Middletown, Conn.-based Mortgage Lenders Network USA plans to move to this new Wallingford, Conn., facility in 2007. Construction continues on the building despite the company’s recent announcement that it would stop funding residential loans.

Citing “a lack of available warehouse funds,” Middletown, Conn.-based Mortgage Lenders Network USA, one of the nation’s top subprime lenders, announced Dec. 29 that it would stop funding residential loans.

On Jan. 2, MLN President and Chief Executive Officer Mitchell Heffernan further cited the “economics of the wholesale mortgage market [that] have deteriorated dramatically over the past two months industry-wide” as his reason.

“Until we see credit quality and margins return to acceptable levels, we have determined that MLN needs to pause from wholesale broker originations,” Heffernan said in a prepared statement.

The news left some 150 Massachusetts customers whose loans had closed but weren’t yet funded in the lurch.

Collectively, they had 174 loans – mostly refinances of primary residences, but including about 20 purchase loans – that had closed but were not yet funded, according to Massachusetts Deputy Commissioner of Banks David Cotney.

“Our No. 1 priority now is to ensure all these loans are funded and Massachusetts consumers are not harmed,” he said.

Cotney said the Division of Banks – part of the Massachusetts Office of Consumer Affairs and Business Regulation – will address possible regulatory issues, as well as loans MLN had approved but not yet closed, at a later date.

Local firms who brokered approved loans said they will find their customers another loan at the same rate, even though interest rates have gone up by as much as a half-percent in the past few weeks.

“We may have locked into a great rate with Mortgage Lenders Network [but] we will probably end up honoring the lower rate [with a new lender] and losing money on the loan to save face,” said Jim Hastie, president of United Funding of Milford and Boston.

Norwood real estate lawyer David Turchetta said Poli Mortgage, a company with which he works, is going to honor the rate it quoted its customers “at a huge loss.” He added that he knows two who had refinance loans approved by MLN.

“Nobody is at fault here except MLN,” said Turchetta, who noted that he imagines a possible chain of lawsuits could result from the recent announcement.

For example, he and others said, buyers, sellers, moving companies and brokers are all potentially affected.

“You don’t close your doors on the busiest day of the month,” he added, noting that Dec. 29 was actually the busiest day in his office in the past six months.

A ‘Recission’ Clause

Massachusetts likely had fewer mortgage loans affected by MLN’s announcement because of its 1994 Good Funds Statute, which requires that mortgage loan funds clear before a loan closes, explained Sami Baghdady, an Arlington real estate lawyer and president of the Real Estate Bar Association.

If a mortgage closes without funds on hand a purchaser could, conceivably, be encumbered with an official debt, as recorded at the Registry of Deeds, without actually having the money, he explained – which is what happened when lender Abbey Financial filed for bankruptcy in the early 1990s.

“If that law is applied in Massachusetts and if attorneys are used to doing closings, this should never happen” on a purchase loan, Baghdady said. “That is one of the reasons why we in Massachusetts believe so strongly that attorneys should be involved in the closing process.”

Not every state requires an attorney to be involved, and not every state has a law comparable to the Good Funds Statute, he and others said.

Refinance loans have a “recission” clause attached that allows three days between the closing and when they are recorded, immediate past REBA President Robert J. Moriarty Jr., noted – which probably explains why most of the unfunded, but closed MLN loans in this state were refinances.

Hastie said 10-year-old MLN was one of United Funding’s top four lenders.

“We probably did about $15-20 million in loans with them in 2006,” he said. “We will now have to find someone to fill the void.”

Aegis Lending Corp.’s subprime division is another major lender that stopped doing business – in Massachusetts – in recent months, he added.

California-based Ownit Mortgage Solutions, the country’s 11th-largest subprime lender with $8.3 billion in loans, shut down completely just last month, saying a major investor forced the closure by cutting off funding, Inman Real Estate News reported at the time.

Until recently, MLN employed 1,800; however, it temporarily laid off 80 percent of its workforce on Dec. 29.

Company executives will sit down in the next few weeks to discuss the future of its wholesale mortgage operations, said James Pedrick, the company’s executive vice president.

According to the Associated Press, MLN said its goal last year was to produce more than $12.1 billion in loans, 80 percent of which would be subprime loans.

MLN has said it will continue to service its existing $17.8 billion loan portfolio. The Hartford Courant also reported on Jan. 3 that it will still run a small, in-house loan sales division, and said construction on MLN’s new, 305,000-square-foot headquarters in Wallingford, Conn., was continuing.

That facility was part of MLN’s Connecticut expansion plan announced in 2005, which also included adding 1,000 new employees there over eight years.

Connecticut’s Department of Economic and Community Development had been in the process of giving the company a $4 million loan to support the expansion, but is now investigating details of the layoffs and their impact.

MLN is working on a restructuring plan, according to James Heckman, spokesman for the Connecticut Department of Banking. He declined to disclose specifics of the plan, but said he understands the company intends to stay in business.

On Dec. 29, the Massachusetts Mortgage Bankers Association issued a statement advising brokers who work with MLN of what they should do with its news.

“It is suggested that if you have clients who are applicants for loans with MLN that you contact them immediately to advise them of MLN’s announcement. You may wish to ask the clients whether they wish your assistance in finding another lender. If you were involved in a MLN transaction that was closed in escrow and has not been funded, you should discuss the situation with your client and counsel for the seller. Mortgage brokers may be able to obtain approvals from other lenders on an expedited basis,” the trade group wrote in the e-mailed statement.

Asked for further thoughts on why MLN might have decided to stop funding loans, Turchetta said he knows exactly why it happened.

“They aggressively priced to get into the market [but] they had nobody to sell their loans to,” he said.

Turchetta added, “They may have had some venture capital funding pulled,” and news reports suggested the same.