994.

First Guaranty Mortgage said it was originating far fewer mortgages and had been on pace to originate between $5-$6 billion in new loans this year compared to the nearly $11 billion originated in 2021. And, it is seeing lower profits on the re-sale of loans causing the company to suffer a $23.3 million after-tax net loss in the first four months of 2022.

First Guaranty Mortgage said its existing mortgages are serviced by third parties and will not be impacted by the bankruptcy filing, the company said in a press release.

The company has lined up financing for its bankruptcy case and is exploring all available restructuring options, chief executive Aaron Samples said.

The bankruptcy loan the company is finalizing will allow it to continue operations and honor commitments to fund already-approved residential mortgages, and it has engaged potential partners to support its pipeline of in-process loans, according to its statement.

Shortly before its Chapter 11 filing, the company laid off 471 of its 600 employees, according to court documents.

Rising mortgage rates and the drop in home-buying demand have contributed to layoffs in the mortgage department of JPMorgan Chase and staff reductions at real estate brokers Compass Inc and Redfin Corp.

First Guaranty Mortgage is scheduled to appear for an initial hearing in Wilmington, Delaware, bankruptcy court on Friday.

The case is In re First Guaranty Mortgage Corp, U.S. Bankruptcy Court for the District of Delaware, No. 22-10584.

For First Guaranty: Mary Caloway and Laura Davis Jones of Pachulski Stang Ziehl & Jones.

https://www.reuters.com/legal/litigation/first-guaranty-mortgage-files-chapter-11-after-layoffs-2022-06-30/